Several thousand high-earning savers could be in line for compensation after a landmark High Court judgment that Pension Protection Fund (PPF) rules amount to age discrimination.
The dispute centres on the retirement incomes paid by the PPF, the industry lifeboat scheme, to members of defined-benefit pension schemes when their employers go bust. The PPF guarantees that members who have reached retirement age and begun drawing their pension will not lose any benefits. But for those yet to reach retirement age, there is a cap on the payout: around £41,400 for savers aged 65.
A dramatic impact
Since most pensions do not exceed this cap, few people are affected. But for higher earners with substantial pension entitlements, the effect can be dramatic. In one case considered by the High Court, a pilot saw his expected pension fall by 75% from £66,000 a year to just £17,000. Now, however, the High Court has ruled the PPF cannot legally apply a cap to younger savers that older savers do not face. So savers whose benefits transferred to the PPF before they reached the normal pension age for their scheme should now receive their pension entitlement with no cap applied. Savers hit by the cap who have already begun receiving smaller pensions will be entitled to back payments of the income they have missed out on – although these will be limited to six years’ benefits.
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The judgment won’t be implemented straight away, with the PPF and the Department for Work and Pensions considering an appeal. The PPF believes the ruling will cost it around £240m. It could also prompt further claims from PPF members unhappy about another age-related rule. Anyone transferring to the PPF before their scheme’s retirement age only receives 90% of their expected pension, irrespective of the size of their entitlement. A challenge to the 90% limit – not considered by the High Court in this case – on age-discrimination grounds could prove even more expensive for the PPF. It could lead to increased benefits for everyone who has transferred to the scheme before reaching their scheme pension age – more than 100,000 savers.
One other issue is high earners who transferred out of their pension scheme because they were worried their employer might go bust and their PPF benefits would be capped. The Financial Conduct Authority, the City regulator, says independent financial advisers should not base advice to savers on the possible insolvency of their employer or the PPF limits. Savers may now be able to bring a case against their adviser if they suggested transferring for this reason.
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