In a judgment handed down today, 28 July 2016, the Court of Appeal has decided to refer questions to the EU Court of Justice on whether limitations on the compensation paid by the Pension Protection Fund (PPF) to former employees of insolvent employers are consistent with Directive 2008/94/EC (the Insolvency Directive).
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 (around 0.2%) of PPF members have their compensation capped, which results in some cases in a loss of more than half of their pension. The cap is imposed on those who are below their scheme’s normal pension age at the time of the employer’s insolvency. 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 today’s judgment a majority of the Court of Appeal have accepted the argument of the Appellant, Mr Hampshire, that (except in cases of abuse) EU member states must ensure that every employee of an insolvent employer receives at least half of their accrued pension benefits, and that the provisions of the 2004 Act imposing a cap on compensation and limiting annual increases at a level below that minimum 50% guarantee therefore do not comply with EU law. The majority of the Court has rejected the argument of the PPF and the Secretary of State that EU law only requires member states to put in place a suitable ‘system of protection’ but does not provide an individual right to a minimum level of compensation in every case.
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 scheme entered PPF assessment in 2006 and although the scheme has been valued as having a surplus of around £50m, under the 2004 Act Mr Hampshire and around 40 other members of the scheme are subject to the compensation cap, which in some cases has 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. Mr Hampshire and his former colleagues appealed to the High Court from the PPF Ombudsman on the basis that compensation amounting to less than 50% of accrued pension benefits is inconsistent with Article 8 of the Insolvency Directive as interpreted by the Court of Justice in cases C-278/05 Robins and C-398/11 Hogan. In December 2014 the High Court rejected Mr Hampshire’s appeal.
Today’s provisional finding by the Court of Appeal in Mr Hampshire’s favour, and the reference to the EU Court, represents a significant victory for him and the hundreds of pensioners who have campaigned against the compensation cap and its unfair impact on employees with a significant pension pot who happen to be below normal pension age when their employer goes insolvent.
Of potentially even greater significance than the impact of the ruling on the cap is the potential impact of any ruling that pensioners in receipt of PPF compensation must receive at least half of any entitlements to annual increases in their pension. Such a ruling will potentially benefit thousands of PPF members, including those who were initially in receipt of 90% or 100% of their original pension but who have lost any rights they had to index-linked or guaranteed annual increases.
While the majority of the Court of Appeal agreed with Mr Hampshire, the Court considered that the point was not free from doubt and decided to ask the EU Court of Justice for a ruling. The Court also decided to ask the EU Court whether Article 8 of the Insolvency Directive is directly effective, meaning that it can be invoked directly against the PPF to override the terms of the 2004 Act.
A copy of the Court of Appeal’s judgment is available here.