Scrap the cap? PPF rules challenged at CJEU

Mr Hampshire, a former senior employee of defunct manufacturing business Turner & Newall, is challenging the cap on the grounds that it fails to comply with Article 8 of the EU Insolvency Directive 2008/94.

That directive obliges member states to “ensure that the necessary measures are taken to protect the interests of employees and of persons having already left the employer’s undertaking or business at the date of the onset of the employer’s insolvency”.

Fewer than 400 PPF members are currently affected by the cap, and of those, very few are not receiving at least 50 per cent of their accrued pension

It applies “in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors’ benefits” promised by any occupational or inter-occupational pension schemes that are not part of a country’s state pension or national social security.

Following a referral from the UK Court of Appeal, the case was heard by the CJEU on March 8 2018.

Anti-cap precedent is mounting

The debate over the PPF cap stems from another CJEU decision, involving Allied Steel and Wire, sometimes known as the Robins case, back in 2007.

That found that not ensuring that every member received at least half the benefits to which they were entitled could contravene Article 8.

The interpretation cropped up again in the 2013 Hogan case, also known as Waterford Crystal, where the court confirmed that the Irish government had failed to comply with the directive.

The court said: “As soon as the judgment in Robins and Others was delivered… the Member States were informed that correct transposition of Article 8 of Directive 2008/94 requires an employee to receive, in the event of the insolvency of his employer, at least half of the old-age benefits arising out of the accrued pension rights for which he has paid contributions.”

Will Hampshire end differently?

Turning back to the case currently under consideration, Mr Hampshire argues that the UK is not presently compliant with the directive because the cap can restrict PPF compensation to less than half the benefits accrued by a small percentage of highly-paid employees (in his own case, to barely a quarter).

The first issue for the Court to decide is whether Article 8 does require at least 50 per cent protection.

Alternatively, is it sufficient to have a system where employees usually receive more than 50 per cent, but some receive less by virtue of a compensation cap and/or rules limiting indexation or revaluation?

Third, is Article 8 directly effective in the circumstances of the present case?

The third issue is important because the Turner & Newall insolvency occurred in 2006, before the decision in Robins. If that ruling of January 25 2007 was an authoritative determination of the meaning and effect of Article 8, then it may be directly applied to earlier cases.

Even if the court decides otherwise, Robins could support claims where a national government has failed to protect employee benefits against reduction below 50 per cent in the event of a post-January 25 2007 insolvency.

This follows a 1991 European Court of Justice decision, Francovich v Italy, which requires EU member states to compensate individuals for loss arising from failure to transpose an EU Directive into national law.

UK’s cost claims hold little water

Disregarding the cap, there is little doubt that the UK has adequately implemented the directive.

The Department for Work and Pensions says there are two reasons for the cap, which currently limits PPF compensation at age 65 to £35,105.

The first is to limit the costs of the PPF. The second is to deter excessive risk-taking or malpractice, for example by company directors tempted to take decisions that result in the insolvency of the company, knowing that their own pension benefits would, in effect, be underwritten.

Fewer than 400 PPF members are currently affected by the cap, and of those, very few are not receiving at least 50 per cent of their accrued pension.

This undermines the government’s claim that if Mr Hampshire’s claim succeeds it could significantly increase PPF costs. Its real concern is surely the threat to the principle of the cap.

Ian Neale is director at Aries Insight