11 Dec 2018

The Court of Justice of the European Union (CJEU) has confirmed, in Hampshire v the Board of the Pension Protection Fund, that each individual employee must be guaranteed to receive, on the insolvency of their employer, at least 50% of their accrued benefits under the employer's pension scheme. This has implications for the level of compensation paid by the Pension Protection Fund (PPF), as well as potential knock on effects for pension schemes which wind up outside of the PPF.

Background

The EU Insolvency Directive requires EU member states to ensure that "necessary measures" are taken to protect the interests of employees (including former employees) on the insolvency of their employer "in respect of rights conferring on them immediate or prospective entitlement to old age benefits, including survivors' benefits" under the employer's occupational pension scheme.

The main vehicle for complying with the EU Insolvency Directive in the UK is the PPF, which pays compensation to members of eligible defined benefit pension schemes on the insolvency of the employer. However, this compensation may not fully match the benefits which employees have accrued under their employer's pension scheme. In particular:

  • those employees who are under normal pension age at the date of the scheme's assessment for entry into the PPF will receive only 90% of their accrued benefits and will, in addition, have their benefits limited by the PPF's compensation cap (currently standing at around £39,000), and
  • the PPF does not apply increases to pensions in payment which are attributable to service prior to 6 April 1997.

In some cases, particularly higher earners with more valuable benefits, or with the majority of their benefits accrued prior to 6 April 1997, this may result in members receiving less than 50% of their accrued entitlement. The earlier cases of Robins v Secretary of State for Work and Pensions and Hogan v Minister for Social and Family Affairs had cast doubt on whether this means that the UK has fully complied with the EU Insolvency Directive.

Facts of the case

In 1998 Mr Hampshire took an early retirement pension of £48,781 from the T&N Retirement Benefits Scheme, which was guaranteed to increase by at least 3% per annum. His employer, Turner & Newall Limited, became insolvent in 2006 and, in 2011, the PPF completed its assessment of the Scheme, concluding that it was sufficiently well funded to wind up outside of the PPF. 

This meant Mr Hampshire would only receive a pension equivalent to PPF compensation, albeit outside of the PPF. In 2006 this would have only been around £19,800 per annum due to the operation of the 90% limit and the compensation cap as Mr Hampshire was below normal pension age at that date. Furthermore, the bulk of his benefits had accrued prior to 1997, meaning his entitlement to annual indexation was minimal. Overall, Mr Hampshire calculated that his current pension entitlement was around 67% less than he would have been receiving from the Scheme in the absence of his employer's insolvency.

His complaints to the PPF and the PPF Ombudsman were rejected and he appealed to the High Court, arguing that the implication of Robins and Hogan is that EU law requires him to receive at least 50% of his accrued pension benefits. The High Court disagreed, holding that both cases had been concerned with the possibility of employees bringing claims for damages against their government for breaching the EU Insolvency Directive, and whether that breach was sufficiently serious. 

The High Court also found that the CJEU's reference in previous case law to a 50% threshold applies on average across the membership as a whole and was not mandating a 50% guarantee in respect of each individual employee. Mr Hampshire took his case to the Court of Appeal.

Decisions of the Court of Appeal and the CJEU

The Court of Appeal was less sure that the High Court's interpretation of previous case law was correct and felt that the CJEU in Robins and Hogan may indeed have been specifying a guarantee of 50% for each individual member. It therefore referred the following points to the CJEU:

  • whether the EU Insolvency Directive confers a minimum entitlement on every employee of at least 50% of the value of their accrued pension benefits on an employer's insolvency, and
  • whether the EU insolvency Directive confers rights on individuals which they could, in this instance, enforce directly against the PPF.

In summary, the CJEU answered these questions in the affirmative. It held that, under the EU Insolvency Directive, members of their employer's pension scheme must receive at least 50% of their accrued pension entitlement on their employer's insolvency. It is not possible to say that "necessary measures" have been taken if PPF compensation amounts to less than 50%.

In calculating whether the 50% threshold has been met, account must also be taken of annual pension increases, which means comparing the PPF level of compensation each year against what the member's pension in payment would otherwise have been under the employer's pension scheme. Furthermore, Mr Hampshire is not restricted to claiming damages against the UK Government for failing to correctly implement the EU Insolvency Directive. He is able to bring his claim directly against the PPF.

What next?

The case will return to the Court of Appeal for a final decision but, ultimately, the Government will need to amend the legislation governing the PPF.  

The PPF has stated that the majority of its members already receive compensation in excess of 50% of their accrued benefits and the number of people affected by the CJEU's judgment is likely to be small. Pending further statutory changes the PPF has announced that it is putting in place an interim process to uplift compensation payments. The question of arrears will also need to be considered.

There is a potential knock-on effect on pension schemes which wind up on an underfunded basis outside of the PPF, as the statutory order of priority for securing members' benefits refers to the corresponding PPF liability, which may now need to take account of the decision in Hampshire. Schemes which have already bought out benefits on a "PPF plus" basis should consider if this needs to be revisited.