UK: ASW - ECJ Rules That Full Protection Of Pension Benefits On Insolvency Not Required

Last Updated: 25 January 2007
Article by Mark Grant

The UK government, and many employers, will be breathing a sigh of relief following the handing down by the European Court of Justice today of its decision in the Allied Steel & Wire (ASW) case brought against the UK government (Robins, Burnett and others v Secretary of State for Work and Pensions).

The ECJ found that, in breach of the 1980 EC Insolvency Directive, the UK government had failed to take steps to ensure that the benefits of two former ASW employees had been adequately protected when their employer became insolvent. However, there was a significant difference of emphasis between the reasoning of the ECJ and the Opinion given by the Advocate-General in the case in July 2006.

The Advocate-General had suggested that a Member State could provide less than full protection of pension benefits on insolvency only in exceptional circumstances, where full protection could adversely impact on "balanced economic and social development" in the Community.

However, the ECJ has clearly taken a more relaxed view of the degree of protection required, stating merely that the relevant provision of the Directive "cannot be interpreted as demanding a full guarantee of the rights in question… the Directive gives the Member States, for the purposes of determining the level of protection considerable latitude which excludes an obligation to guarantee in full". While the court explicitly said that guaranteeing less than half of the promised entitlement would not constitute "protection", the judgment leaves open the question of what percentage, between 50% and 100%, would be sufficient protection for these purposes. What is clear is that 100% protection is not required.

It seems unlikely, certainly for the majority of pension scheme members, that the level of benefits now guaranteed under the PPF would fall foul of the Directive. In the short-term, we do not therefore expect the Government to take any action in relation to changing the shape of the PPF. However, there may be implications in individual cases, for example high earners or members with generous pre-1997 service related pension increases, where the effect of PPF "capping" could reduce benefits substantially and in some cases by more than half. The Government may wait for the outcome of the UK proceedings before implementing any such changes.

Moreover, the High Court will now have to decide whether the breach of the Directive described by the ECJ was "sufficiently serious" to warrant compensation from the Government for insolvencies in the past. The former ASW employees will need to show that the Government’s failure to implement the Directive amounted to "manifest and grave disregard" of its obligations under it. It will be up to the High Court to obtain and consider all the appropriate evidence. However, the ECJ judgment gives a strong steer that it may be difficult for the members to establish this.

The decision is therefore likely to represent a disappointment for the former ASW workers and something of a let-off for the Government. If the ECJ had held, as was feared in some quarters, that the Directive required employees’ pension entitlements to be fully protected, this could have involved significant restructuring of the PPF and / or tightening up the recently-introduced "scheme specific funding" regime, and far more prescriptive investment and governance policies.

The full transcript of the decision can be found by clicking here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 25/01/2007.

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