Appendix 3: Draft Financial Assistance Scheme (Increased Cap for Long Service) Regulations 2018
Additional Information from the Department for Work and Pensions
“Q1: Can you please explain the relevance of the court case, although it is solely directed at the Pension Protection Fund (PPF) are we to assume that if the European Court found against the UK then you would also pay increased sums to claimants under the Financial Assistance Scheme (FAS) due to the principle of parity you mention at para 7.7 of the EM.
A1: The Hampshire case was mentioned in the Explanatory Memorandum to the FAS long service cap regulations only as potentially relevant background information which might be considered of interest to the Committee, given the parallels between the PPF and FAS caps. The outcome of the case will have no impact on the vast majority of PPF and FAS members (see the answer to question 2 for more information on this point).
Mr Hampshire contends that Article 8 of the EU Insolvency Directive requires the UK to ensure that every pension scheme member gets at least 50% of their accrued benefits in the event of the insolvency of the sponsoring employer. Mr Hampshire further argues that Article 8 of the Insolvency Directive has ”direct effect”, ie it confers rights on individuals which are directly enforceable against the PPF, and therefore the PPF cannot accept any scheme valuation under which any member would receive less than the 50% “minimum”. Having been unsuccessful in the High Court, Mr Hampshire appealed to the Court of
Appeal, which referred certain key questions in the case to the Court of Justice of the European Union (CJEU). The case is currently awaiting hearing by the CJEU.
The case concerns the level of protection that the UK is required to provide for pension scheme members’ accrued benefits in the event of the insolvency of scheme’s sponsoring employer. As the FAS, as well as the PPF, is one of the mechanisms by which the UK provides such protection, the CJEU’s ruling could have implications with regard to the compliance of the FAS regime with the Directive.
In the event of an adverse decision, the Government would need to consider the precise terms of the judgement in order to determine what legislative changes might be needed in relation to the rules for both the FAS and PPF.
Q2: What is the concern about the court case?–the plaintiff seeks that any claimant should receive at least 50% of their pension entitlement in the case of insolvency, but the FAS ensures that members generally receive 90% of their pension accrued at the time of the insolvency–which would appear to be a greater amount. Can you set out what the differential is that concerns the DWP–is it the potential to override the cap or is it the costs of adopting a different method of calculating the benefits due at the point of retirement?
A2: Both the PPF and FAS pay scheme members 90% of the pension accrued respectively, at the point their scheme entered PPF assessment or began to wind-up, subject to an overall cap. In the case of the PPF these restrictions apply only to members below their scheme’s normal pension age at that time.
The cap is set as at age 65 and is currently £34,229 for FAS payments and £34,655 for PPF compensation. The cap is actuarially reduced if a member opts to receive their compensation early, so that members who take their compensation at different ages are treated fairly.
There are two reasons for the cap. The first is to limit the costs of the FAS and the PPF. The second is to deter excessive risk taking or malpractice by, for example company directors, who may be tempted to take decisions that result in the insolvency of the company, in the knowledge that their own and colleagues’ pension benefits would, in effect, be underwritten.
It is possible for the capped amount of compensation or assistance to be less than 50% of the member’s accrued pension, for example where a member has a large pension due to a high salary and/or long service within the same pension scheme. However, we believe the numbers affected to be very low. Only around 400 PPF and 500 FAS members are currently affected by the cap which represents around 0.3% of the total membership of both schemes as at April 2017. We estimate that a very small proportion of these capped members are not receiving at least 50% of their accrued pension and the increased FAS cap for long service will further reduce the number of members affected.
The Government’s concerns regarding the position for which Mr Hampshire argues relate to both the potential costs and the undermining of the principle of the cap. The impact on Government, the PPF and pension schemes more generally, in the event of an adverse decision, would depend on the precise terms of the judgment but the implications would likely be significant. Even with relatively few scheme members affected, any requirement to ensure that every member of every scheme receives no less than 50% of their original scheme entitlement could, depending on the terms of the judgment and the nature of any legislative changes made in response, significantly increase the costs for both the FAS, which is funded by the taxpayer, and the PPF, which is funded via a levy on eligible pension schemes.
Q3: Costs - you state that the change will give rise to additional admin costs of £ 0.5–0.7 million this does not appear to include the payments due to the 290 in back pay and additional future payments. Is that correct?
A3: Yes the £500,000–£700,000 range is the one-off cost of amending existing IT systems and communicating with eligible FAS members about the increased payments they will receive. The cost is based on estimates provided in 2016 when the policy was agreed. Spending on this project is monitored via quarterly reviews between the PPF (who administer FAS) and DWP and the project is now on target to come in at the lower end of this range. Given the nature of changes required and the need to communicate with FAS members to ensure that they understand what their assistance payments will be going forward, the DWP is content that this change represents value for money.
Increases due to FAS members who are eligible for the long service cap will only take effect from the date that the regulations come into force; payments will not be backdated. The expectation is that the regulations will come into force on 6 April 2018 and therefore increased payments will only apply from this date.
The long service cap will increase the overall cost of FAS by approximately £1.2m per year. Actual costs will depend on a number of factors, including pensioner deaths (which will reduce FAS payments) and new retirements (which could increase costs). As the FAS closed to new schemes on 1 September 2016 the actual costs may be lower than the £1.2 million quoted.
Q4: Also because the FAS is a legacy scheme the number of affected individuals is fixed and finite–we therefore wonder how administrative costs of £0.7m compare with the estimated additional sums that will be paid to the claimants. We also wonder whether extensive IT changes are proportionate and represent value for money? Do you have any evidence on this and have you considered any alternative solutions–such as manual amendments for that limited cadre?
A4: Please see our answer to question 3.”