Why Hasn’t My £22k Pension Increased After PPF Cap Was Ruled Unlawful?

I would like your advice regarding justice for pensioners whose employers went into liquidation and whose pension schemes were assessed by the Pension Protection Fund.

This situation must affect very many long-serving employees, with good pensions, who were near retirement when their employers went bust. 

My employer went into administration in February 2005 and was subsequently wound up. I had been with the company for nearly 32 years in a senior position and had built up a substantial pension fund.

The pension scheme entered the Pension Protection Fund for assessment and was ultimately assessed as being able to provide ‘PPF level’ pensions OUTSIDE of PPF control.

Therefore the pension scheme did NOT enter PPF jurisdiction but was, nevertheless, subject to PPF rules and constraints.

My pension scheme allowed me to retire at 60 years of age, at which stage I expected to receive at very least £45,500 per annum in pension benefits.

The PPF guaranteed all such pensions at 90 per cent of entitlement BUT subject to a ‘cap’.

I ended up taking my pension two years early at age 58, at which stage the PPF cap was £24,487, of which they paid 90 per cent thus giving me a pension of £22,039.

Even although I commenced my pension two years early, this was still a vast reduction on what I should have received.

My pension was subsequently increased a little due to an ‘excess funds’ distribution at the end of calculations but, after 16 years, is still only £27,036 as at the end of the last tax year.

Now, all of this misfortune I put down to hard luck until I recently discovered that a group of airline employees, backed I think by their union, took the PPF to the High Court regarding the issue of the PPF cap on pension payments.

In 2020, the High Court ruled that the cap was unlawful. As a result, the PPF HAS ABOLISHED THE CAP AND ARE NOW IN THE PROCESS OF PAYING AFFECTED PENSIONERS APPROPRIATE RETROSPECTIVE COMPENSATION.

I asked the PPF what about those pensioners whose pensions were capped under – at the time – legally-imposed PPF constraints and rules, but were not adopted into the PPF itself.

However, I was informed that as the schemes were not ultimately absorbed into the PPF, there was nothing they could do to help.

This I believe to be a very major injustice and one which requires to be rectified alongside those pensioners whose pensions finished under PPF control and who are now being compensated.

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Steve Webb replies: To explain the background to this issue for all readers, for people who are members of traditional defined benefit pension schemes, there are three possible outcomes if the employer goes bust.

The first is that enough money has been built up in the pension scheme to be handed over to an insurance company who will then guarantee to pay the pensions in full.

The second is that there is so little money in the pension scheme that it gets taken over by the ‘lifeboat’ Pension Protection Fund which pays out benefits according to its own rules.

Broadly speaking these are that those over scheme pension age will receive compensation based on 100 per cent of their pension and those under pension age get compensation based on 90 per cent of their pension.

Until recently there was also a ‘cap’ on the maximum amount which could be paid out to those under pension age.

But if your scheme is short of the amount which would cover all of its pension promises, yet has enough money to pay out more than the PPF would pay out, then you find yourself in the third scenario, known in the industry as ‘PPF plus’.

In this situation, the assets of your pension scheme form the basis of a deal with an insurance company to pay out guaranteed pensions which are generally lower than the full pension promise but higher than the PPF would pay.

The important point about this process is that the way the assets are carved up is benchmarked against what you would have got from the PPF at the time, and this is why your payout was reduced to take account of the PPF cap.

Turning now to your case, as you rightly say, since your employer went bust and the scheme was assessed by the PPF, there has been a successful legal challenge to the PPF cap (on age discrimination grounds).

As a result, the PPF is in the process of restoring the pensions of members who had previously been affected by the cap.

Unfortunately, you are in a different position. All of the assets of your pension scheme have now been used up to pay for legally-binding contracts with an insurance company to pay you and your fellow members in line with the pensions agreed at the time the deal was struck.

My understanding is that the insurer is under no legal obligation to increase your pension, despite the court ruling, as they have simply paid out a pension at the level they promised.

And the scheme has been emptied out and wound up, so there is no money left there to top up your pension.

I’m afraid that unfortunately I cannot see any easy way round this problem, but I do appreciate that it is a harsh outcome, and could leave you in a worse position than if your scheme had been more poorly funded and found itself in the PPF.