ECJ ruling could force PPF to provide buyout uplift
On the go: An opinion given to the European Court of Justice by its Advocate General could mean that defined benefit lifeboats like the Pension Protection Fund have to cover the entire value of members’ benefits when their sponsor becomes insolvent.
Gerard Hogan disagreed with the precedent set in previous cases including one involving the PPF, where judges have found that safety nets must cover at least half of a members’ accrued benefits, in an opinion relating to the German equivalent of the PPF.
Brexit notwithstanding, if the court is persuaded and follows the opinion of Mr Justice Hogan, the rule could be incorporated into the EU Solvency Directive and mean massive cost increases for the PPF and its peers.
The PPF is funded by a levy on solvent schemes, meaning that an increase in member payouts would also fall on employers.
Anna Rogers, senior partner at ARC Pensions Law, commented: “The European Court may or may not be persuaded by the Hogan Opinion. Hogan’s reasoning is powerful in terms of protecting members, but this is the third time the recommendation has been made and in the past cases the court balanced social protection against the cost.”
Ms Rogers said that any ruling’s application to the UK would depend on Brexit, and that the previous consensus around providing at least half of benefits should stop it from applying retrospectively.
“This kind of temporal limitation was used in the Barber case in 1990 to soften the impact of the ruling that pensions had to be equal between men and women. If the European Court ruled that full protection had to be given for future accruals only, that would dramatically reduce the cost, given that so many DB schemes are closed to future accrual,” she said.
If, however, the court does adopt the advisory opinion in full, Ms Rogers said this could “fundamentally change the nature of funding discussions”.
“The PPF-plus market could disappear because there would be little or no gap between PPF and full buyout,” she said. “Ultimately, if insolvency protection has to be backed by the State then even the capital adequacy requirements of the insurance regime lose some of their attraction. TPR might want to up the pressure on the pace of funding, with the new funding code coming out.”
A spokesperson for the PPF said: “We note the Advocate General’s opinion. We await the outcome of the case with interest.”