The European Court of Justice has handed down its decision in Pensions-Sicherungs-Verein VVaG v Günther Bauer. The case relates to Article 8 of Directive 2008/94/EC, which requires Member States to take measures to protect employees’ rights to old age benefits in the event of the employer's insolvency.
The ECJ decision means that Pension Protection Fund compensation may have to be increased for members whose benefits are reduced as a result of their employer’s insolvency to such an extent that they have to live below the Member State’s “at-risk-of-poverty” threshold determined by Eurostat. Although this may give rise to some practical difficulties, any financial implications for the PPF and levy payers should be less than initially feared.
The ECJ confirmed in two earlier cases (Robins and Hogan) that Article 8 means that employees must retain at least 50% of their entitlement to benefits in the event of their employer's insolvency. In a more recent case (Hampshire), the ECJ went further and said that every individual employee must receive at least 50% of the value of their accrued benefits in the event that their employer becomes insolvent.
PPF compensation has not historically complied with this requirement, with some members receiving less than 50% of the value of their accrued benefits (mostly where PPF compensation is capped or where there is a difference between the indexation / revaluation rates under their original scheme and in the PPF). The PPF has started to make increased payments to pensioners affected by the decision in Hampshire.
The ECJ has decided that a reduction in the amount of benefits provided to a former employee as a result of their employer’s insolvency will be “manifestly disproportionate”, even where the employee receives at least 50% of the value of their accrued benefits, if the individual will (as a result of the reduction) have to live below the Member State’s “at-risk-of-poverty” threshold determined by Eurostat. It is not entirely clear to us what this threshold is for the UK, but we think it is around £10,000 a year.
The ECJ’s reasoning is that:
- In transposing Article 8, Member States have considerable latitude in determining both the means and the level of protection of employees’ accrued entitlement to pension benefits. That provision cannot therefore be interpreted as requiring a full guarantee of the rights in question.
- Consequently, Article 8 does not preclude Member States, in the pursuit of legitimate social and economic objectives, from reducing the accrued entitlement of employees in the event of their employer’s insolvency, provided they have regard to the principle of proportionality.
- The objective of the Directive was to protect employees from hardship caused by the loss of pension benefits.
- It can be deduced from the above that a reduction in a former employee’s benefits must be regarded as being manifestly disproportionate where the reduction results in the former employee’s ability to meet their needs being seriously compromised. That would be the case if a reduction resulted in the former employee having to live below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned.
What does this mean for pension schemes?
The Advocate General's Opinion had given rise to concern in the industry that a considerably greater proportion of employees’ pension benefits would need to be covered than is the case under the current PPF compensation regime. This would have had significant implications for the PPF and levy payers, as well as for “PPF plus” buy-out transactions.
There will be widespread relief that the ECJ has not gone as far as many had feared. Assuming this decision is implemented by way of the PPF rather than by any other mechanisms which may be open to the government, the PPF (and schemes considering “PPF plus” buy-out transactions) may face some practical difficulties in assessing whether any reduction in benefits will result in members having to live below the at-risk-of-poverty threshold. But it seems likely that any financial implications for the PPF and levy payers will be less than initially feared.