Pension: DWP & the PPF appeal against court ruling on compensation caps – full details

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Pension scheme members in DB plans will be able to receive compensation from the PPF (so long as they’re members) if the schemes managing company becomes insolvent. How much a person can receive however will be capped.

The PPF explains how this works as follows: “This only applies to members that haven’t reached their scheme’s normal pension age when the employer becomes insolvent.

“The total amount of compensation you can receive each year is capped at a certain level, although the vast majority of members are not affected by this cap.

“From April 1 2020, the cap at age 65 has been set at £41,461. This is an increase of 3.6 percent from the 2019/20 cap which was £40,020. The increase reflects the level of wage inflation over the period.

“As the cap is applied before your compensation is reduced to 90 percent of our levels, the actual amount you would receive as a capped member retiring at 65 is £37,315.

“The cap varies by age. For example, at age 60 it is £34,750 and at age 70 it is £50,781.

“The new cap will be increased for the majority of members.

“The later you retire, the higher the annual cap is set, as you’ll be receiving payments for a shorter period of time.”

“These cap rules however were recently ruled unlawful by the High Court of Justice.

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The court ruled in June that the PPF compensation cap was unlawful on the grounds of age discrimination, as quoted from the ruling laid out by the honourable Mr Justice Lewis: “The imposition of the cap on compensation payable by the Board constitutes unlawful discrimination on grounds of age contrary to EU law.

“The cap on compensation provided for in paragraphs 26 and 26A of Schedule seven to the Act must be disapplied.

“Article eight of the Directive does not require the Board to assess whether the compensation payable in each pension year is equivalent to 50 percent of the pension benefits that would have been payable under the relevant pension scheme in that year.

“The Board is entitled to adopt a scheme which ensures that the overall compensation payable during retirement (or the lifetime of a survivor) will equal 50 percent of the amount of the benefits that the member (or the survivor) would have received under the pension scheme.”

In response to this, both the PPF and the DWP who are responsible for the cap’s levels and the legislation governing them, launched an appeal on the ruling on August 20.

As explained by the PPF: “The Administrative Court’s judgment in June 2020 upheld our general approach to calculating increases in compensation as a result of the Hampshire ruling.

“But it also said we need to make sure members and survivors each receive at least 50 percent on a cumulative basis of the actual value of the benefits their scheme would have provided.

“These additional requirements mean we’d need to amend our methodology. It’s also different to our view of what the Insolvency Directive requires.

“So we’re appealing:

  • the approach we may adopt to meet the requirement for members to receive 50 percent of the value of their entitlement
  • how survivors’ benefits should be dealt with”

The PPF detailed that they have asked the Court of Appeal if they can wait until the appeal process is completed before they make any changes to payments in accordance with the June 2020 judgement.

Until further clarity is given on this, they will continue to apply the cap according to the current levels set by the DWP.

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