Legal Review Challenges PPF Compensation – DB & Derisking

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Exempting certain pension benefits from age discrimination laws has been found incompatible with EU law, leaving some schemes open to the prospect of discrimination claims and redress payments.

Section 3 of the Equality Act 2010 permitted the limitation of pension payments relating to accrued or payable benefits, in respect of periods of pensionable service before 1 December 2006, the date on which the legislation on age discrimination was introduced.

Seventeen claimants at an employment tribunal hearing in January 2022 argued that by reducing or capping their pension payments, the T&N pension scheme had treated them less favorably because of their age.

It is likely that the schemes involved, and the PPF, will not appreciate the added cost, complexity and uncertainty given the possibility of further decisions on this issue, which the decision leaves in its wake.

John Gordon, Ashurst

The case follows a 2018 ruling by the European Court of Justice, which determined that PPF members should not receive less than 50% of the benefits to which they are entitled in the event of their employer’s insolvency.

UK law establishes that the pensions lifeboat will pay 90 per cent of a scheme member’s benefits if they have not reached the scheme’s normal retirement age when they transfer to the PPF. Pensioners receive 100% of their benefits.

However, there is a cap on the total amount payable each year, currently £40,000 at age 65.

The January 2022 tribunal struck down Section 3 of the Equality Act, finding it incompatible with an EU discrimination directive. However, the decisions of the Labor Court are not binding on the courts.

Ashurst’s lawyer, John Gordon, said the decision “is a further challenge to the law governing PPF compensation, and may mean that schemes cannot continue to restrict the amount of benefits paid for a period compensation from the PPF”.

The Department for Work and Pensions is supposed to appeal the decision. “We do not comment on live disputes,” a DWP spokesperson said.

A PPF spokesman said: “The PPF is not a party to this case and we have no comment on the judgment.”

Remedies for “Feelings of Hurt and Interest Only”

The claimants, except one, the widow of a contributor to the plan, had left pensionable service, with benefits having become payable before January 31, 2005.

The following year, the sponsoring employer entered into a voluntary enterprise agreement. His plan remains under evaluation for entry into the PPF. In October 2011, the employer entered into a block annuity contract with Legal & General, securing its benefits just above the PPF pay level.

The Pensions Act 2004 limits pension payments for schemes at the start of their PPF assessment period so that they do not exceed the level of compensation from the rescue fund, even without being under the responsibility of the PPF at this stage.

The claimant’s benefits were reduced accordingly effective July 10, 2006, when the assessment period began.

20-20 Trustee Services, which acts as trustee for the T&N plan, said it has recalculated those benefits and agreed to increase payments and refund amounts owed.

One of the claimants, Mr Hampshire, had previously challenged the level of PPF compensation, arguing that cutting his benefits to less than 50% of his accrued rights was unlawful.

The PPF compensation cap was later found to be illegal. An interim solution, known as the “Hampshire Uprising”, was applied.

The PPF methodology for recovery was later challenged, and in July 2021 the Court of Appeal ruled that the application of a cap in the calculation of the PPF compensation payable to those who had not reached or past the normal retirement age when a scheme entered its assessment period amounted to unlawful age discrimination.

If this decision is upheld, it will mean that schemes will have to review pre-2006 benefits, which they may not have previously taken into account when undertaking age discrimination reviews.

Vikki Massarano, Arc Pensions Law

The cap has been removed and the T&N administrator is recalculating the benefits to an extent known as the “Hughes uplift”. Although he agreed to pay these arrears, they have not been paid, the trustee claiming that his cash reserves are insufficient to cover them for more than a limited period.

In August 2021, Mr Beattie – one of the claimants in the January case – and others filed a complaint against the employer arguing their reduced pay amounted to unlawful age discrimination.

In October 2021, this claim was consolidated by two earlier claims filed by Hampshire and another claimant in 2019.

“The remedies sought by the plaintiffs are declarations, recommendations and indemnities,” the court said.

Given the employer’s agreement to pay and backdate Hampshire and Hughes’ raises, “the financial relief sought by the plaintiffs is likely to affect feelings and interests only,” he added.

The outcome of the case could nevertheless reconfigure the way the PPF must structure its compensation, the importance of which could lead to it being heard in a higher court, an expert has said.

Additional cost for the PPF?

A European Council Directive which sets out a general framework against discrimination was implemented in the UK in December 2006, initially through the Employment Equality (Age) Regulations 2006.

These rules were superseded by the Equality Act 2010, which imposed non-discrimination rules for occupational schemes.

A separate Equality Act Order provided for a time limit from October 2010, which stated that having “rules, practices, actions or decisions relating to vested rights or benefits payable in with respect to periods of pensionable service prior to December 1, 2006 that would violate the non-discrimination rule”.

Legal representation for the trustee, led by K Bryant, observed that the claimants had left pensionable service, their pensions had come into payment, the PPF assessment period had begun and the obligation to reduce their services had taken place before the entry into force of the framework directive. force in 2006.

Bryant argued that the accrued right at issue in this case was the right to receive benefits under the Pensions Act 2004 during a PPF assessment period, which began in July 2006 and, importantly, before the deadline of December 1, 2006.

Justice Walker found, however, that the situation was not resolved until December 1, 2006, and that the plaintiffs and the trustee had a continuing legal relationship after the rules applied.

As there was an ongoing relationship, the “future effects principle” applies, the judge said, with the new rules applying immediately to the situation that emerged under the old rules.

“The point of unequal treatment occurs when the pension is not paid, not when it accrues,” Judge Walker said.

The judge rejected Bryant’s argument that the PPF cap represents a separate entitlement, responding that it constitutes a restriction on the benefits payable under the plan’s rules.

The decision is not expected to affect the majority of benefits payable by the schemes, which will still fall under a specified exemption, a Hogan Lovells blog post read.

“Nevertheless, the case raises concerns that other benefits not falling under an exemption could be challenged with respect to pensionable service prior to December 2006,” a- he declared.

“The case law regarding guaranteed minimum pensions suggests that no statute of limitations would apply in a claim against a funded scheme, meaning that trustees could not rely on the passage of time to dismiss a claim.”

Gordon of Ashurst said: ‘The ruling may also have a wider impact, as it may require pension schemes to review their historical rules and practices to ensure they comply with discrimination rules based on age.

“While the decision is applauded by plan members, it is likely that the affected plans, and the PPF, will not appreciate the added cost, complexity and uncertainty given the possibility of further decisions on this matter, that the decision leaves in its wake. ”

A preliminary hearing has been set for March 22, 2022, with an outcome currently unavailable. The main hearing has been set for November 2022 and it is understood that the DWP appeal will take place before November.

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‘If this decision is upheld, it will mean that schemes will have to review pre-2006 benefits, which they may not have previously taken into account when undertaking age discrimination reviews’ , said Vikki Massarano, partner of Arc Pensions Law.

“The PPF should review its compensation structure, which could in turn lead to a need for higher levies on DB plans,” she continued.

“If the PPF is to provide higher compensation to some members, this will also have a ripple effect on the schemes’ PPF funding levels.”

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