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The PPF pays compensation to members of pension schemes whose employer becomes insolvent but this compensation is restricted in a number of situations. In particular, if an individual has not reached “normal pension age” under the scheme’s rules at the date of the employer’s insolvency, a cap is applied to the compensation which the PPF will pay.

Mr Hampshire took early retirement from his pension scheme in 1998 at the age of 51 with a pension of almost £50,000 per annum. His employer became insolvent in 2006 and the pension scheme then entered the PPF. As a result, Mr Hampshire’s pension was reduced to around £20,000 in line with the PPF’s restrictions and, because of the rules regarding increases to PPF compensation, remains at broadly that level today. If benefits had continued to be calculated in line with the pension scheme’s rules, Mr Hampshire believes that his pension would now be over £75,000 per annum.

Mr Hampshire claims that the application of the PPF compensation cap is contrary to EU law because his benefits have been reduced to less than 50% of the annual amount that would have been paid to him from his pension scheme.

The EU Insolvency Directive requires each member state to take “necessary measures” to protect the pension rights of employees and former employees in cases where their employer has become insolvent. Mr Hampshire’s claim tests whether the UK’s system of PPF compensation is sufficient to meet this standard or whether further protections should be applied to individuals in his position.

The PPF’s position is that in order to establish whether the requirements of EU law are met, it is necessary to look at the system as a whole. As the compensation cap applies to only around 0.2% of its members, the PPF believes that “necessary measures” have been taken to implement the requirements of the Insolvency Directive.

In the first instance, the High Court sided with the PPF. However, the Court of Appeal has now found there to be sufficient uncertainty for a reference to be made to the European Court of Justice for a final ruling.

We now await the ECJ’s decision in order to establish whether any changes will be required to the PPF compensation cap. Although the cap only impacts a very small number of people, it can have a substantial impact on those individuals’ pensions as demonstrated in the case of Mr Hampshire. The position is further complicated by the timing of the UK’s departure from the EU given that the principles in this case are derived from European law and questions will therefore remain as to how any decision by the ECJ will be affected by this process.

This post was edited by Stephen Maynard. For more information, email blogs@gateleyplc.com.


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.