European Court rules against UK pension lifeboat scheme

The Court of Justice of the European Union (EU) has today ruled individual pension scheme members should receive at least 50% of the value of their accrued old age pension in the event of employer insolvency.

This ruling will affect pay outs from the UK’s Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS). The current structure of the PPF and the FAS is such that a minority of members could potentially end up with benefits of less than 50%, meaning that they could be affected by this ruling.

If a member were to receive less than 50% of their benefits at the moment, it is likely due to the schemes benefit cap where the maximum pay-out is 90%. For 2018/19 the cap is £39,006, meaning that when the 90% factor is applied, the maximum pay-out is £35,105.

Alternatively, it could be due to the cap on inflation proofing benefits, which may not be as generous as the terms of the original scheme. Both the PPF and FAS apply no inflation proofing to benefits built up in the original scheme before 1997.

Hargreaves Lansdown has said that the impact of this judgement on the PPF is likely to be minimal, as they have estimated an increase to their liabilities of 1% at the most. They reported that the PPF is currently 122.8% funded, with a surplus of £6.7bn.

The PPF will contact members where adjustments need to be made to their benefits, and it is unlikely the ruling will have a material impact on the levies paid into the PPF annually by employers.

Commenting on the ruling, Hargreaves Lansdown head of policy Tom McPhail said: “For now at least, the European Court continues to exert control over the UK, something for which some pension scheme members may now be grateful.

“It is to the credit of successive UK governments that we have a robust and reliable lifeboat scheme in place to protect pension scheme members in the event of their employer going bust. The PPF’s healthy surplus means it can take this hit without materially weakening its funding position.”

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