Two recent High Court decisions revisit Pension Protection Fund compensation levels for certain members on employer insolvency, and FCA action on protection for pension savers

Hughes: PPF compensation cap

Protection of the rights of qualifying pension scheme members on insolvency of sponsors of eligible defined benefit pension schemes dates from the Pensions Act 2004, which established the Pension Protection Fund (“PPF”) – arguably to implement article 8 of Directive 2008/94/EC, which provides pension protection on employer insolvency. The directive did not prescribe either the protection required or how that should be achieved.

The PPF pays compensation based on categorisation at the point of the employer’s insolvency. Members who had reached normal pension age under their original scheme rules at that point would receive 100% compensation (based on original scheme benefits), albeit inflationary increases are materially lower. However, if a member was under normal pension age, PPF compensation was generally limited to 90% of benefits, and subject to an absolute cap. As a result, some members’ benefits were materially reduced. Earlier cases challenged the UK’s approach, including Hampshire v Board of the Pension Protection Fund (C-17/17) [2019] ICR 327, decided by the CJEU in 2018 – which required a 50% of scheme benefits underpin. Following Hampshire, the PPF has applied a one-off compliance check at the PPF assessment date, on an interim basis.

Both the compensation cap and the method of implementing the Hampshire underpin were challenged by 25 claimants in Hughes v Board of the Pension Protection Fund [2020] EWHC 1598 (Admin), decided on 22 June in the Administrative Court. Many of the claimants had reductions applied to PPF compensation because they were below normal pension age in their original schemes at the relevant insolvency dates: for Hughes the reduction was 75%. They contended that the cap was disproportionate and age discriminatory, and that the method the PPF used to implement the Hampshire judgment was not precise enough.

The court held that:

  • the application of the compensation cap constitutes unlawful age discrimination, so is contrary to article 8;
  • whilst article 8 does not require a yearly comparison, any scheme adopted by the PPF must actually deliver compensation equal to 50% of the amount of benefits a member/survivor would have received under their original scheme – not 50% of the actuarially predicted value. However, the “precise mechanism” to achieve compliance was not prescribed, with the court stating it was to be a matter for the PPF;
  • the time limit for compensation underpayment claims to the PPF is six years;
  • during a PPF assessment period following employer insolvency, trustees of schemes must calculate the limit on benefits payable by reference to the PPF level of compensation, including the uplifts required by article 8, so checks and action will be required.

If not successfully appealed, a review of PPF compensation should be expected, with adjustments to remove the cap and deliver compensation to meet 50% of scheme benefits for both members and survivors, based on the rules of the original scheme.

Avacade: unlawful activities and restitution orders for FCA

On 30 June, the High Court held that the activities of two pension advisory companies, Avacade Ltd and Alexandra Associates (UK) Ltd (“AA”), were unlawful, because they had carried out FCA-regulated activities without FCA authorisation: Financial Conduct Authority v Avacade Ltd (in liquidation) (t/a Avacade Investment Options) [2020] EWHC 1673 (Ch).

The FCA alleged both companies provided a pension report service, and made misleading statements inducing pension savers to transfer their pensions into self-invested personal pensions (“SIPPs”) and then into “alternative” investments such as HotPods (office space available for rent), tree plantations and Brazilian property development. More than 2,000 pension savers transferred more than £90 million into these SIPPs. Many underlying investments failed or were in liquidation.

The court also found that the companies had made unapproved financial promotions via their websites, issued promotional material and made telephone calls to pension savers and had made false or misleading statements. The FCA was found to have jurisdiction to apply for restitution orders, as the “knowingly concerned” test was met since the three individuals who were directors and managers in Avacade had knowledge of the business models and active involvement, as had two of those individuals as senior managers in AA. The FCA has asked the court for orders banning the companies from engaging in unauthorised activities in the UK, and for financial restitution: a further hearing will take place.

The Author

June Crombie, head of Pensions Scotland, DWF LLP

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