The Court of Justice of the European Union (CJEU) has ruled that the Pension Protection Fund (PPF) is not, and has never been, fully compliant with, Article 8 of the EU Insolvency Directive. This is because it doesn’t pay a minimum level of compensation of 50% of each member’s retirement benefits in the event of their employer’s insolvency.
This ruling has a major impact on those members with higher pension benefits which were reduced when their pension schemes entered the PPF. Such members are now entitled to recover the difference between what they were originally compensated with, and 50% of their retirement benefits. The PPF will also be required to pay at least 50% of each individual member’s benefits (to which they are entitled under their rules of their pension scheme) as compensation going forward.
While the judgment itself is fairly straightforward, it does lead to various questions about how it may be implemented in practice. Interestingly, there have been previous cases that should have highlighted to the UK Government that it has not fully implemented the Directive but it managed to ignore those judgments in the past.
This one will be less easy to ignore.
As the CJEU’s decision was handed down before Brexit, it’s currently binding in accordance with section 3(1) of the European Communities Act 1972 (ECA 1972). Even post-Brexit, it’s expected to retain the same binding, precedent, status as a Supreme Court judgment under Section 6 of the European Union (Withdrawal) Act 2018 (EU(W)A 2018). So, the UK Government will have to take action.
We’re still waiting to hear what form this action will take but we can expect changes to the statutory PPF compensation regime. However, even without Government action, Mr Hampshire and other affected members could apply directly to the UK courts to enforce their rights under EU law, as the CJEU has decided that this part of EU law has “direct effect”.
Whilst the PPF are still working through the implementations of the judgement, they have begun to contact affected members to implement the changes to their benefits. Although only a small number of scheme members will be affected overall (mainly high earners), this is still likely to create a significant amount of additional administrative work for the PPF, which only recently relaxed the effect of the PPF compensation cap for members with long service.
Given the potentially small numbers of members affected, the case is unlikely to have any material impact on the levy for schemes that pay the PPF levy. It will, however, impact on some schemes’ Section 179 PPF valuations and it will cause uncertainty for those schemes and companies that are looking at going through a restructuring.
Published: October 2018
Pensions Law Update - October 2018
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