Pension compensation payable to employees of insolvent businesses by the UK's Pension Protection Fund (PPF) cannot be capped at less than 50% of what the individual would have otherwise been entitled to, the Court of Justice of the European Union (CJEU) has ruled.
The judgment by the EU's highest court confirms that EU law requires members of insolvent defined benefit (DB) pension schemes receive compensation worth at least half of the benefits they would otherwise have received under EU law. The CJEU's judgment also has direct effect against the PPF, superseding UK legislation which provides for an absolute cap on claims for compensation from the PPF, the UK's employer-funded DB pension 'lifeboat' scheme.
"Effectively, the CJEU has said that 50% of benefits mentioned in its earlier judgment means 50% on an individual basis," said pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com. "Otherwise there is limited consistency, and that undermines confidence in the system."
"It seems that the government and PPF will now have to review the way the cap on PPF compensation operates and the way in which PPF pensions increase, as the lack of increases for pre-1997 pensions exacerbates the effect of the cap. However, this creates a mismatch between the compensation provided by the PPF in the event of employer insolvency, and the statutory order in which trustees must secure members' benefits if their scheme is sufficiently well funded to avoid the PPF," he said.
The Court of Appeal in England had asked the CJEU to intervene in a case brought by Grenville Hampshire, a former senior executive at collapsed manufacturing business Turner & Newall. Hampshire had not yet reached the retirement age provided for in the scheme rules when the company became insolvent in 2006, meaning that the annual pension he will receive from the PPF will be capped at a value approximately 67% lower than what his pension entitlement would otherwise have been.
The PPF had argued that while EU law requires EU countries to provide for pension protections to account for insolvency events, it does not stipulate the compensation payable to individual claimants. Its compensation cap particularly affects high earners and long-serving employees entitled to a relatively high pension. Capped benefits also do not always increase year on year in line with inflation.
In its judgment, the CJEU said that although EU law did not oblige member states to guarantee pension payments in full in the event of sponsoring employer insolvency, limiting any guarantee to less than half of an individual's pension entitlement "cannot be considered to fall within the definition of the word 'protect' used in [the relevant directive]".
"The purpose of that directive, which is to provide each employee with a minimum level of Community protection in the event of their employer's insolvency, would be seriously undermined if, in the absence of any abuse of rights by the employee ... the member states could discharge their obligations under [the directive] without granting each individual worker such minimum protection," it said.
"It cannot, therefore, be argued that the scope of that interpretation is limited to certain insolvent employers belonging to specific sectors or to certain employees falling within a particular economic and social context," it said.
The CJEU also agreed with its advocate general that any compensation payable by the PPF must reflect inflationary increases to which the employee would otherwise be entitled "in order to prevent, as a result of the passage of time, the amount guaranteed falling below 50% of the initial value accrued for one pension year".
In a statement, the PPF said that it would "work to implement the judgment as quickly as possible", in conjunction with the Department for Work and Pensions (DWP).
"The vast majority of PPF and [PPF predecessor] Financial Assistance Scheme (FAS) members will already receive compensation in excess of 50% of their accrued old age benefits and we expect the number of members affected by this ruling to be very small," it said.
"We now need to consider the ruling carefully to understand what action we can take prior to legislative change and/or the conclusion of UK court proceedings."
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