In mid-May of this year, the Pension Protection Fund (PPF) came under scrutiny from the European Court of Justice (ECJ) for its payment cap, which limits the amount of pension compensation that higher earning claimants were entitled to. Currently, the upper limit is set at approximately £35,000. In practice, this means that pension holders could receive less than their lawful pension entitlement in situations with qualifying insolvency conditions.
This facet of the PPF’s procedure came to light when a member of an occupational final salary pension scheme took the fund to court over apparent bias against higher-earning employees. It was determined that the pension compensation cap amounted to less than half of the total value of the claimant’s accrued rights. This extreme case was escalated to the ECJ, where a preliminary case hearing suggested that this policy was illegal.
This case has now concluded, with the ECJ ruling that the PPF’s pension compensation cap for higher earners does indeed violate the law.
Why is the Pension Compensation Cap Unlawful?
According to EU law, member states must have a regulated lifeboat that guarantees payments for policyholders in DB pension schemes where the provider has gone into insolvency. The ECJ found that the PPF has failed to fulfill these requirements by implementing a cap which results in some employees receiving less than 50% of their accrued entitlements. The court claimed:
‘It cannot, therefore, be argued that the scope of that interpretation is limited to certain insolvent employers belonging to specific sectors or to certain employees falling within a particular economic and social context.’
In a landmark ruling, the ECJ ruled that each claimant who lost out because of the cap should receive supplementary pension compensation equal to a minimum of 50% of their retirement fund. This payout will ostensibly be classified as old-age benefits. Despite initial suggestions that any hearing by an EU court would not drastically affect the way the PPF operates, the fund has admitted that changes will likely be forthcoming:
‘We now need to consider the ruling carefully to understand what action we can take prior to legislative change and/or the conclusion of UK court proceeding. For the financial assistance scheme (FAS) this will involve working particularly close with DWP colleagues.’
This follows recommended changes to the Financial Services Compensation Scheme (FSCS) pension compensation limit of £50,000. The Financial Conduct Authority (FCA) has questioned whether this upper limit is a reasonable value for statutory pension compensation, with suggestions that the limit could be increased to £85,000 in the future.
Pension Compensation with Money and Me Claims
Money and Me Claims is a pension compensation specialist with extensive experience supporting clients in unique financial situations. We have provided expertise to claimants with pension compensation claims ongoing with the Financial Ombudsman Service (FOS) and the FSCS. A number of our clients have already received the maximum pension compensation allowance of £50,000 from the FSCS.