The European Court of Justice ruling on the Bauer has been described as a “welcome relief” for the Pension Protection Fund, as the lifeboat will only have to up member benefits if the individual is living below the at-risk-of-poverty threshold.
Industry experts have argued that there is a very low chance of this judgment impacting the PPF, since the PPF pays out benefits in full to pensioners, and the Eurostat threshold for poverty in the UK is set at around €12,500 (£10,500) per year - only slightly above the current full state pension.
In Pensions-Sicherungs-Verein VVaG v Günther Bauer, the ECJ stated that “member states have considerable latitude in determining both the means and the level of protection of employees’ accrued entitlement to old-age benefits”, and that this “provision cannot therefore be interpreted as requiring a full guarantee of the rights in question”.
The judgment makes reference to the Hampshire case, from September 2018, which determined that PPF members should not receive less than 50 per cent of their entitled benefits in the event of the insolvency of their employer.
Given the state pension, and triple-lock protection, it seems unlikely that the poverty threshold will apply in many cases – but it looks set to make the calculation of compensation more difficult
Stephen Scholefield, Pinsent Masons
However, the ECJ judges stated that "a reduction in a former employee’s old-age benefits must be regarded as being manifestly disproportionate" if the individual has to live below the at-risk-of-poverty threshold determined by Eurostat as a result of the reduction.
Ruling does not follow advocate general’s opinion
The judgment contradicts the opinion of ECJ’s advocate general Gerard Hogan delivered in June, which stated that lifeboats should pay full benefits in the case of a defined benefit scheme sponsor going bust.
Mr Hogan argued that member states should provide full employees’ pension entitlements when following the EU Insolvency Directive. Under this rule, member states need to protect the interests of workers in the event of the insolvency of the employer.
A PPF spokesperson said: "The recent ECJ judgment in the case of PSV v Gunther Bauer has restated that, as a minimum, every individual must receive at least 50 per cent of their accrued benefits. We consider that the implementation methodology we announced following the ECJ's judgment in Hampshire, which will make sure that all our members receive at least 50 per cent of the value of their accrued benefits, meets this requirement.
"There are other details of the judgment that we'll need to work through with the Department for Work and Pensions. In the meantime, we'll continue to make payments in line with the existing levels, and to assess and increase payment to those members affected by the Hampshire ruling."
A ‘sensible approach’ from the ECJ
According to Stephen Scholefield, partner at law firm Pinsent Masons, the judgment “will be a welcome relief for the PPF, for levy payers and for those looking to get consolidators off the ground, whose business models may otherwise have been threatened”.
He added: “It confirms that the PPF need not provide full benefits, but adds further gloss to the ’50 per cent minimum’ compensation requirement previously confirmed by the Hampshire judgment.”
David Everett, partner and head of pensions research at consultancy LCP, said: “It is pleasing to see the judges take a sensible approach in this case.”
“No doubt there will be plenty who have been watching this case unfold with interest, and who will have welcomed today’s decision – rejecting the key aspect of the earlier advocate general’s opinion – as in keeping with the fundamental aims of the Insolvency Directive.”
Mr Scholefield argued that it seems unlikely that the poverty threshold will apply in many cases, given the state pension and triple-lock protection.
However, “it looks set to make the calculation of compensation more difficult”.
PPF includes levy adjustment for GMP equalisation
The Pension Protection Fund will allow companies moving from a profit to a loss – due to the impact of guaranteed minimum pension equalisation – to request an adjustment in their levy calculations.
Trouble ahead as Brexit lingers
Anna Rogers, senior partner at Arc Pensions Law, noted that the poverty threshold “looks like a nightmare to implement for the PPF,” as it “looks like a level playing field in terms of minimum income to be protected, but not level at all for people who have saved more or are still working”.
She also argued that it will be an issue to deal with “post-Brexit, as members’ rights may still apply under UK law and/or under the terms of a trading relationship, but the poverty measure may not be maintained for a non-member state”.
Nevertheless, “whatever rights members have – and this is going to take time to work out – will be enforceable either against the PPF or the government,” she concluded.
