Government changes pension compensation rules

Government changes pension compensation rules

The Department for Work & Pensions (DWP) is making changes to the compensation rules in the Pension Protection Fund (PPF) to make sure a recent court ruling doesn’t affect some of its current members.

The government is claiming if the rules aren’t changed, some individuals in receipt of survivor benefits could see their payments reduced, and in some cases, stop altogether, due to the unintended outcome of the court case.

In Beaton versus board of the PPF, the High Court ruled in October that a member who transferred benefits to a final salary scheme, and was given a fixed pension transfer credit, was entitled to PPF compensation calculated separately for his two pension entitlements.

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Ian Neale, director at pensions technical specialist Aries Insight, explained there is a cap on the maximum amount of PPF compensation an individual can have.

He said: “Mr Beaton successfully argued that the legislation meant the cap applies separately to the funds he transferred (a ‘relevant fixed pension’, worth about £47,000 a year at age 65) and the benefits he accrued directly in the scheme which entered the PPF (currently valued I understand at about £26,000 a year).

“Both the PPF and the ombudsman thought the two pensions should be aggregated before application of the cap (which is currently just over £39,000 but at the time of the judgment was £500 less).  

“The judge decided they were wrong, because crucially the ‘relevant fixed pension’ was not ‘attributable to the person's pensionable service’ under the scheme which entered the PPF, to which the cap applies. The result is a massive difference to the compensation due to Mr Beaton.”

The judge referred the case back to the ombudsman to consider other outstanding issues.

In terms of the compensation cap, the practical implication of the ruling is that people with a relevant fixed pension derived from a transfer could receive more PPF compensation than someone whose pension benefits were made up entirely of actual pensionable service within the scheme.

In a consultation issued today (3 July), the government argued this judgment could also lead to a number of wider perverse and unintended outcomes for a range of individuals “whose PPF compensation was derived, wholly or in part, from a relevant fixed pension”.

This is because the phrase “attributable to pensionable service” is used throughout the compensation provisions in the current legislation.

It follows that if a relevant fixed pension is not attributable to pensionable service for the purposes of the compensation cap, it is not attributable for other purposes, some of which would have significant detrimental implications, including for some vulnerable groups, the DWP said.

On survivor benefits, except in the case of members in active pensionable service at the start of the PPF assessment period, the spouse or civil partner of a member with a fixed pension who dies after the start of the assessment period would no longer be entitled to any survivors’ compensation in respect of that pension. This would also be the case for dependent children who would be eligible for survivor benefits.