The government has denied making changes to a rule that sees certain members of the Pension Protection Fund (PPF) lose out on inflationary increases.
According to the current rules, individuals with accrued benefits before April 1997 aren't entitled to inflationary increases before that date.
The UK law establishes that the pensions lifeboat will pay 90 per cent of a scheme member benefits if they are not retired when they are transferred into the PPF.
However, this percentage can be less if the member has pre-1997 benefits, since some defined benefit (DB) pension schemes pay out inflationary increases to pensions built up before that year, even though they are not obliged by law to do so.
This was one of the reasons why Grenville Hampshire, a current PPF member, saw his pension cut by 67 per cent when he was transferred to the pensions lifeboat, and has brought a case against PPF to the European Court of Justice (ECJ).
Guy Opperman, minister for pensions and financial inclusion, said in a written answer to Parliament that the government isn’t considering changing the current legislation.
He said: “The PPF is fundamentally funded by a levy on eligible schemes.
“Therefore, any decision to increase either the level of compensation, or to provide inflation increases to pensions built up before April 1997, would result in significant increases to levy payers.
“It is not proposed to change the present law.”
The PPF levy is payable by all UK DB pension schemes whose members would be eligible for compensation if the scheme employer becomes insolvent, and there aren’t enough assets remaining in the scheme to pay benefits at PPF levels of compensation.
The levy for defined benefit schemes in 2018 to 2019 will be £550m, 10 per cent less than the previous year.
Neil Walsh, pensions officer at Prospect – a union which has several members in the PPF with benefits pre-1997 – argued that obviously it is very important for government to take the interests of levy payers into account.
He said: “However, the loss of indexation on pre-1997 accruals disproportionately impacts older members and could potentially result in compensation for individuals, falling below levels the ECJ considers to be reasonable over time.
“It would have been useful for the government to have shown what the impact of indexing pre-1997 accruals would have been on overall compensation levels and/or PPF levies.”
According to Sir Steve Webb, director of policy at Royal London, and former pensions minister, the PPF has always had to strike a balance between the benefits paid out to members and the burden of the PPF levy on employers.
He said: “The PPF was designed to reflect the core benefits which occupational pension schemes are required to pay by law, and has therefore never included provision for pre-1997 indexation.
“It would be particularly hard to increase the PPF levy for employers whose employees do not get pre-1997 indexation from their schemes, in order to fund pre-1997 indexation for the members of other schemes which do offer more generous benefits.”
John Ralfe, independent pensions consultant, argued that the pensions lifeboat compensation was deliberately set to be less than the full pension promise, to make the levy more affordable and giving pre-1997 increases now would increase the levy paid by all schemes.
He added: "No pre-1997 increases reflects current legislation, as pension schemes don't have to give pre-1997 increases, so any change in the PPF terms would mean changing the law (retrospectively) forcing all schemes to give pre-1997 increases, increasing pension costs for many hard-pressed companies.”
Stephen Scholefield, pensions partner at international law firm Pinsent Masons, said: "Undoubtably protecting different benefits in different ways is a bit arbitrary - a flat 1/60th pension is better protected than an increasing 1/80th pension - but compared to the system before the PPF there has been a big step forward in terms of member security and the PPF has never pretended to fully replicate the promised scheme benefits.
"In many ways, the fact that the debate is focused on the loss of future pension increases shows how far we have come."
maria.espadinha@ft.com
