The government’s pensions lifeboat could pick up a bill for millions of pounds after a court ruling has lifted a cap on payments to retirees.
The Pension Protection Fund steps in to safeguard pensions if an employer can no longer service the scheme – typically when a business goes bust.
Pay outs for high earners are limited to 90% of the capped amount – which is generally around £35,105 a year for someone giving up work at the scheme’s normal retirement age.
But the European Court of Justice has decided the PPF rules are wrong after a case brought by a worker who lost 67% of his pension when his former employer fell into insolvency.
The court has ordered that every employee in a scheme managed by the PPF should receive at least 50% of the value of their accrued pension savings as a minimum protection.
“It cannot, therefore, be argued that the scope of that interpretation is limited to certain insolvent employers belonging to specific sectors or to certain employees falling within a particular economic and social context,” said the ruling.
The court was told that the legislation underlying the way the PPF calculates pension arrangements was flawed because some employees received less than 50% of their benefits despite European Union rules directing this should not happen.
“We have been working with the Department for Work & Pensions about the changes that may result from this judgment. For those members affected, we will work to implement the judgment as quickly as possible,” said a statement from the PPF.
“We now need to consider the ruling carefully to understand what action we can take prior to legislative change and/or the conclusion of UK court proceedings. For the financial assistance scheme (FAS) this will involve working particularly closely with DWP colleagues.
“We will update on our approach in due course and will write to affected members as soon as we are able.”
The PPF looks after 5,588 pension schemes from firms that have fallen into financial difficulties. Just over 3,500 schemes are in the red, while total assets are £1.62 billion against liabilities of £1.68 billion.
So far, 132,385 out of 235,835 members have received £3.6 billion in payments from the PPF.