Opperman rejects PPF and FAS inflation caps review

PPF compensation based on benefits accrued after April 6 1997 increases in line with prices, capped at 2.5 per cent. There was no legal obligation to index benefits accrued before this date, with the exception of guaranteed minimum pensions.

Therefore, inflation protection for PPF and FAS scheme members may be lower than that under the rules of the scheme in which members were originally enrolled.

A freedom of information request submitted by Prospect revealed that the cohort of PPF members getting no inflation increase to their compensation is significantly older than the cohort of counterparts getting at least some inflation increase to their compensation.

Few other groups of retirees or social welfare recipients are being forced to endure a freeze on a substantial portion of their income at this time

Sue Ferns, Prospect

In an exchange of letters with the government, seen by Pensions Expert, Prospect deputy general secretary Sue Ferns highlighted on May 19 the limits on inflation protection set by the rules for many Prospect members, and urged the government to consider reforms.

In a response dated June 23, Opperman reminded Ferns that the PPF and FAS “were never intended to replicate the benefits of pension schemes that were unable to fully secure their liabilities”. 

A balance has to be maintained between compensation and the interests of levy payers and taxpayers, he said.

‘An unacceptable burden’

Recent forecasts have darkened the outlook of the cost of living crisis, with annual energy bill estimates for next year now exceeding £5,000 and inflation expected to surpass 18 per cent, according to Citi.

In May, the Financial Times reported that the PPF had received complaints from members over their lack of inflation protection while their living costs soared.

Prospect submitted an FOI shortly afterwards, receiving a response from the PPF in June. It disclosed that 210,783 members had received some inflation increases, while 83,455 had not received any rises.

A fifth of those who had not received any increases were over the age of 85, compared with just 1.6 per cent of those aged above 85 who had received rises.

In her letter to the government, Ferns pointed out that many Prospect members whose schemes have transferred to the PPF were receiving compensation in relation to pre-April 1997 service only, and as a result “have their entire compensation completely frozen”.

“In the context of very high and fast-rising inflation, this is both an unacceptable burden and a disproportionate hardship for members of the PPF,” she said.

“Based on the latest Bank of England forecasts, PPF members in this situation could see their compensation fall by nearly 20 per cent in real terms by the start of 2026. This is in addition to real-terms reductions already incurred, and often to a 10 per cent cut applied to compensation when it was first paid.

“Few other groups of retirees or social welfare recipients are being forced to endure a freeze on a substantial portion of their income at this time,” Ferns continued.

“It is particularly galling for pension scheme members who were originally promised full inflation protection to be in this situation. It is unfair for members of the PPF to have to face these particular difficulties during the current cost of living crisis.”

Ferns suggested that “the scale of these real-terms reductions in compensation” would drag many members close to, or below, 50 per cent of the value of their accrued benefits. 

In what became known as the Hampshire judgment in 2018, the Court of Justice of the European Union ruled that, in the event of employer insolvency, former employees should receive no less than 50 per cent of their accrued old age benefits. This protection should never fall below this minimum level.

“It is not clear whether the PPF’s implementation of the Hampshire judgment fully allows for the current cost of living crisis. There is a real risk of a further legal challenge on this point,” Ferns wrote.

Hampshire increase ‘does take inflation into account’

Ferns asked the government to assess whether the PPF and FAS compensation increases would properly protect members from the cost of living crisis, and to make any necessary reforms. 

She also asked whether the PPF’s approach to the Hampshire judgment appropriately considers the current inflationary backdrop, and requested that the board considers any changes if needed.

In his response to Ferns, Opperman observed that the PPF and FAS schemes “are intended as a form of safety net for members of failed schemes”.

“Importantly, the schemes are a means of improving on the previous situation where many members received vastly reduced benefits from pension schemes in financial difficulty, and sometimes nothing at all, irrespective of the contributions they had made,” he added.

The pensions lifeboat fund is currently making payments to PPF and FAS members to bring them up to the minimum level demanded by the Hampshire judgment, he wrote. 

In a “one-off value test”, the PPF assesses the total actuarial value of the member’s scheme benefits — payable from date of the employer’s insolvency — using the member’s original scheme benefit structure, based on the increases payable by the original scheme. 

The calculation of Hampshire increase or uplift payments does take inflation into account

Guy Opperman, pensions minister

This is compared against the total actuarial value of the member’s PPF benefits, from the date of the employer’s insolvency.

If the total actuarial value of a member’s PPF benefits is less than 50 per cent of the total actuarial value of their original scheme benefits, the PPF will increase their level of its benefits, until the actuarial value of these benefits equals 50 per cent of the actuarial value of their original scheme benefits.

“This may mean that a member will initially receive more than 50 per cent of the pension they would have received from their scheme, because the PPF has taken into account the differences between the increases payable by the pension scheme and level of increases payable by the PPF,” Opperman wrote.

“Therefore, the calculation of Hampshire increase (or uplift) payments does take inflation into account.” 

The pensions minister advised that the current inflationary environment will be taken into account for schemes entering PPF assessment now, but not for those that entered assessment in the past. 

Opperman pointed to a Court of Appeal decision in 2021 that dismissed any requirement to consider any changes in circumstances after an employer’s insolvency date when implementing the Hampshire judgment.

He added that the same methodology for calculating uplift payments applies to the FAS with some minor changes.

Government offers cost of living support

Opperman highlighted support measures offered by the government, which have included £500mn diverted to local authorities for food and utility bills.

Ferns told Pensions Expert that the loss of inflation protection for PPF members with pre-April 1997 benefits is “devastating, particularly so when inflation is soaring”. 

“The evidence that the impact falls mostly on older pensioners, who generally have lower incomes and therefore less financial resilience, strengthens the case for the government to urgently review the adequacy of compensation,” she continued.

“The minister asserts that using out-of-date inflation assumptions to assess whether compensation is at least 50 per cent of the value of accrued entitlement is allowed under the Court of Appeal’s judgment.

“However, that judgment did not address this specific issue and it is possible that the approach could be challenged,” Ferns argued. 

“Even if it is legally permissible, it is beyond the pale to deliberately subject pensioners to financial hardship on the basis of a technicality.”

A DWP spokesperson said:“The PPF continues to play a crucial role protecting people with a defined benefit pension when an employer becomes insolvent. Prior to its introduction, some people received vastly reduced benefits from schemes in financial difficulty and sometimes nothing at all, irrespective of the contributions they had made.

“But it is a compensation scheme, and as such was never intended to replicate the benefits of schemes which were unable to secure their liabilities.

“However, we recognise current cost of living pressures and are doing what we can to help, including £300 to help pensioners cover the rising cost of energy this winter, with those on pension credit getting a further £650 cost of living payment.”

A PPF spokesperson said:“The compensation levels for both PPF and FAS members are set in legislation, and we regularly share the issues and concerns raised by members with the DWP to ensure they’re given full consideration in all decision-making. We understand the cost of living concerns being raised.

“The Court of Appeal ruled in the Hughes case that our one-off value test was acceptable, and that there was no requirement for us to revisit the one-off test to reflect changing circumstances.

“Our priority now is to manage the complex calculations as quickly as we can so all members impacted by the Hampshire ruling receive their increased compensation and arrears as quickly as possible. Revisiting criteria would significantly delay this process.”