The Court of Appeal delivered judgment on 28 July 2016 in the case of Hampshire v The Board of the Pension Protection Fund  EWCA Civ 786. The case concerned Article 8 of the EU Insolvency Directive, which requires Member States to ensure that "necessary measures" are taken to protect the pension benefits of current and former employees under the employer's occupational scheme, in the event of the employer's insolvency. The requirements of Article 8 had been transposed into UK domestic law by establishing the PPF and the Financial Assistance Scheme. Broadly, under the Pensions Act 2004, where there has been a "qualifying insolvency event" in relation to a scheme's employer and a "section 143 valuation" which demonstrates that a pension scheme has insufficient funds to pay at least the PPF levels of compensation, the PPF will pay compensation to beneficiaries of the pension scheme concerned.
PPF compensation for members is paid at one of two levels:
- The "100% level": for members who have reached Normal Pension Age by the Assessment Date. The annual amount of compensation paid at this level is not subject to any cap.
- The "90% level": for members who have not reached Normal Pension Age by the Assessment Date. The annual amount of any compensation paid at this level is subject to a cap.
The amount of the cap depends on the age at which compensation is paid, and the amount of the compensation cap is increased each year in line with the increase in the general level of national earnings. Unfortunately, the existence of the PPF compensation cap means that it's possible for some members to end up receiving less than 50% of their full pension entitlements.
Facts of Hampshire
- Mr Hampshire appealed a decision of the High Court, which had rejected his claim relating to the application of the PPF compensation cap to his pension. His pension had been reduced by almost 67%.
- In the High Court, Mr Hampshire had argued, unsuccessfully, that in light of the ECJ decisions in Robins and Hogan, the obligation under Article 8 of the EU Insolvency Directive to take "the necessary measures" imposed a requirement on Member States that every member of an insolvent employer's pension scheme must receive at least 50% of their pension benefits, and that the Directive was therefore directly effective.
- The High Court had concluded that the Insolvency Directive was not binding on the PPF and that the PPF had acted correctly in complying with the relevant UK legislation. For there to be a finding of direct effect, the content of the protection must be identified with sufficient precision and the minimum level of protection must be identifiable, which was not the case as spelled out in the Insolvency Directive.
Robins and Hogan
The Court of Appeal in Hampshire discussed the cases of Robins and Hogan. In Robins, the claimants (former employees of ASW Limited which had become insolvent in 2002) argued that the UK Government had failed to protect their pensions in accordance with Article 8 of the Insolvency Directive. The case pre-dated the introduction of the PPF (established by the Pensions Act 2004). At the time of Robins, some protection was afforded by:
- The employer debt arrangements under the Pensions Act 1995. The statutory regime then in force provided that if an underfunded salary-related scheme winds up, the trustees can pursue the employer for the shortfall, calculated on a prescribed statutory basis. Benefits were paid strictly according to a statutory order of priority, with pensioner members of the scheme ranking first, ahead of active members and deferred pensioners;
- Provisions that any contributions relating to members' contracted-out rights due but unpaid as a result of the employer's insolvency were paid from the National Insurance Fund ("NIF");
- The Financial Assistance Scheme had also been established for pre-April 2005 insolvencies whilst the Robins case had been proceeding.But at the time of the ECJ's judgment the assistance it provided was less than the PPF compensation for post-April 2005 insolvencies.
It was noted in Robins that two of the claimants would receive only 20% and 49% respectively of their pension benefits. The ECJ held that while Article 8 gave no indication of the minimum level of protection required from Member States in respect of pension benefits, provisions of domestic law which led (in some cases) to such a low level of protection could not be considered to fall within the definition of the word "protect", employed in Article 8.
In Hogan, the claimants (10 former employees of Waterford Crystal Ltd) who stood to receive less than 50% of their accrued rights on the winding up of the company's DB pension scheme, brought proceedings against the Irish Government. Article 8 of the Insolvency Directive was transposed into Irish law via section 7 of the Protection of Employees (Employers' Insolvency) Act 1984. This provided that any contribution deducted by an employer, or due to be paid by that employer, during the 12 months preceding insolvency should be paid into the occupational pension scheme. A minimum funding standard applied to the schemes before they were wound up, but the legislation did not provide for any funding shortfall to be recoverable as a statutory debt on the employer when the winding-up was triggered .The ECJ in Hogan held that Ireland had failed to properly transpose the Insolvency Directive into Irish law and that failure to implement adequate measures (following the case of Robins) to ensure members of occupational schemes would receive in excess of 49% of the value of their accrued pension benefits constituted a serious breach of its obligations.
For the Court of Appeal in Hampshire, the importance of Hogan lay in its apparent confirmation at paragraph 51 of the judgment, that Robins established a minimum level of protection that was of universal (and therefore individual) application. In paragraph 51 of Hogan, the Court said that, following Robins, the correct transposition of Article 8 required an employee to receive at least half of the benefits to which he was contractually entitled.
The High Court in Hampshire, however, declined to read paragraph 51 of Hogan literally. Indeed, in considering both the decisions of Robins and Hogan, the High Court had found it "almost inconceivable" that the ECJ would "hold that it was unlawful per se to impose a cap on protected benefits". The majority of the Court of Appeal took a different view and considered that the ECJ had "meant what it said" at paragraph 51 of Hogan. Further, that if the majority's interpretation was correct, the capping provisions under the Pensions Act 2004 have not correctly or adequately transposed Article 8 into UK domestic law. The Court of Appeal held, however, that the point was not free from doubt, and so proposed to refer it to the ECJ before determining this point on appeal.
The Court of Appeal also found that it was not clear whether Article 8 of the Insolvency Directive was sufficiently clear and precise to have direct effect. The parties had differing points of view as to whether direct effect was to be judged solely by reference to the terms of Article 8, without recourse to how it had been interpreted by the ECJ, and additionally, whether Article 8 specified the guarantor of the protected liabilities. The Court of Appeal therefore also decided to refer to the ECJ the question as to whether Article 8 has direct effect in domestic law.
Of course, whether the referral will be heard by the ECJ before the official Brexit is another story. Even if it does, what happens to the authority of ECJ judgments post-Brexit is unclear, as does whether the terms of Brexit will mean that the UK is still subject to the EU Insolvency Directive. So there could be uncertainty over the lawfulness of the cap for some time to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.