Steve Webb says there are many questions that need to be answered following the landmark ECJ ruling
The recent ruling by the European Court of Justice in the case of Hampshire v. the Pension Protection Fund (PPF) will hopefully result in Grenville Hampshire getting a big boost to his pension, but could have some important implications across the pensions landscape.
Mr Hampshire was a member of the Turner and Newall pension scheme from the early 1970s to the late 1990s but was under normal retirement age when the scheme entered a PPF assessment period in 2006.
Under the rules of the PPF, Mr Hampshire's PPF payment falls short of what he would have received from the T&N scheme in three main respects.
First, as a member under normal retirement age, his compensation is based on 90% of his full pension, rather than the 100% that would apply to someone over retirement age.
Second, as someone with a relatively large pension, he is caught by the PPF cap. This effect would subsequently have been somewhat mitigated by the introduction of the long-service cap for those with more than 20 years of service, but the cap was not in force at the time the case was first brought, and any uplift was not applied retrospectively.
Third, through the course of his retirement he would have received very little in the way of inflation protection because the PPF does not provide indexation for pre-1997 service, which accounted for the vast bulk of his time in the scheme.
A combination of these factors led to Mr Hampshire's pension being less than 50% of the amount he would have received had the firm continued to trade and his lawyers argued this was in breach of European insolvency law. The ECJ upheld that view.
The PPF has said that it expects relatively few people to be affected by the ruling and that the increase in its future liabilities will probably be no more than around 1%. Given the relatively robust funding position of the PPF, it seems unlikely this will have any material effect on the PPF levy.
However, this judgment leaves a number of questions to be answered. The first is how often the 50% test should be applied. For example, it would be possible to make an estimate at retirement of someone's expected future PPF payments and to compare these with their expected payments had the scheme continued. But this calculation would be based on assumptions and estimates. It could be that someone would 'pass' the 50% test at retirement but that future outturns for inflation or longevity could mean they failed the 50% test at a later stage. It is not clear whose job it would be to monitor such things.
The second is what the PPF can do now while it is waiting for new legislation. My assumption would be that the PPF is obliged to pay PPF benefits in line with existing legislation, even though it may know it will have to pay more in future.
It is also unclear how the Department for Work and Pensions will respond to this ruling as there are a number of different elements to the compensation formula that could be varied to address this issue. For example, the risk of members falling below the 50% threshold would be reduced if the PPF started to pay (some) pre-1997 indexation costs, but this would affect a large group of members and not just the narrow group that had suffered the biggest losses. Alternatively, they could focus their attention primarily on the PPF cap, but that could still leave others at risk of a shortfall, especially older members with a lot of pre-1997 service.
Finally, as ever, the ruling could have a knock-on effect on schemes being benchmarked against PPF benefit levels, including those going through PPF assessment, especially if the ruling is applied retrospectively.
For all of these reasons, there can be no doubt that the sooner the government moves to resolve the uncertainty over the way forward, the better it will be not only for Mr Hampshire but for all involved in pension provision.
Steve Webb is director of policy at Royal London
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