The government has U-turned on compensation rules for the UK pensions lifeboat after the European Court of Justice ruled last week the cap on payouts to higher earners was unlawful.
In July the Department for Work and Pensions (DWP) launched a consultation on changing the regulations of the Pension Protection Fund (PPF) so benefits accrued with a former employer and transferred into a new employer's scheme were combined.
But the ruling from the European court, which found PPF members should not receive less than half their entitled benefits if their employer becomes insolvent, also concerned the level of compensation the PPF should pay, and the government said there would "inevitably" be an interaction with the PPF compensation cap.
While the government and the pensions lifeboat considered the implications of this judgment, DWP said it had decided not to push through with the original proposals.
The U-turn means 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.
"This is not the government’s intention and we had intended to remedy this anomaly as part of this instrument," the DWP said.
"However, there is a risk that proceeding with this change may result in individuals inadvertently receiving less than 50 per cent of their expected pension benefits within the PPF, which would run counter to the [...] judgment," it added.
The DWP's proposed change was prompted by a court case brought to the High Court by scheme member Antony Beaton ruled in October 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.
According to UK law the pensions lifeboat will pay 90 per cent of a scheme member benefits if they’re not retired when they are transferred into the PPF.
But there is a cap on the total amount to be paid – set by government each year – which is currently £39,000 at age 65 and which means high-earners could see their pensions cut.
But in a case brought to the European Court of Justice by Grenville Hampshire, the judges ruled this should change after an employee took the PPF to court when his pension fell by 67 per cent after his former employer became insolvent.
The new rules will still be effective to guarantee that individuals in receipt of survivor benefits could won’t see their payments reduced, and in some cases, stop altogether, which was one of the unintended outcomes of the Beaton case.
Ian Neale, director at pensions technical specialist Aries Insight, said the government has accepted the "clear-cut decision of the [court] in Hampshire, which means they now have two problems with the existing PPF legislation".
He said: "The amendments proposed in July would fix the immediate problems highlighted by the Beaton case, but not avoid the risk that a member's compensation might fall below 50 per cent of their accrued pension rights, i.e. the issue identified in Hampshire.
"Rather than have to return later to amend the amendments, and having decided that primary legislation will be required anyway to fully remedy the problems created by the Beaton judgment, the Government has decided instead to proceed with more limited Regulations to come into force in early October 2018.
"These will correct the immediate and detrimental implications of the Beaton judgment and restore the policy intent-apart from aggregation for the purposes of the cap. For a short while, a few people like Mr Beaton will enjoy a higher level of PPF compensation than they should."
maria.espadinha@ft.com
