The Pension Protection Fund (PPF) is facing new court proceedings due to the way it has decided to uplift payments to members affected by a European court ruling.
A ruling from the Court of Justice of the European Union (CJEU) handed down in September determined that PPF members should not receive less than 50 per cent of their entitled benefits in the event of the insolvency of their employer.
UK law already establishes that the pensions lifeboat will pay 90 per cent of a scheme member's benefits if they are not retired when they are transferred into the pensions lifeboat.
But there is a cap on the total amount that can be paid to members each year – set by the government – which is currently £39,000 at age 65 and will increase to £40,020 in April.
This means high-earners could end up with a pension cut of more than 90 per cent.
Individuals who accrued benefits before April 1997 could also see large cuts because members receiving compensation from the PPF are not entitled to inflationary increases before that date.
The pensions lifeboat revealed in January how it would uplift the payments to the affected members.
In an update published last week, the PPF said new court proceedings have started against it seeking to challenge, among other things, the lifeboat’s intended approach for calculating any increases due to its members as a result of the ruling.
PPF officials said they have "thought carefully" about whether the work to implement the ruling should stop in light of the new court proceedings.
But it stated: "For the time being, we’ve concluded that it's right to continue with our plans to pay increases to affected members."
However, the pensions lifeboat intends to limit the size of arrears payments to avoid the risk of having to recover overpayments from members, should the court decide the PPF must take a different approach to calculating the increase.
The PPF stated: "We expect our proposed approach to lead to higher payments in the near term than some of the alternatives the court is being asked to consider. Interest will continue to accrue on the arrears."
The lifeboat added there was no date set for the case hearings, and that it will keep its approach to implementation under review in the light of how the proceedings develop.