The combined effect of the PPF cap and non-indexation of pre-April 1997 benefits – are members adequately compensated?

The PPF cap has been controversial since the creation of the PPF. The cap essentially operates as a restriction on the amount of compensation which is recoverable from the PPF by members of schemes which have entered the fund.

In general, once a scheme has successfully passed through the PPF assessment period, the PPF will pay compensation equal to either:

  • The full amount of pensions in payment to members above normal pension age at the start of the assessment period. Payments under this category are not subject to the PPF cap.
  • 90% of the member’s pension in payment if they are under normal pension age (and did not retire in ill health) at the start of the assessment period. Payments under this category are subject to the PPF cap.
  • 90% of the member’s pension not in payment at the start of the assessment period and where entitlement to payment has not arisen. Again, payments under this category are subject to the PPF cap.

The cap is essentially irrelevant for members falling into category 1 above. However, for those members who fall into categories 2 and 3, if the benefits to which they would be entitled under the rules which have been adopted by the PPF for the scheme would exceed 90% of the cap, then their compensation will be limited to 90% of the cap. The PPF compensation cap is currently set at £34,867.04 for 2013/14 and is further adjusted depending on the member’s age at the time of assessment.

In a recent matter, which was referred to the Pension Protection Fund Ombudsman (PPFO), a concern was raised that the combined effect of the compensation cap and the non-indexation of pre-April 1997 benefits was that some members were receiving compensatory benefits which equated to less than 50% of what their benefits should have been, had the scheme not entered the PPF. The suggestion was therefore that sometimes the PPF was not compensating affected members adequately.

The Decision – PPFO-750 Applicant: Mr G H Hampshire, Scheme: The T&N Retirement Benefits Scheme (1989).

The referral to the Review Committee of the PPFO had been made on two grounds:

That the actuarial calculation used to assess whether the scheme could meet the required level of PPF compensation to its members and accordingly whether it should enter the PPF (the ‘section 143 valuation’) was based on benefit levels that were in breach of Art 8 EC Directive 80/987/EEC (the ‘Insolvency Directive’). The Applicant argued that the Board should not have approved a valuation which reflects a benefit level which is in breach of European law (i.e. below 50% of the original benefits).

The combined effect of the PPF compensation cap and the non-indexation of pre April 1997 benefits meant that some members’ PPF benefits represented less than 50% of the original entitlement.

The non-indexation of benefits before April 1997 refers to the fact that since that date benefits built up are increased in line with CPI or 5% (whichever is the lower and any benefits accumulated since April 2005 are increased by CPI or 2.5% (whichever is the lower). Accordingly, an employer is not required to ‘boost’ any pre-April 1997 benefits accrued.

The review decision held that, under the legislation governing the PPF, the PPF Board is required to approve a PPF valuation “where the Board is satisfied that the valuation has been prepared in accordance with the legislation”. The valuation had been produced in accordance with the PPF legislation and relevant guidelines and so the original approval was upheld.

The review decision also had to address the applicability of EU law and, in particular, whether the national legislation referred to above should be overridden by Article 8 of the Insolvency Directive, which provides as follows:

“Member States shall ensure that the necessary measures are taken to protect the interests of employees and of persons having already left the employer's undertaking or business at the date of the onset of the employer's insolvency in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors' benefits, under supplementary company or inter-company pension schemes outside the national statutory social security schemes”.

However, it was determined that Article 8 was not unconditional or sufficiently precise to be directly effective.

The matter was referred to the Reconsideration Committee of the PPFO, who upheld the decision of the Review Committee. It had been argued by the applicant that the previous case of Robins supported the argument that the protection offered by national law had to extend to at least 50% of the original benefits, however the Reconsideration Committee refuted this, stating that the case had suggested a capping provision was lawful because it was necessary to have regard to the absolute level of protection provided as well as to the proportion of an individual’s benefits.

Changes in the pipeline?

The Pensions Bill 2013-14 proposes to introduce a higher PPF cap for long-service employees, as length of service is not currently taken into account. Under the proposals, the current cap will become the ‘base cap’ and a new ‘long service cap’ will be introduced whereby the cap is increased by 3% for every full year of service beyond the first 20 years (subject to a maximum of double the standard cap). The reforms will affect any scheme if it begins winding up or enters the PPF assessment period after the revised cap is introduced. It is hoped that the new ‘long service cap’ will reduce the number of employees who receive less than 50% of their accrued benefits. It remains to be seen whether this might be the catalyst for improvements being made for those members already in the PPF.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Tim Green

Partner - Head of Pensions

I am a Partner in the Pensions team with a broad advisory, transactional and dispute resolution practice.