UK: European Court Rules Pension Protection Fund Compensation Cap Unlawful

Last Updated: 13 September 2018
Article by Mark Howard
Most Read Contributor in UK, December 2018

The Court of Justice for the European Union has ruled that Pension Protection Fund compensation cap breaches the EU Insolvency Directive.

The EU Insolvency Directive provides that Member States should protect employees' and former employees' pension rights on insolvency. The Court of Justice (or "ECJ" for short) had ruled in the cases of Robins (2007), Hogan (2013) and Webb-Samann (2016) that the protection under the EU Insolvency Directive means that Member States should ensure that employees and former employees receive at least 50% of the value of their pension.

The PPF compensation rules provide that members who are under their scheme's normal pension age receive 90% of the pension they would have received subject to a cap. The cap at age 65 is currently £39,006.18, which equates to compensation of £35,105.56 when the 90 per cent level is applied. The PPF compensation rules also do not take full account of increases which would have been paid by a scheme – only valuing increases for pensionable service after April 1997.

Mr Hampshire was a member of the Turner & Newall pension scheme and had taken early retirement in 1998 at the age of 51. His pension was just under £49,000 pa with 3% pa increases. Following the insolvency of the Federal Mogul group, the Turner & Newall pension scheme entered into a PPF assessment. As Mr Hampshire had not reached normal pension age he was subject to the cap, which at the time would mean he would receive compensation of just under £20,000.

The ECJ has followed the opinion of Advocate-General Kokott:

  • the 50% minimum under the EU Insolvency Directive should apply on a member-by-member basis.The ECJ ruled that the purpose of the Directive would be seriously undermined if Member States could implement it without granting protection to each individual worker.
  • the increases the member receives under the scheme rules had to be taken into account when assessing the value of the pension.This is significant for Mr Hampshire as most of his pension was earned before April 1997 and so would not have attracted increases to his PPF compensation.
  • the Directive was directly enforceable against the PPF.Even where the scheme would have sufficient assets to wind up outside of the PPF – as is the case for the Turner & Newall Scheme – the PPF had the power to give directions to the trustees, which meant that Directive would still be enforceable against the PPF.

Clyde & Co Comment

This has been a long running dispute as the Turner & Newall Pension Scheme entered a PPF assessment in 2006. The PPF has estimated that around 0.5% of its members are subject to the cap1 which, with over 240,000 members currently in the PPF, would suggest around 1,200 members affected. The PPF will have to go through the process of adjusting their benefits and compensating them for past underpayment of benefits.

The judgement will also be an embarrassment as the PPF's mantra is that it exists to "to pay the right people the right amount at the right time" as the ECJ first ruled in 2007 that compensation under the EU Insolvency Directive should be at least 50% of the value of pension benefits.

The most significant part of the decision may be that the valuation of members' benefits should take full account of the increases they would have earned from the scheme – rather than increases earned after 1997. How will this be implemented? If full increases are taken into account in the future then that could significantly improve compensation for members – and the levy charged to employers. So we might see the PPF looking to impose an "underpin" test: continuing to apply the same compensation rules but with a check at the end to make sure members meet the 50% value limit required by the EU Insolvency Directive. The PPF's press release has said that it has already been working with the Department for Work and Pensions (DWP) about the changes that may result from this judgment.

It also poses the question of whether members of schemes that have been wound up, but were subject to the cap could now bring claims against the PPF for damages. This is a further headache for the PPF and the DWP. They might claim that these members are barred from bringing a claim, but politically it might be difficult to exclude them: in Hogan (2013) the ECJ found the Irish Government to be in serious breach of its obligations under the EU Insolvency Directive – and therefore liable for damages – having failed to implement the Directive in line with earlier decision of Robins (2007).

For employers, a further unwelcome consequence could be that the value of "protected liabilities" in their schemes will increase, with a consequent rise in the levy paid to fund the PPF.



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