The Pension Protection Fund could be forced to increase payments made to higher earners following a ruling by the Court of Appeal last week.
A ruling given on 28 July states the current compensation paid by the PPF – which caps the maximum pension paid to some scheme members, and limits annual inflation increases – was potentially incompatible with European law.
However, the Court of Appeal has asked the European Court of Justice to give further guidance on this issue.
The case was brought by 15 former employees of Turner & Newell, a manufacturing business that went insolvent in 2006.
At the time its pension scheme was absorbed into the pension’s lifeboat scheme. This limited the pensions paid to some executives, who have previously challenged these PPF payments through the Pensions Ombudsman and the High Court.
Those pursuing this case argue EU laws state compensation schemes should pay at least 50 per cent of the benefits members were entitled to.
Although some scheme members (such as those already retired) get 100 per cent of their pensions, others can get far less.
This is because the PPF imposes a cap on the maximum pensions paid to those who have not reached normal retirement age when the scheme is deemed insolvent. The value of these pensions may be further eroded over as these pensions may not be fully uprated in line with inflation.
The PPF argues EU laws require countries to provide a rescue scheme for insolvent pension fund, but it is “not intended to confer a minimum level of pension in each individual case”.
Hargreaves Lansdown head of retirement policy Tom McPhail stressed this judgment did not mean any immediate change to the way the PPF structured its benefits.
He says: “Last week’s ruling by the Court of Appeal doesn’t have any immediate impact on the pensions paid out by the PPF. But it does potentially open the door to longer-term changes.”
He points out even if the ECJ rules the structure of PPF payments is in breach of EU law, this ruling would still have to be ratified by the UK Parliament.
McPhail says: “Nothing is expected to change in the short term and Brexit events could even end up overtaking any judgment eventually made by the ECJ.
“It’s also important to note that any modification of PPF compensation limits would still have to be paid for, either in the form of reductions to other aspects of the compensation scheme benefit structures, or in higher levels imposed on the occupational scheme which pay for the PPF.”