European Court of Justice – UK pension protection rules are contrary to EU law
The CJEU has concluded that the restrictions on the compensation payable by the UK Pension Protection Fund (PPF) to employees of insolvent companies are contrary to Directive 2008/94/EC (the Insolvency Directive). The Court of Appeal referred the case to the CJEU in July 2016.
The CJEU judgment confirms that, when their employer becomes insolvent, “every individual employee must receive old-age benefits corresponding to at least 50 per cent of the value of his accrued entitlement,” including any indexation benefits. According to the CJEU, the UK statutory cap that imposes an absolute limit on pension payments to members of schemes rescued by the Pension Protection Fund (PPF), irrespective of their original pension entitlements, is unlawful. The CJEU also held that Article 8 of the Insolvency Directive is directly effective and can therefore be relied on directly against the Pension Protection Fund to override the terms of the Pensions Act 2004. The judgment recognises the potential consequential effects on trustees administering any pension scheme that is or has been subject to PPF assessment.
The case arises out of a challenge by Mr Hampshire and 15 other former employees of Turner & Newall (“T&N”) to the PPF’s valuation of the T&N pension scheme. The PPF is the industry-funded statutory “lifeboat” fund responsible for insolvent pension schemes. While most pensioners whose schemes fall within the PPF initially receive compensation of 90% or 100% of their original pension, a small percentage who have not reached retirement age by the time of the insolvency have their compensation capped, which results in some cases in a loss of more than half of their pension. The impact of the cap is exacerbated by restrictive provisions in the Pensions Act 2004 on annual increases, which further reduce the value of PPF compensation over time. In this case, although the T&N scheme had been valued as having a surplus of around £50m, under the 2004 Act Mr Hampshire and around 40 other members of the scheme were subject to the compensation cap, which in some cases resulted in a loss of over 75% of the pension those employees were entitled to receive, and were receiving prior to 2006, under the scheme rules.
The judgment represents a significant victory for Mr Hampshire and other pensioners who have campaigned against the UK’s pension compensation cap for well over a decade. It means that several thousand former employees of companies that have gone insolvent are likely to receive increased compensation payments and increased future pensions, which in some cases may amount to hundreds of thousands of pounds over a pensioner’s lifetime.