EU court asked to rule on dispute over minimum pension entitlements in insolvency situation

Pensions law expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said the answers to questions referred to the Court of Justice of the EU (CJEU) could have broad implications for many pension schemes that have wound up in recent years.

In this case, the Court of Appeal is considering whether the UK legislation that provides for compensation to members of DB pension schemes when their employer goes bust complies with EU law.

Grenville Hampshire, a former senior executive at manufacturing business Turner & Newall, has challenged a cap placed on his pension entitlements under the UK legislation. Turner & Newall became insolvent in 2006. At the time its pension scheme's liabilities were greater than the value of its assets.

When the Turner & Newall pension scheme wound up, the Pension Protection Fund (PPF), a safety net for defined benefit pension schemes, took over the scheme assets and started providing compensation for scheme members. PPF places a cap on the compensation members of such pension schemes are entitled to.

Because Hampshire had not reached normal pension age when the PPF took over, a compensation cap applied to his pension. This meant that the annual pension payable by the PPF was approximately 67% lower than the pension he would have received from the Turner & Newall scheme if the employer had not gone insolvent, according to the Court of Appeal.

Hampshire has claimed that EU legislation, together with case law, requires the UK and other EU countries to ensure that pension savers in his position can obtain "at least half of the benefits to which they are entitled under the relevant occupational pension scheme".

The Board of the Pension Protection Fund (PPF), however, has claimed 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".

In a previous ruling the High Court sided with the PPF and said EU law did not provide for "a uniform minimum level of guarantee of benefits for every individual by reference to a percentage of those specified by the scheme, irrespective of the absolute level of those benefits".

However, the Court of Appeal said that two of its three judges disagree with the High Court's findings. Because the issue is" not … entirely free from doubt", though, the Court of Appeal has decided to refer the point to the CJEU for guidance on the correct interpretation of EU law.

Scholefield of Pinsent Masons said the case highlights the impact that EU law has on pensions. He said, though, that the decision of the CJEU might not have long term effect in the UK as a result of the country's vote to leave the EU.

"If EU law does require a higher level of protection, this will most likely apply up until Brexit is implemented," Scholefield said.

This would come at a retrospective cost for the PPF and for pension schemes that pay into the pension protection levy that helps to underwrite the cost of the PPF's compensation payments, he said.

Scholefield said: "If EU law would require the protection from the PPF to be improved, it is not yet clear whether Brexit would mean that this additional protection would need to be maintained. Political realities might mean that the EU level of protection does needs to be maintained post-Brexit."

The outcome of the case will not just affect the PPF, Scholefield said.

"It also affects those schemes that have wound up over the last few years where they have been able to provide benefits that are more generous than the PPF, but less than full benefits," the pensions expert said. "Schemes in this position are required to provide benefits for members using the PPF benefits as a starting point. If the starting point turns out to be wrong, they may not have done this correctly. For schemes currently going through this process, it could cause real uncertainty as to how they should proceed."