Last month, the European Court of Justice (CJEU) ruled in Bauer that the current 50% minimum level of protection is too low if it means that the pension member is living below the 'at risk of poverty' measure in the member state concerned.
The court did not agree with the Advocate-General that 100% compensation was required, thereby averting a major crisis in the UK’s defined benefit (DB) funding system; however, the ruling still raises a number of uncertainties in relation to the Pension Protection Fund (PPF).
It seems the PPF is currently in discussions with the Department of Work and Pensions (DWP) about how this affects the UK, and, assuming they accept that it does, how the judgment should be implemented. State pensions may go a long way towards meeting the poverty test, but not for everyone, so it seems that further increases to PPF compensation, and therefore the levy, will be required. It is hard to estimate the quantum of any impact; perhaps it will be lost in the rounding for most schemes when valuing their PPF liabilities.
Will Brexit affect this? The Withdrawal Agreement Bill will apply the Directive and the CJEU ruling after 31 January, up to the end of the implementation period. After that, the European Union (Withdrawal) Act 2018 prevents a cliff edge in legal framework by continuing the application of all EU-derived law, until and unless it is amended by the UK Parliament. Alignment constraints under a future trading relationship might restrict changes to the law.
Protecting a minimum level of income may have an unintended effect: like all means-tested benefits, it could be seen as penalising those who saved more, or who are still working. Will the PPF be able to prevent such individuals choosing to stop working? Or to spend their savings, or cash in their pensions?
The current 50% requirement was based on income from the scheme concerned; the Bauer case adds to the current confusion over what level of PPF compensation may be due.
Only HMRC will have the information about combined income, if the member is within the tax system. Presumably, the onus for claiming top-up compensation from the PPF will be on the individual.
For now, there is little that DB schemes can do other than monitor developments.
Anna Rogers is senior partner at Arc Pensions Law
