Hogan Lovells

Key Dates

R (Hughes and others) v Board of the Pension Protection Fund and the Secretary of State for Work and Pensions

Judgment given by the Court of Appeal on 19 July 2021.

Judgment given by the High Court on 22 June 2020.


Summary

The Court of Appeal has upheld the High Court’s decision that held that the Pension Protection Fund (PPF) compensation cap constitutes unlawful age discrimination and must be disapplied.  It has allowed the PPF’s appeal concerning its approach to uplifting PPF compensation following the CJEU’s decision in Hampshire v PPF.

The case was brought by 24 individual claimants and BALPA (which represents airline pilots).   The claimants were pensioners and survivors who had lost out significantly when their pension schemes had entered the PPF, because of the impact of the PPF compensation rules on those with long service; or with particular benefit structures under their original scheme rules, including: pre-1997 non-statutory increases; survivors' benefits calculated on pre-commutation pensions; survivors' benefits of greater than 50%; and five year guarantees.

Secretary of State’s appeal: does the application of the PPF compensation cap constitute unlawful age discrimination?

The High Court had held that Article 8 of the Insolvency Directive 2008/94/EC (which requires Member States to put in place protection for employees on the insolvency of their employer) was not limited to requiring compensation of at least 50% of the pension benefits payable under the original scheme and protection from poverty (following EU case-law).  While a Member State has discretion on the method of implementing Article 8, the rules adopted can be measured against principles of EU law, including principles of unlawful discrimination.

The High Court found that the PPF compensation cap (both in its original form and as amended in 2017 to reduce the impact on those with more than 20 years' pensionable service) was not an appropriate means of achieving the DWP's legitimate aims of combatting moral hazard (underfunding of DB schemes), encouraging longer working and controlling costs.  In particular:

The Court of Appeal dismissed the Secretary of State’s appeal.  The High Court had not been wrong to conclude that the compensation cap was inconsistent with EU law and must be disapplied.

Background: PPF’s proposed Value Test

The CJEU held in Hampshire v PPF that Member States must ensure that employees of insolvent companies receive at least 50% of the value of their accrued pension entitlement.  The PPF subsequently announced its proposed method of implementing the decision using a “Value Test”:

The PPF proposed keeping its overall benefit structure, with any uplifts applied to current benefits and so not applying features of the original scheme benefits (such as increases on pre-1997 pensions in payment).  It was accepted that under this method long-lived pensioners might receive less than 50% of the benefits they would actually have received from their scheme.

The PPF also proposed calculating survivor’s benefits at 50% of the member’s (post-uplift) PPF compensation.

Value Test and survivors’ benefits: High Court decision

The High Court decided that the PPF’s approach of providing 50% of the value of the member’s benefits was insufficient to comply with Article 8, and that it must also identify and rectify any cases where the individual ultimately receives less than 50% of the benefits they actually would have received from their original scheme.  In addition, the High Court found that the PPF’s approach to survivors’ benefits was wrong in principle and that it must ensure that survivors receive at least 50% of the survivors' benefit they would have actually received over time under the member's original scheme, including the amount of any lump sum guarantee.

Value Test and survivors’ benefits: Court of Appeal

The Court of Appeal overturned the High Court’s decision:



Date Accessed: 03/12/2021