High Court ruling could prompt firms to question final salary commitment

Employers may question their commitment to defined benefit (DB) pension schemes following a ruling by the High Court that government ministers were guilty of maladministration in their communication of the safety of final salary plans.

The ruling in the case, which was brought by four pensioners who have lost either all or part of their pension, has put further pressure on the government to compensate such workers.

This could fuel employers’ fears of a potential increase in the levy payable to The Pension Protection Fund (PPF). These could be affected if the government awarded compensation that was higher than the current compensation limit of 90% paid out by the PPF.

The High Court test case challenged the government’s rejection of parliamentary ombudsman, Ann Abraham’s,report which accused ministers of maladministration and stated that they should think about compensating the pensioners for their pension loss. She also claimed the government should be able to offer greater compensation than is currently being provided by the financial assistance scheme.

In his ruling, Mr Justice Bean agreed that leaflets and pamphlets published by the government about the security of occupational pension schemes had been misleading. These stated that the 1995 Pensions Act would ensure scheme members would be secure even if their plan was wound up. He added that members of the general public between 1995 and 2005 would not have been able to tell that, if their employer went out of business just before the they retired, there was a chance they would receive no occupational pension.

The government has not yet decided how to compensate those whose pension schemes collapsed. In yesterday’s Prime Ministers’ Question Time, Tony Blair supported David Cameron’s suggestion of working on a cross-party basis to provide for pensioners. Blair said: “I entirely agree with the right honourable gentleman that it is a terrible situation for those people who have lost their pensions. However, we must ensure that any package we put forward is affordable.” Cameron suggested that Blair should consider pooling the financial assistance scheme funds and rolling its administration into the PPF, however, Blair defended the financial assistance scheme.

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Tom McPhail, head of pensions research at Hargreaves Lansdown, said the judge’s decision and the situation the government has found itself in may deter employers from offering final salary pension schemes in the future. “It certainly illustrates the risks associated with the kind of commitment we’ve seen from employers in the past with things like final salary schemes and trust based schemes, so if you make any kind of commitment to your workforce either through a final salary scheme promise or through taking on the responsibilities of a trusteeship, you need to be very very confident that you can meet those commitments and responsibilities.

“I think, going forward, this is likely to reinforce the perception that a simple contract-based arrangement where the employer makes a commitment over the contributions and the funding and ensure that it’s set up under suitable governance and then walk away is looking increasingly likely.”