The UK Pension Protection Fund’s (PPF) cap on high earners has been described as ‘unlawful’, according to an advocate general of the European Court of Justice (ECJ).
The case was brought forward by Grenville Hampshire, a former senior executive at manufacturing firm Turner & Newall which became insolvent in 2006 and subsequently relied on the PPF’s support.
The PPF currently caps the maximum annual retirement income at £35,000, which represented a 67% loss of Hampshire’s income. This cap has been set by the Department for Work and Pensions, which is listed as interested party in the advisory opinion.
The ECJ Advocate General argued that employees in occupational pension schemes should be guaranteed a protection of at least 50% of their average pension entitlement.
Following the publication of the Advocate General’s opinion, the case will now be referred to the ECJ, which is expected to decide on the matter within four months. While the ECJ is not bound by the opinion, it tends to decide in line with the Advocate General’s opinion in a majority of cases.
A PPF spokesperson said: “We note the Advocate General’s opinion and await the outcome of this case with close interest. Members are currently receiving benefits from the Turner and Newall scheme at the levels set out in the Pensions Act. They can be reassured that this is the minimum that they will continue to receive.”
According to the PPF, only 500 of the 250,000 members covered by the compensation scheme, representing 0.2% of all members, are affected by the cap. However, the decision could potentially increase the costs for pension schemes that pay into the pension protection levy to underwrite the costs of PPF compensation payments.
Alex Hutton-Mills, managing director of Lincoln Pensions, comments: “If it stands, this ruling could materially increase the size of the pension liabilities guaranteed by the PPF, and will present big questions over, firstly, how this should be funded and secondly the broader question of the fairness of the cap not applying to pensioners. Reducing the level of protection offered to pensioners and the benefits of lower earners could be politically unacceptable.
“If the PPF chooses to increase its annual levy on all defined benefit pension schemes, this would provide a stronger incentive for many sponsors to accelerate funding of their pension obligations. Finally, removing the benefit cap could also reduce the perverse incentives that PPF drift creates to avoid dealing with “zombie” schemes”, he adds.
