Rachel Pinto: CJEU rules that UK’s pension compensation regime is inadequate

Rachel Pinto

The Court of Justice of the European Union (CJEU) ruled in Hampshire v The Board of the PPF¬†that under EU law, on an employer’s insolvency, every employee must receive compensation corresponding to at least 50% of the value of their accrued pension entitlement under an occupational pension scheme. This means that the compensation levels payable from the Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS) will need to be adjusted. The decision may also have implications for schemes that have narrowly missed out on PPF entry in the past, and schemes that have secured benefits with an insurer by reference to PPF compensation levels.

Background

Following the demise of Turner and Newall¬†in 2006, Hampshire saw his pension under the Turner and Newall pension scheme¬†cut by around 67% due to under-funding, although the scheme’s funding level was not low enough for it to enter the PPF. He also lost his entitlement to a generous 3% annual pension increase.

Hampshire challenged this on the basis that the UK’s pension protection regime did not comply with article eight of the EU Insolvency Directive (2008/94/EC), which requires member states, broadly, to ensure that necessary measures¬†are taken to protect the pension entitlements within occupational pension schemes, including survivors’ benefits, of employees and former employees where their employer becomes insolvent.

Following Hampshire’s appeal to the Court of Appeal, various matters were referred to the CJEU for a preliminary ruling.

CJEU ruling

The CJEU has ruled that article eight requires that every individual employee must receive old-age benefits corresponding to at least 50% of the value of their accrued entitlement under an occupational pension scheme in the event of their employer’s insolvency. This must take into account the envisaged future growth in the pension entitlement, to prevent the amount of protection falling below 50% over time.

The Court also held that article eight has direct effect, and that Hampshire can invoke it against the PPF.

Implications

The compensation payable under the PPF and FAS will need to be adjusted in light of this judgment. However, this will not be straightforward, particularly if the organisations are required to keep track of individual member’s entitlements to pension increases over time to check that compensation remains above 50%.

The judgment also raises the question of what should happen where a scheme has narrowly missed out on PPF entry in the past, and who will be required to cover any additional liability where members’ benefits have previously been secured with an insurer by reference to existing PPF compensation levels.

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Legislative action will undoubtedly be required. But first, the matter reverts back to the Court of Appeal for a final ruling on how the CJEU’s judgment should be applied in this particular case.

Rachel Pinto is pensions partner at Herbert Smith Freehills