The High Court has ruled that the cap on maximum compensation available under the Pension Protection Fund (PPF) flouts age discrimination rules.
This ruling is likely to have widespread implications for the pension industry, according to LCP partner, and former pensions minister Steve Webb.
Under current rules if a company becomes insolvent and its pension scheme transferred to the PPF then those over state retirement age get 100 per cent of the scheme benefits, but those under retirement age get 90 per cent.
In addition those under pension age also have a cap applied on the maximum benefit that can be paid. It is this cap that the High Court has ruled is unlawful.
As a result, hundreds of capped PPF members may see their benefits increased, and in some cases will receive backdated payments.
However, the court did not rule on whether paying 90 per cent compensation to those under pension age and 100 per cent to those over pension age is itself discriminatory.
Webb says this judgement may lead to further legal action as a result.
As well as PPF members receiving additional payment this ruling is also likely to affect the PPF levy paid by firms who run final salary schemes. Those who have relatively large numbers of higher earners may be asked to pay more because their deficit measured on a PPF basis would go up.
Webb says: “This ruling is great news for thousands of workers whose pensions were capped simply because their company went bust before they reached pension age.
“But it could have a much wider knock-on effect. If it is discrimination to cap compensation on larger pensions only for those under pension age, there could be further legal challenge to the whole principle of only paying 90 per cent compensation across the board for those under pension age.
“This could have much more far-reaching implications for the overall size of the PPF levy and for the levy payable by individual schemes and employers”.