The Pensions Protection Fund has set aside hundreds of millions of pounds to increase compensation to members affected by a European court ruling, its chief financial officer has said.
Andy McKinnon told FTAdviser the pensions lifeboat anticipated a £300m lifetime cost in additional benefits, which has been accounted for in PPF’s annual report and accounts.
This follows a ruling from the Court of Justice of the European Union (CJEU), handed down in September, which 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 states 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 to be paid each year – set by the government – which is currently £39,000 at age 65. This means high-earners could end with a big pension cut.
The PPF doesn’t have a precise figure on the number of members affected by the ruling because it is still waiting on legal analysis to finalise the process.
Mr McKinnon said: "The precise details of how it’s done are still being challenged in court so we are still working through how these uplifts will be handled and how long it will take us to pay the last of the members."
PPF’s 2018-19 annual report, presented today (July 4) in Parliament, stated benefits have been recalculated for a small number of individuals who are expected to be the most impacted.
The impact of this is an increase of 0.8 per cent of pensioner liabilities and 1.3 per cent of deferred member liabilities.
Overall, the PPF had reserves – amount over and above what it estimates is needed to pay every current member and their dependants – of £6.1bn in 2018-19, down from £6.7bn in the previous year.
This reduction was due to the impact of taking on the Kodak Pension Plan (No. 2), with some 11,000 members, which entered PPF assessment in April, but was already anticipated in the lifeboat’s long-term projection at March 2018.
The defined benefit scheme, which started negotiations with the PPF in September, announced at the time that it wouldn’t have enough money to pay out future benefits.
Due to this the lifeboat registered a record year in claims, but overall volumes remained low – there were 23 new claims in the year, which compared with 47 in the previous period.
PPF’s investment return stood at 5.2 per cent in 2018-19, while its assets under management grew from £30bn to £32bn.
Oliver Morley, PPF’s chief executive, said: "The 10.4m members of defined benefit pension schemes can be reassured of our protection. We now have around 400,000 members, and a further 150,000 members of schemes in PPF assessment.
"Our steady investment and funding approach over the coming years will help us to make sure we can provide a secure retirement for all our current and future members.