A recent appeal against a determination of the Pension Protection Fund (PPF) Ombudsman regarding the application of the PPF compensation cap has been rejected. In this article we review the decision and consider what impact it may have.
In this case, Grenville Holden Hampshire v the Board of the Pension Protection Fund, a pension scheme member appealed against a determination of the Pension Protection Fund (PPF) Ombudsman. The member argued that the EU Insolvency Directive imposed a requirement on member states to ensure that every member of an insolvent employer's pension scheme must receive at least 50% of their pension benefits, and that the Directive was directly effective.
EU Insolvency Directive
Article 8 of the Insolvency Directive provides that Member states are obliged to take “necessary measures” to protect the interests of employees and former employees, in respect of accrued rights under occupational pension schemes where an employer becomes insolvent.
Appeal to the High Court
The claimant, Mr Hampshire, was a member of a Defined Benefit (DB) scheme who had been receiving an annual pension of £56,721. Following the PPF assessment he was awarded annual compensation of approximately £20,000. The reduction was due, in part, to the operation of a cap on compensation awarded by the PPF and non-indexation under the PPF of pre-6 April 1997 benefits.
Mr Hampshire complained that the PPF cap resulted in a pension that was reduced to below 50% of the rights which he had accrued. He argued that the PPF acted in error and should not have approved a valuation for the scheme which resulted in the reduction of his benefits to this degree. He relied on decisions of the European Court of Justice (ECJ) in Robins and others v Secretary of State for Work and Pensions and Hogan and others v Minister for Social and Family Affairs and argued that there was an obligation to ensure that members received as a minimum, 50% of their pension benefits.
In the Robins case, the claimants were employees of a company which became insolvent in 2002. The case concerned the statutory order of priority on winding up where benefits of active and deferred members ranked behind those of pensioners. They successfully argued that the UK had failed to implement Article 8. The ECJ held that although it was impossible to determine the minimum level protection required by the Directive, the system in place which resulted in such low levels of protection was inadequate. Similarly in the Hogan case, where scheme members received less than half of their accrued benefits when the company became insolvent, protection was found to be inadequate.
The High Court considered the terms of the Insolvency Directive and concluded that it was not binding upon the PPF, and that the PPF had acted correctly in complying with the relevant UK legislation. In distinguishing these cases, His Honour Judge David Cooke observed that in both Robins and Hogan the claimants sought damages and did not suggest that Article 8 was directly effective.
For there to be a finding of direct effect the content of the protection must be identified with sufficient precision, and the minimum level of protection afforded must be identifiable. The Directive does not make such a provision. His Honour Judge Cooke stated that it would therefore be “inconceivable that the Court would hold that it was unlawful per se to impose a cap on protected benefits” (paragraph 32 and 33).
The Court rejected the claim that EU law requires the UK to ensure that every member of a scheme receive as a minimum fifty percent of their scheme benefits and the assertion that that the Directive was directly effective.
The Pensions Act 2014 implements a higher PPF compensation cap for people with more than 20 years’ service. This may result in fewer people receiving less than 50% of their accrued benefits and reduce the number of potential future claims.
Author: Mikela RochfordThis 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.