The EU Court of Justice has found in favour of former employees of Waterford Crystal in a landmark case taken over losses to their pension entitlements.
Waterford Crystal went into receivership in January 2009. At that time it had two defined benefit pension schemes which were subsequently wound up on 31 March 2009. Actuarial valuations revealed a combined funding deficit in the two schemes of approximately €110 million, which meant that the schemes could only cover between 18-28% of the employees’ (active members’) accrued pension entitlements.
Ten former employees took legal action against the State in the Irish High Court claiming that it had breached its obligations under Article 8 of a 2008 European Insolvency Directive. Article 8 imposes a general obligation on EU member states to ensure that, in the event of the insolvency of an employer, the interests of the employees in respect of their entitlement to old-age benefits under occupational pension schemes are protected. The High Court stayed the proceedings and referred a number of questions to the European Court on the interpretation of Article 8 of the Directive.
The European Court had occasion to consider Article 8 in 2007 when an English woman, Carol Robins, and 835 others sued the UK Government after their employer’s insolvency left them with significantly reduced pensions. In that case, the European Court held that domestic law which lead to employees being guaranteed less than half of what they had been promised under a pension scheme did not amount to “protection”. Consequently, it was left to the UK Government to improve the level of coverage protection.
In the Waterford Crystal case, the European Court considered both the provisions of Article 8 and the Robins case and held that:
- Article 8 is designed to apply in situations where a pension scheme is underfunded and the employer is insolvent and therefore incapable of making further contributions to the pension scheme. It is not necessary for claimants to prove that there are other factors giving rise to the loss of pension entitlements.
- the provision of a state pension is not to be taken into account when assessing whether the member state has complied with its obligations under Article 8.
- the economic situation in Ireland does not constitute an exceptional situation which would justify providing a lower level of protection for the pension benefits of employees.
- the Irish State’s failure to guarantee at least half of the pension benefits from an insolvent company’s pension scheme is a “serious breach” of its obligations as a member state of the European Union.
- The case will now be referred back to the Irish High Court to decide on the level of cover which the State will have to provide in respect of the Waterford Crystal pensions.
The 2008 European Insolvency Directive gives member states a discretion to decide the level of protection to give to employees of insolvent companies. It is clear from the European Court’s judgment that such protection should be at least half of the pension benefits promised by the insolvent company’s pension scheme.
It should be noted that following the European Court’s judgment in the Robins case, the UK established a financial assistance scheme which covers 90% of an employee’s expected pension in certain insolvency situations. UNITE, the union which represented the Waterford Crystal employees, has said that it would expect a similar type of arrangement to be secured for employees in Ireland.
Practically speaking, however, it will be up to the High Court to decide on the exact level of cover.
This ruling also comes just days after a detailed report on Ireland’s pension system by the OECD, criticising the absence of adequate protection of benefits for defined benefit members, including the absence of a protection fund. However, the Tánaiste (the Deputy Prime Minister) has made it clear that the Government will await the outcome of the full High Court hearing of the Waterford Crystal case before deciding on its response or next course of action.
It is likely that this ruling will have implications for other employees who have suffered losses to their pensions in similar situations. The likely outcome of all this is that the State (ie taxpayers) will have to find substantial sums of money to meet any liabilities it may be said to have following the European Court’s decision.