All eyes on European Court’s Bauer ruling

European law is pretty clear about protection for workers’ pensions when their employer goes bust. The regulatory system has to provide protection, but it can be limited in the amount.

In the UK, the Pension Protection Fund has a number of limits and these can reduce the value of the compensation significantly depending on the member’s age and when they earned the pension, whereas other people may get 100 per cent cover.

Previous rulings have nudged compensation upwards. Last year in Hampshire, the European Court said PPF coverage had to be at least 50 per cent for each person, not 50 per cent overall.

A government-backed 100 per cent safety net for occupational defined benefit schemes could have profound implications for the consolidation market, maybe the buyout market as well

In May this year, advocate general Gerard Hogan, advising the European Court, strongly recommended a change of approach. The reasoning is nuanced, but any reduction that is more than de minimis would be challengeable. Members could have directly enforceable rights against the compensation vehicle or the member state itself.

If the court agrees with the advocate general, then the government would have to look carefully at the precise terms of the ruling.

Case could push employers to insolvency

Hampshire was a UK case about the PPF. Bauer is a German case about compensation arrangements that are quite different, and the facts of the case are somewhat complex. Depending on the detail of the reasoning, it may be possible to argue that the UK is not affected.

If the UK is affected, any jump in past and future PPF payments will have to be financed out of the PPF levy, already slated to increase dramatically. The Pensions Regulator might have to step in to protect the PPF and require a faster pace of funding, where it can be afforded, possibly pushing some employers into insolvency.

A government-backed 100 per cent safety net for occupational defined benefit schemes could have profound implications for the consolidation market, maybe the buyout market as well.

The court must be aware of the potential impact in the UK. It could adopt a ‘temporal limit’ like the 1990 cut-off in the Barber case. A temporal limit seems fair because past cases have stated the law differently. A temporal limit has to be embedded in the initial change-of-direction ruling.

What about Brexit?

The Bauer ruling would be founded in the insolvency directive. The question would be whether the rights concerned form part of “retained EU law”. If they do, they could still potentially be changed by the UK government.

However, there will be constraints. Perhaps the new government would be politically willing and able to cut back pension protection. But in a post-Brexit world, the level of insolvency protection will depend on the terms of the future trading relationship, in particular how level a playing field is required. And European law continues to apply in the UK, at least for the duration of the transition period.

The UK DB funding regime is based on a compromise; the law allows flexibility in the system. Our current understanding of “fully funded at all times” does not sit comfortably with 100 per cent compensation.

For sponsors, if Bauer goes in favour of members it could be Solvency II by the back door. For members, it would be a welcome development – though bad news for current employees if their employer’s future is threatened.

No need to watch this space. Either there will be a new high-profile pensions drama to play out over the coming months, or the issue will quietly go away on Thursday.

Anna Rogers is senior partner at Arc Pensions Law