The cap on pension compensation payable to employees of insolvent businesses by the UK's Pension Protection Fund (PPF) may breach EU law, according to a legal adviser to the Court of Justice (CJEU).
Grenville Hampshire, a former senior executive at collapsed manufacturing business Turner & Newall, has argued that EU law requires member states to ensure that members of insolvent defined benefit (DB) pension schemes receive compensation worth at least half of the benefits they would otherwise have received. Hampshire had not yet reached retirement age 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 his pension entitlement.
Advocate general Juliane Kokott has now backed Hampshire's position, which he is currently arguing before the Court of Appeal in England. CJEU judges are not bound by the opinions of advocates general, although they are followed in the majority of cases.
"The court stresses in settled case law the aim of the [relevant EU] Directive, which is to ensure a minimum degree of protection for all employees," the advocate general said. "However, this aim is effectively achieved only if the minimum standard applies to and can be relied on by each individual employee."
"By contrast, the postulation favoured by [the UK] of merely guaranteed receipt of 50% of the pension entitlement 'in principle' would allow situations to arise in which individuals are entirely unprotected. Nevertheless, the idea of minimum harmonisation underlying the directive prohibits non-compliance with the level of protection declared as binding by the directive. The exclusion of individual employees from that minimum standard is therefore unlawful," she said.
In Kokott's view, it is also unlawful for compensation paid by the PPF not to reflect any inflationary increases to which the employee would otherwise be entitled if this would drop the member below the 50% level.
EU law requires member states to take measures to protect pension entitlements in the event of an employer's insolvency. The CJEU has clarified this requirement in case law as meaning that employees must retain at least 50% of their pension entitlement.
UK legislation provides for an absolute cap on claims for compensation from the PPF, the employer funded DB pension 'lifeboat' scheme. This cap particularly affects high earners and long-serving employees entitled to a relatively high pension. In addition, capped benefits do not increase year on year in line with inflation. Hampshire is one of 16 former Turner & Newall employees whose compensation entitlement is significantly lower than 50%.
The English High Court found in favour of the PPF in a previous ruling in the case. The PPF has argued that while EU law requires EU countries to provide for pension protections to account for insolvency events, it does not stipulate any "obligations owed to individual claimants" and is "not intended to confer a minimum level of pension in each individual case". Two out of three Court of Appeal judges disagreed with this decision, but the court decided to make a referral to the CJEU on the grounds that the issue was "not ... entirely free from doubt".
Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said that the financial implications of an adverse CJEU decision were likely to be of "limited significance" for the PPF.
"Even where the PPF cap bites, most members end up with more than 50% of their expected benefits," he said.
"More difficult will be the process of putting things right, especially for schemes that have wound up outside the PPF without being able to secure benefits for members in full. It may turn out that these schemes, which will have taken account of the way the PPF provides compensation, have unwittingly secured benefits incorrectly. If so, it may now be impossible to put that right," he said.
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