Could such tidings increase levy cost for those employers with ongoing defined benefit schemes?

Will the PPF have to provide 100% compensation?

The Court of Justice of the European Union (CJEU) has handed down its judgment in the case of Pensions-Sicherungs-Verein VVaG v Günther Bauer on 19 December 2019 which will mean that the PPF will need to revisit the compensation it is paying its members. Although the vast majority of PPF members will be receiving less than 100% of the benefits that they would have received (had their employer remained solvent and provided the benefits promised under their scheme rules), it is too early for all to celebrate those glad tidings as the extent of the increase (if any) needs to be explored in detail.

The CJEU acknowledges that Article 8 of the EU Insolvency Directive does not prevent Member States with legitimate social and economic objectives from reducing a member's benefits following employer insolvency, provided that the reduction is proportionate. However, the court has decided that it is "manifestly disproportionate" to reduce benefits if it would mean that the member would be living below the poverty threshold set by Eurostat for the Member State concerned. This is the court's view notwithstanding the CJEU's judgment in the Hampshire case which required that members should receive a minimum of 50% of their benefits.

The judgment also confirms that individuals who receive PPF compensation would be able to bring a direct claim against the PPF if they did not receive the required level of benefit; but the real question is just what is that level of benefit?!

The facts of the Bauer case relate to the interaction of the insolvency of a German employer and German pension arrangements. It will have implications for the PPF and the UK occupational pension system but we do not yet know how severe those implications will be. The Government and the PPF will be analysing the judgment to decide what action the UK will need to take in response. Reports in the pensions press that the PPF "must pay out 100% of members’ pre-insolvency entitlements" are a gross oversimplification.

PPF levy 2020/21

The PPF has published the final levy rules for the 2020/21 levy year. These reflect a "business as usual" approach for the next levy year and confirm the levy estimate at £620 million. The final rules are largely unchanged from the consultation proposals made earlier this year – see our update for details of the changes being made and the levy deadlines.

Other points to note in the PPF levy policy statement are:

  • the PPF's view that, even if the Bauer judgment (still awaited at the point of publishing the statement) makes a case for increasing the PPF levy, there is very limited scope to do so for 2020/21 as the levy estimate is only slightly below the maximum the PPF can set under pensions legislation; and
  • following concern about the possible impact of GMP equalisation on insolvency risk scores, the PPF will allow employers "in the most affected cases" to request an adjustment where GMP equalisation costs move them from profit to loss (subject to certain conditions being met, including that a specific amount, relating solely to a GMP equalisation adjustment, can be identified in accounts used to calculate at least one monthly score).

Trustees and employers should be taking action now if they wish to reduce the levy payable for their pension plan.

Our comment

The impact of the Bauer case is unlikely to impact the levy for 2020/21 but the potential outcome of that decision for increases to PPF compensation could result in a material increase to the levy in future years. That would be not so glad tidings for defined benefit scheme employers.