English High Court rules compensation cap for pensioners below normal pension age discriminatory

England and Wales High Court
England and Wales High Court

The High Court of England and Wales has ruled that the operation of a compensation cap operated by the Pension Protection Fund to reduce the pensions of those below normal pension age was discriminatory on the grounds of age.

Paul Hughes, along with 23 other individual claimants and a 25th claimant that was a body representing airline pilots, brought the claim in relation to four pension schemes operated by the PPF for companies that had become insolvent.

The case was heard before Mr Justice Lewis.

Vastly reduced entitlement

The PPF managed the pension schemes for the former airlines BMI and Monarch Airlines, along with the Heath Lambert pension scheme and the Turner & Newall pension scheme. It was under a statutory obligation to pay compensation to members of those schemes. The scheme was created in compliance with EU regulations, which were still in effect in UK law as the claim was brought during the transition period ending on 31 December 2020.

Under the Pensions Act 2004, which implemented the relevant EU directive in UK law, the PPF was obliged to assume responsibility for the schemes after their original operators became insolvent. The compensation owed to individual members of the schemes was 100% of the annual value of their pension under the scheme if they were of normal pension age or 90 per cent if they were below normal pension age on the date that the scheme operator entered insolvency.

In addition, there was a compensation cap on the amount payable to those under normal pension age. If a person’s pension would have been above this cap, they were only entitled to 90 per cent of the capped amount instead of 90 per cent of the full value of their pension.

The first claimant, who retired in 2003 aged 56 to look after his terminally ill wife, was entitled under the Heath Lambert pension scheme to £66,245 per year, with annual increases. On 26 May 2005, his employer became insolvent. Application of the compensation cap reduced his entitlement to £17,241, roughly 26 per cent of his scheme entitlement.

Other claimants identified as representative of the positions of claimants under the other four schemes had their entitlements reduced to around 33 per cent for the Turner & Newall scheme, 31 per cent for the BMI scheme, and 46 per cent for the Monarch scheme.

Following previous litigation by the second claimant in which the Court of Justice ruled that the relevant retirees were entitled to at least 50 per cent of the value of their accrued benefits, the Board of the PPF proposed to make an adjustment to payments to those not receiving that amount based on a one-off calculation. This decision was challenged by the claimants.

It was claimed that the imposition of the compensation cap by the 2004 Act was unlawful and discriminatory on the grounds of age. The method by which the original EU directive was implemented in domestic law was also challenged.

Differential treatment

In his decision, Lewis J, after allowing for an extension of the time under which the claim had to be brought, said of the effect of the scheme: “The statutory provisions governing the imposition of the compensation cap do involve differential treatment on grounds of age. Those who are above the NPA (which is fixed by reference to a specific age) do not have the compensation cap applied to them. Those who are below the NPA do have the compensation cap applied to them. The differential treatment does apply to those in materially similar provisions.”

On the legitimacy of this differential treatment, he said: “The provisions of [the 2004 Act] do not satisfy the aims of the Directive that the legislation was, in part, meant to implement. They fail as enacted to provide protection for pension rights in the event of an employer’s insolvency. Those provisions will have to be modified to that extent in any event. That reinforces the conclusion that the kind of compensation cap provided for by the terms of the legislation […] was not an appropriate means of achieving the aim of protecting accrued pension entitlements.”

On the Board’s method of increasing the payment via an uplift based on a one-off calculation, he said: “A member state may choose to adopt a scheme which operates by considering each year whether the amount of compensation paid is equal to the pension benefits that would have been paid in that year. That would be one way in which the guarantee of 50% protection could be achieved. But the member state is not obliged to adopt that system.”

He continued: “The Board is entitled instead, if it chooses, to adopt a scheme which involves a one-off calculation, and then to pay out the compensation due as a result of that calculation over the period of the pension. That may involve paying more than 50% in some years and less in others provided that, overall, the cumulative level of compensation paid does not fall below 50% of the value of the benefits that would have been paid under the scheme over the lifetime of the pensioner.”

On the limitation period on any claim for arrears of compensation, he said: ”I am satisfied that a claim to enforce a statutory right of compensation against a statutory corporation is different from a claim by a beneficiary of a trust to recover trust property from trustees. There is, in principle, nothing wrong with having different limitation periods for different types of causes of action serving different purposes. For those reasons, a claim against the Board for arrears of compensation payable under [the 2004 Act] resulting from underpayment because of the application of the compensation cap is subject to the six-year limitation period provided for by [the Limitation Act 1980].”

Lewis J concluded: “The imposition of the cap on compensation payable by the Board constitutes unlawful discrimination on grounds of age contrary to EU law. The cap on compensation provided for in paragraphs 26 and 26A of Schedule 7 to the Act must be disapplied.”

For these reasons, the claimants were now entitled to receive compensation or pension benefits without reduction by a cap, and could seek to recover arrears of compensation from the Board for a period of up to six years.

© Scottish Legal News Ltd 2021