Guest Comment: The 'ominous precedent' set by the ECJ's PPF ruling

Written by PMI technical consultant Tim Middleton

On 6 September 2018, the European Court of Justice ruled that compensation payments made by the Pension Protection Fund may not be less than 50 per cent of the benefit originally accrued.

There may also be a requirement for pre-1997 benefits to be subject to indexation.

At first glance, the impact of the ruling does not appear particularly significant. It will affect perhaps 1,200 individuals and increase the PPF’s overall liabilities by about £200m. Given the overall size of the PPF, this represents a very small increase. However, it does represent a potentially ominous precedent.

The PPF was never intended to replicate exact benefits accrued in the schemes of insolvent employers. Whilst pensions in payment have always been ringfenced, ensuring that pensioners’ benefits are paid in full, deferred pensions have been restricted on the understanding that affected members would still have an opportunity to accrue further benefits before retirement.

Viewed in this context, the judgment looks like the first twist of the regulatory ratchet that proved to have such a detrimental impact on DB provision in the eighties and nineties.

In the past, we have witnessed a succession of reforms providing formal guarantees for DB members. Perversely, this had the effect of destroying DB provision as increasingly expensive schemes closed to future accrual – with some ultimately falling into the PPF. It is to be hoped that PPF guarantees are not to be improved to the point where the PPF itself becomes unviable.

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