The Department for Work and Pensions (DWP) clearly believed it had a good news story on its hands when it announced changes to the Pension Protection Fund (PPF) compensation cap last week.
The move is intended to help long-serving workers who build up large pension pots but have their compensation capped when their scheme falls into the PPF.
It was described by one national newspaper, which declared pensions minister Steve Webb to be "the only Liberal Democrat in the government who is worth his salt", as a "fair and sensible reform". It is undeniably good news for some PPF members such as John Elvins (see case study 1, below) who will see a considerable increase in their pensions.
But campaigners have reacted angrily to the changes, claiming the impact will be minimal for many (see case study 2), and businesses are concerned they will have to pay the bill. Equally worrying for the DWP, lawyers say the revisions do not bring the cap into line with European law.
The cap
At present members who have not reached normal pension age (NPA) when their scheme enters PPF assessment get 90% of their accrued benefits while members beyond the NPA get 100% of their pension. Indexation than provided by schemes, with no increases for benefits accrued before April 1997 and increases for service after this date capped at 2.5%.
But members under the NPA are also subject to a cap which limits annual compensation to £31,380 regardless of the size of pension pot they have amassed. These measures were introduced when the PPF was set up to limit its exposure and to introduce an element of ‘moral hazard' for highly paid executives.
But at a parliamentary debate last December, Webb revealed he was increasingly concerned the cap was penalising long-serving employees and announced a review. The results were announced last week, with legislation promised as soon as possible.
Members who have belonged to a scheme for more than 20 years will see the cap increase by 3% for every year of service after this landmark. The maximum annual pension members who are subject to the revised cap can receive is approximately £63,000.
Announcing the changes, Webb said: "It cannot be right that someone who has been with a company for much of their working life - and relies heavily on that for their pension income - gets the same in compensation as someone with far shorter service and who could also have other pension income to fall back on. I want to ensure that those who are or could be affected will in future have their long service recognised."
The cost
The bill for this will not be picked up by the DWP or HM Treasury, but will have to be absorbed by the PPF. The government believes, however, that the added liabilities will have no material effect on lifeboat fund.
This is because so few members are subject to the cap at the moment. Just 160 of the funds 90,000 pensioners have their benefits capped and the DWP says the changes will increase liabilities for the £16bn fund by just £37m, even taking into account the larger number of deferred members.
But the Confederation of British Industry (CBI) describes the announcement as a "bitter blow" and is critical of the government for failing to engage with companies over the changes.
Its director for employment and skills Neil Carberry says: "The fund is paid for by business, not the government. At a cost of over £600m a year, it is already more than double the original plan. An even greater levy will hold back business investment and growth."
Towers Watson senior consultant Stephen Rees adds: "The government could have financed this higher level of compensation by paying those above NPA fractionally less than 100% of their losses, but it has decided instead that levy-payers should meet this increase in costs."
The campaigners
The announcement is an even more bitter blow for pensioners who have been campaigning to have full benefits restored. Former Turner& Newall (T&N) senior manager Grenville Hampshire says: "Many of us who have been fighting this battle for over seven years will derive little benefit from the proposed changes and some will derive no benefit at all. The minister has squandered a golden opportunity to address what everyone, including the minister, accepts is gross injustice, with no cost to the tax payer."
This view was echoed by members of the government-funded predecessor to the PPF, the Financial Assistance Scheme. Although there is a feeling that the DWP will be unable in the long run to resist calls to bring FAS benefits into line with the PPF, it is not proposing to do so at the moment.
Pensions Action Group spokesman Terry Monk says: "This seems extremely unfair and not in keeping with statements Steve Webb has made. The fact the changes are not backdated would also penalise older people who have already retired."
The Law
The revisions have not deterred these campaigners from challenging the cap. Former T&N workers have taken their complaint to the PPF Ombudsman and expect it to be referred to the High Court. A larger group of members have initiated a claim against the government through the European courts.
Their claims have been bolstered by the European Court of Justice ruling in the Waterford Crystal case earlier this year. This backed up previous rulings which declared article eight of the 2008 EU Insolvency Act requires national governments to ensure employees receive at least half their accrued benefits in the event of an insolvency.
The DWP says it is confident PPF legislation complies with article eight, but Eversheds partner Giles Orton says: "The PPF is still going to deliver less than 50% compensation for many members. I cannot conceive how the DWP expects to be able to justify this to the European Court."
Orton adds that the DWP should act to reduce the cliff-edge effect which sees members beyond the NPA get 100% of benefits.
He says: "It would make sense is to come up with a coherent cap for both pre- and post-NPA members. You can imagine a Fred Goodwin who was over NPA; PPF would pay him £700,000 a year. The government seems to be perfectly happy with that, and yet they say if you are a day younger it could become £30,000."
Case study 1: John Elvins
John Elvins worked as shop floor supervisor for car parts manufacturer Visteon UK and its predecessor Ford Motor Company for 39 years. He took early retirement in 2008 at 55, 10 years before his scheme's NPA.
In March 2009, Visteon became insolvent, and its scheme entered PPF assessment. As a result, Elvin's pension was reduced. In February 2012 the scheme transferred to the PPF. As Elvin was still under the NPA, and had a pension just above the £32,000 compensation cap, his entitlement was reduced by more than a third.
The DWP says Elvin will now see a 50% increase in his compensation. He will receive of 90% of the benefits he accrued in the Visteon scheme.
Case study 2: Peter Farrell
Peter Farrell was a senior manager for T&N for 24 years until he was made redundant in 1997 aged 52 and took early retirement. His annual index-linked pension was £32,400.
The T&N scheme entered PPF assessment in July 2006, one month before Farrell reached normal retirement age when his full pension would have been protected. His benefits were reduced by 52% from the £42,000 he was then receiving to £20,200.
Under the changes announced last week it appears Farrell will receive just over £2,400 a year more, taking his annual compensation to £22,600. This is 44% of the £51,740 Farrell says his income would have risen to if the T&N scheme's minimum annual indexation had been applied.
