Paul Hughes, the PPF, and the practical implications going forward
If you’re wondering who Paul Hughes is then you’re probably not alone. Most pension scheme members have probably never heard of him and the same would apply to many pension transfer specialists. However, a number in both categories might indirectly have a lot to thank him for. This article is relevant to those studying for the CII AF7 exam.
The Legality of the Compensation Cap
Mr Hughes, you see, was the leading litigant in the case of Hughes versus the Board of the Pension Protection Fund (PPF). This legal saga has been dragging on for quite some time, but fundamentally concerned the legality or otherwise of the compensation cap. Most of you will be aware of the cap, which applied to PPF members who were not yet at their scheme’s normal retirement age at the point their scheme entered the PPF. It was the contention of Mr Hughes, a former pilot who retired aged 57 in 2003 and stood to lose almost 75% of his pension, that the cap was unlawful under EU age discrimination laws.
The Latest Judgement
The claim had previously been upheld in 2020 by the High Court, following which the Secretary of State for Work & Pensions was granted leave to appeal. In the latest judgement, the Court determined that this compensation cap was not objective justification for treating younger members differently to those who had reached their normal retirement age and to whom the cap does not apply. Members of pension schemes operated by a number of employers including Monarch Airlines and BMI, should therefore receive their full entitlement going forward. Whilst the precise mechanics of how the system will work are still being determined, they could also be eligible to reclaim up to six years’ worth of arrears from the PPF.
This means that staff of any future defined benefit scheme, which is taken into the PPF, will have the security of knowing that their hard-earned retirement security is not going to be taken from them unexpectedly. Whilst the compensation cap only impacted a small number of members (c 0.5% at last estimate), the potential for detriment to this number should the cap be applied was significant.If you’re wondering who Paul Hughes is then you’re probably not alone. Click To Tweet
An Increase in Clients Wishing to Transfer
The issue has also historically caused a certain degree of trepidation amongst the adviser community. In the aftermath of the credit crunch, and later the COVID-19 pandemic, the industry saw an increase in the number of clients looking to transfer out of defined benefit schemes due to concerns over the solvency of their employer. Whilst the concerns may be very valid in some cases, a lack of either precedent or regulatory clarity on such matters meant that many firms were reluctant to provide such advice in the first instance. The FCA clarified its views slightly in FG21/3 earlier this year when it stated the following:
‘We agree with the Pension Protection Fund (PPF) that scheme deficits should generally not be used as a reason to take a transfer. The PPF expects that most schemes will pay their benefits in full.
As the appropriate examination standards for a Pension Transfer Specialist (PTS) do not include how to analyse employer covenants, we think it’s unlikely that PTSs are able to draw conclusions about possible PPF entry in the future. Employer covenant assessment is complex, and even experts find it difficult to predict the financial future of an employer. You should also make it clear to your client that a scheme deficit does not mean the scheme is about to enter the PPF’.
The Hughes Judgement Will Likely Remove the Dilemma
Whilst this was helpful to a degree, it appears that the dilemma is likely to be largely removed going forward as a result of the Hughes judgement.
Note: interestingly, the judgement as it stands applies only to the cap on compensation for those who have not yet reached normal retirement age as the scheme enters the PPF. It made no judgement on the split of 90% for those not yet at NRA versus 100% for those who are. This could be considered equally discriminatory, yet the current likelihood is that this will remain in place.
There’s never a dull moment!
Grab the resources you need!
If you’re studying for your CII AF7 exam, and you’re wanting to feel confident on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself. Click the link to download the AF7 mock paper taster now!
Information in this article is correct as at 29 November 2021.