The Court of Justice of the EU (CJEU) has held once again that the Insolvency Directive does not require member states to put measures in place to fully fund lost pension rights on the insolvency of an employer. This conclusion is contrary to some reporting in the pensions press earlier today.

However, the Court’s approach suggests that current Pension Protection Fund (PPF) practice (of providing at least half a member’s accrued benefits) would not meet the Directive’s requirements if the pensioner would fall below the poverty line after the pension reduction. The case is therefore something of a mixed blessing for the PPF, the Government and for PPF levy-payers.

The Directive and the PPF

The EU Insolvency Directive requires Member States to ensure that “necessary measures” are taken to protect the interests of employees and former employees in respect of their accrued pension rights.

Although PPF legislation generally protects 90% or (for members over normal retirement age) 100% of the ‘core’ pension benefits on an employer’s insolvency, there are exceptions. For example, members below normal retirement age may have their benefits significantly restricted by the PPF compensation cap: a capped member retiring at a normal retirement age of 65 would currently receive a maximum pension of £36,018. Other members may be worse off due to the PPF providing lower pension increases or dependants’ pensions than their original scheme.

Last year, in the Hampshire case (see our LawNow here) the CJEU ruled against the UK Government to hold that where any individual member received less than half of their scheme entitlement from the PPF, this was a breach of the Directive. Following that decision, the Government stated that it was carefully considering the implications of the judgment and would respond in due course. The PPF announced that it would revisit the compensation regime, and has been updating industry on its progress in correcting payments for affected members.

Bauer: the new game in town

However, before the dust had settled on Hampshire, another Insolvency Directive claim was making waves: case C-168/18, Pensions-Sicherungs-Verein v Bauer. This case concerned the failure of a national insolvency insurance institution to plug the gap when the member’s employer, who was liable under German law for an existing shortfall in his occupational pension rights, became insolvent and could not pay.

In May this year, Advocate-General Hogan issued a combative Opinion in which he said that the Directive “imposes an obligation on Member States to protect all of the old-age benefits affected by an employer’s insolvency and not just part or a designated percentage of these benefits”. The Advocate-General suggested that earlier CJEU case law, followed in the Hampshire case, had been wrongly decided; and that there was no “special magic” in protecting only 50% of accrued scheme benefits.

Not unnaturally, the Opinion caused ripples within industry and Government. In its Annual Report, the PPF commented that the case “could have a material impact on the PPF”. Today’s judgment was therefore eagerly anticipated.

The CJEU’s ruling

Today the Court rejected the suggestion in the Advocate-General’s Opinion that Hampshire had been wrongly decided, and emphasised that member states had a margin of appreciation. The Directive did not require a full guarantee of the rights in question.

Turning to the benefits that did have to be provided, the Court reiterated that each member must receive at least half of their promised pension on insolvency. However, critically, it also analysed the underlying objective of the Directive as being to protect members in circumstances where the livelihood of the member and his family might be threatened.

The Court therefore concluded that regardless of whether the ‘50% test’ was met, any reduction in pension would be manifestly disproportionate (and so unlawful) if it seriously compromised an individual's ability to support themself. The test for this was whether as a result of the reduction, the member is living, or would have to live, below the at-risk-of-poverty threshold of his EU member state (as determined by Eurostat): this is broadly below 60% of median income.

Our analysis

Although UK pensions plc might have hoped for an early Christmas present by which the Court maintained the Hampshire status quo, the Court did at least avoid taking the nuclear option of requiring member states to guarantee full funding.

However, the suggestion of a new “poverty line” test, to be applied in addition to the 50% member-by-member minimum, will have some impact on PPF funding and may pose a significant administration burden. The PPF and the Government will need to give serious thought to how to respond, and like so many of this Court’s judgments in the pensions field it poses as many questions in a UK context as it answers.

For trustees and employers, an obvious concern will be the potential knock-on effect for PPF levies.

Schemes could also be affected even where they have a PPF surplus but buy-out basis deficit when winding up, because the statutory priority order on wind-up links directly through to applicable PPF compensation levels.

It is of course possible that, once the UK has left the EU, there might be scope to readdress the issue - perhaps via the Pension Schemes Bill that is being reintroduced in Parliament imminently - but as doing so could be portrayed as reducing members’ rights to benefits under European law, this could generate some lively debates in the months ahead.

Finally, an additional complication to note is an ongoing High Court case in which the PPF’s response to the Hampshire CJEU judgment is being challenged. It is not yet clear what impact today’s judgment will have on those proceedings, which had been stayed pending the CJEU’s decision today.

The judgment can be found here.