PPF compensation regime in breach of EU law

United Kingdom

The Court of Justice of the European Union (CJEU) has ruled today that the Pension Protection Fund regime does not satisfy European law requirements. The judgment is likely to have a significant impact on the PPF, and could have wider knock-on effects for many occupational pension schemes.

Background to the case

Although PPF legislation generally protects 90% or (for members over normal retirement age) 100% of the ‘core’ pension benefits on an employer’s insolvency, there are situations in which far smaller proportions of a member’s overall scheme benefits are protected. Members below normal retirement age may be caught by the PPF compensation cap (which currently equates to a maximum PPF pension of £35,106 per year): others could lose out due to the PPF providing lower pension increases or ancillary benefits than those set out in the rules of the employer’s pension scheme.

The applicant, Mr Hampshire, was 58 when his employer became insolvent. As he was below normal pension age, the compensation cap applied which in his case meant his entitlement to PPF compensation was less than half of his scheme entitlement, even before lower future pension increases were taken into account.

The member argued that this was a breach of the EU Insolvency Directive, which requires Member States to ensure that “necessary measures” are taken to protect the interests of employees and former employees in respect of accrued pension rights. In particular, he cited previous European cases which had suggested that members should receive at least 50% of their accrued benefits. The UK Government argued that Member States had some latitude under EU case law, and that the question should be looked at on a broader basis: there was no member-by-member test. In a sign of the importance of the case, the UK intervened directly, with the Secretary of State for Work and Pensions being joined to the proceedings as an interested party.

It is also worth noting that over the course of these proceedings, the Government has taken some steps to address this issue, introducing a new ‘long service’ easement in 2017 which increased the compensation cap by 3% for each year of pensionable service above 20 years, up to a maximum of twice the standard cap.

The decision and its potential impact

The CJEU, agreeing with the earlier Opinion of Advocate-General Kokott, held that EU law requires Member States to guarantee 50% pension compensation on insolvency for each individual employee, “without exception”, with protection lasting for the entire pension period (in order to prevent the percentage falling as a result of the passage of time). The Court also agreed with the Advocate-General that the Directive could be relied on directly by individuals against the PPF.

The Court’s approach will not just affect the estimated 0.1% to 0.2% of members whose PPF compensation initially falls below 50%, but over time could affect other members who had a scheme rules right to more generous (e.g. fully index-linked) pension increases, creating a “moving target” likely to cause the PPF considerable administration and communication headaches. Defined benefit occupational schemes, whose statutory priority order on wind-up links directly through to applicable PPF compensation levels, could also be affected even where the scheme has a PPF surplus.

The PPF has already issued a statement saying that it will work to implement the judgment as quickly as possible, and consider what action it can take “prior to legislative change and / or the conclusion of UK court proceedings” (today’s ruling will now be remitted to the Court of Appeal, which referred it to the CJEU). There is much for the Government and PPF to digest - including whether Brexit may permit a different approach in future - but it is to be hoped that they will make their position clear in the coming months.

In the meantime, please speak to your usual CMS contact if you require more information.

The judgment can be found here.