The Court of Justice of the European Union (the CJEU) ruled in September 2018 that pension scheme members should receive at least 50 per cent of the value of their accrued old age benefits if their employer became insolvent.
Following further legal proceedings in the UK, the Court of Appeal ruled in July 2021 that the PPF’s approach to calculating the increase to payments to the 50% minimum level was lawful. It also confirmed the High Court’s decision that the PPF compensation cap, as set in paragraphs 26 and 26A of Schedule 7 to the Pensions Act 2004, is unlawful based on age discrimination and has to be disapplied.
Although the vast majority of PPF and FAS members already receive more than 50 per cent of the value of their accrued benefits, there will be a small number of members who are affected by this ruling.
We expect that the members who are receiving less than 50 per cent of their entitlement will mostly be those whose FAS assistance is capped and/or those for whom there is a difference between the indexation/revaluation rates that they were due in their original scheme and in the PPF/FAS. There may also be other differences between scheme and PPF benefit structures.
We expect that FAS members whose assistance is capped will typically be affected to a greater extent than those where the difference arises from indexation/revaluation rates.
How we will calculate if an increase is due as a result of the judgment
In advance of legislation, we are putting in place an interim process to increase payments now:
For PPF members:
- To work out if a member is affected, we will assess the total actuarial value of the member’s scheme benefits payable from the insolvency date, using their original scheme benefit structure (e.g. using the original revaluation and indexation rates) and compare it against the total actuarial value of their PPF benefits (from the same date).
- If the total actuarial value of the member’s PPF benefits is less than 50 per cent of the total actuarial value of their original scheme benefits, we will increase their level of PPF benefits until the actuarial value of their PPF benefits equals 50 per cent of the actuarial value of their original scheme benefits. This may mean that a member will initially receive more than 50 per cent of the pension they would have received from their scheme, because we have taken into account the differences between their scheme and PPF level of indexation and revaluation.
- The adjustment considered necessary to achieve the 50% minimum guarantee will be based upon a one-off valuation exercise, and will not be further adjusted (upwards or downwards) in the light of subsequent events.
- This approach means we can make sure members receive at least 50% of the value of their scheme benefits without having to change the levels of indexation as set out in the legislation for either the PPF or FAS.
For FAS members
- We are the scheme manager for FAS on behalf of DWP and administer according to their instructions. Where we find FAS standard assistance is less than 50 per cent of the value of the member’s original scheme benefits we will increase it (following a similar approach to that described for PPF members).
- The process will only capture members of FAS insolvent schemes. This is because the directive applies to insolvent schemes and there is no legislation in place which would allow us to pay any increase to FAS members of solvent schemes.
- A FAS insolvent scheme is a scheme where either the employer’s insolvency took place before the date of scheme wind up, or the employer became insolvent after scheme wind up started while it still owed money to the Scheme or there was a deemed insolvency under FAS rules.
What actuarial assumptions we will use
To value the difference between scheme and PPF benefits, we will use our section 143 assumptions that were in force at the insolvency date. These assumptions are intended to reflect broadly the cost of securing the benefits with an insurance company. Both the scheme benefits and the PPF benefits are valued using the same assumptions, for consistency. A similar approach is used for FAS.
The following pages give a simplified worked example of a fictional member who is affected by the judgment. It shows how we intend to calculate the increase to PPF benefits, where appropriate. It is to be used only as an illustrative guide to our intended approach.
Example – John, PPF member
John’s scheme pension
John was born on 1 January 1967. He took early retirement in 2017 at the age of 50 (at his scheme’s protected minimum age). The pension scheme, which he left in 1997, entered PPF assessment on 1 January 2018, when John was 51. The normal pension age for the scheme was 65. This scheme provided pre 1997 indexation at 5 per cent fixed per year. The scheme did not provide any survivor benefits.
John was receiving a pension from his scheme as follows:
- Pre 1997: £20,000 per year
- Post 1997: nil
His total pension from this scheme when it went into assessment was £20,000 per year.
John’s PPF compensation
John’s pension was £26,179.39 per year for a person aged 51 on 1 January 2018 when the scheme entered assessment. He did not take a lump sum.
Because John was below his scheme’s normal pension age, his compensation was reduced to 90%, or £18,000 per year. This was made up as follows:
- Pre 1997: £18,000 per year
- Post 1997: nil
Comparing the scheme entitlement and PPF compensation
To work out whether John is entitled to an increase in his compensation, the PPF first calculated the value of John’s future scheme pension payments, at the date of his former company’s insolvency event. They applied an ‘actuarial factor’, which was used to work out the value of the future pension payments, which in this example is 44.
Approximate factors have been used in these examples. In practice, the factors to be used will be based on s143 assumptions as at the scheme’s insolvency date, which can be found in the appropriate s143 assumptions guidance. Read current and past versions of the guidance. The calculation of the factors took into account the future increases which would have been due under the scheme rules. The calculation was:
£20,000 x 44
This gave a total of £880,000 as the value of John’s scheme pension. Next the PPF calculated 50 per cent of that value, or £440,000.
The PPF then calculated the overall value of John’s PPF compensation payments, again starting from the insolvency date. They again used ‘actuarial factors’, which in this example is 24. The calculation was:
£18,000 x 24
This gave a total of £432,000 as the total actuarial value of John’s PPF compensation. As this is less than 50 per cent of what John would have expected under his scheme pension, he is entitled to an increase from the PPF.
Working out what increase John will get
To work out the increase due, the PPF takes the PPF compensation, and multiplies that by the factor of increase due. This factor is calculated by dividing 50% of the value of what John expected to receive under his scheme pension, by the value of what he would receive as PPF compensation:
- Pre 1997: £18,000 x (£440,000/£432,000) = £18,333.33 per year
- Post 1997: nil
The total starting PPF compensation after this adjustment is £18,333.33 per year.
Because the PPF has taken into account the indexation that would have been applied to the scheme pension in calculating the increase to the starting PPF compensation, there is no need for any further adjustments for indexation in future years.
What about arrears?
John is also due to be paid arrears. The monthly amount to be paid is calculated by finding the difference between the new starting compensation and the original starting compensation, and dividing by 12 as the number of months in the year:
£18,333.33 - £18,000 = £333.33 per year
£333.33/12 = £27.78 per month
As John has been receiving PPF compensation for 3 years 9 months he will receive arrears based on 3 years 9 months’ worth of the additional £27.78 plus interest.
20 September 2021