The CJEU issued judgment on 25 April 2013 in respect of the questions put to it by the Irish High Court in July 2011 in relation to the claims of ten former employees of Waterford Crystal that the State had failed to properly implement Directive 2008/94 (the "Insolvency Directive") to protect their pension benefits on the insolvency of Waterford Crystal. As such this case concerns the protections provided by the State for members of insolvent pension schemes of insolvent sponsoring employers.

Findings of the CJEU

In summary, the CJEU found that:

  • the State pension could not be taken into account when assessing whether the State had satisfied the requirements of the Insolvency Directive;
  • there is no requirement to identify the causes of the employer's insolvency or of the underfunding in the pension scheme to benefit from the protection of the Insolvency Directive;
  • the protection afforded by the Protection of Employees (Employers' Insolvency) Act, 1984 (the "1984 Act") is insufficient to meet the required level of protection under the Insolvency Directive; and
  • as a result of this, the Irish State is in serious breach of its obligations under the Insolvency Directive.

The CJEU also noted its previous judgment in the Robins decision requires that members must receive in excess of 49% of the value of their accrued benefits under a pension scheme where there is an employer insolvency event.

The Insolvency Directive and the action taken by the former Waterford Crystal employees

Article 8 of the Insolvency Directive requires Member States to ensure that necessary measures are taken to protect the interests of employees and former employees on the employer's insolvency in respect of occupational pension schemes other than national statutory social security schemes.

Ten former employees of Waterford Crystal had commenced litigation in the Irish High Court following the closure of their employer in early 2009.

They claimed, amongst other things, that the State had not met its obligations under the predecessor to the Insolvency Directive and the Insolvency Directive itself by simply implementing the 1984 Act. The High Court found that the issues before it required the opinion of the CJEU and so applied to that court for a preliminary ruling. The decision issued on 25 April 2013 is the result of that reference – it is not a decision in respect of the High Court litigation for the ten former employees. The High Court must now review the decision handed down by the CJEU and determine whether compensation is due to the former employees and, if so, the amount of any such compensation.

The 1984 Act

The 1984 Act requires the Social Insurance Fund to pay certain contributions to pension schemes on the insolvency of the sponsoring employer. The maximum sum payable is any contribution deducted by an employer or due to be paid by an employer during the 12 months preceding the date of insolvency. As set out above, the CJEU found that this was insufficient to meet the State's obligations under the Insolvency Directive.

The Pensions Insolvency Payment Scheme ("PIPS")

PIPS was introduced in 2009 to assist employees of insolvent companies where their defined benefit scheme is in deficit. Under PIPS, the trustees of a defined benefit scheme can pay a sum to the Exchequer to cover the cost of paying pensioner benefits instead of buying annuities. The result is that more pension can be bought for less money with a greater amount remaining to be applied for active and deferred members. In September 2012 (subsequent to the commencement of the High Court action and the reference to the CJEU), the Waterford Crystal schemes entered PIPS and the State has now taken responsibility for making future pension payments to pensioner members with the result active and deferred members will receive a greater proportion of their expected pension benefits. However, it is estimated that those pensions will still be less than 49% of the pensions they would have expected to receive from the Waterford Crystal schemes originally.

The consequences for Irish employers

At this stage the consequences of the CJEU ruling for Irish employers are uncertain. Much will depend on the decision of the High Court when the matter is considered by it and whether consideration is given by the High Court to the fact that the Waterford Crystal pension schemes were admitted to PIPS.

The risk for employers is that the Government might decide to implement a system similar to the Pension Protection Fund (the "PPF") in the UK and/or the "debt on the employer regime" (also known as section 75 debt).

The PPF provides compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer, and where there are insufficient assets in the pension scheme to cover the PPF level of benefits (broadly speaking 90% of the benefit capped at £31,000). The Fund is financed by compulsory annual levies charged on eligible schemes.

The debt on the employer regime creates a statutory debt calculated on a buy-out basis which can be recovered from any solvent company in the corporate group. There are a number of possible triggers including corporate restructuring, weakening of the employer covenant and scheme termination.

The judgment comes at a time when the OECD has just published its report "Review of the Irish Pension System". This found that Irish legislation for the protection of defined benefit scheme members is weak and that the 1984 Act and PIPS provide only partial protection to defined benefit scheme members in the case of employer insolvency. It also noted that current pensions legislation permits sponsoring employers to walk away from defined benefit pension schemes without creating any debt on the employer. The report recommends that "a pension protection arrangement cannot work however unless the employer has the primary obligation to fund shortfalls". Whether this will result in some form of insolvency protection for members remains to be seen. If systems similar to the PPF or the debt on the employer regime are introduced in Ireland this may signal the accelerated demise of many defined benefit schemes.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.