Summary

The ASW case is an important European Court of Justice decision in the fight by ASW pension scheme members for government compensation for loss of their pension benefits following ASW’s insolvency.

The ECJ has ruled that:

  • Where an employer is insolvent and its DB scheme is in deficit, the government does not need to make up the underfunding.
  • The government has inadequately implemented the EU law which requires Member States to ensure that employees’ pension rights are fully funded by the Member State in the event that the employer becomes insolvent and the scheme’s assets are insufficient to fund the employees’ benefits.
  • As a result of the government’s failure to implement its EU obligations, the High Court needs to consider whether the government’s infringement was sufficiently manifest and grave to enable the ASW pensioners to receive government compensation.
  • No temporal limitation (which would have precluded claims being brought by individuals) was appropriate.

Comments from the ECJ suggest that individual claims remain problematic although still capable of being brought.

Even though individual claims may ultimately fail, the government still needs to decide how to implement the Insolvency Directive fully. The decision has potentially major implications for the Financial Assistance Scheme and the Pension Protection Fund, which may not adequately address the ECJ’s concerns. The prospect of increased levies has not wholly disappeared as a result of the judgement.

This briefing note considers the ASW case.

ASW case: the facts

The claimants were members of the ASW DB schemes, which were terminated in July 2002 and are in the process of being wound-up. Both schemes are underfunded and as a result benefits for non-pensioners will be reduced. The claimants’ benefits will be reduced so that they will receive 20 per cent and 49 per cent respectively of their benefits. ASW Limited went into insolvent liquidation before June 2003.

The claimants argued that Article 8 of the 1980 Insolvency Directive required the government to protect pension scheme benefits when the employer has become insolvent leaving a DB scheme in deficit. Since UK legislation did not provide the appropriate level of protection, the government should provide compensation for their pension losses.

What protection is currently provided by UK legislation?

There are various protections in place for employees who have had their pension benefits reduced as a result of their employer becoming insolvent with an underfunded scheme. The main protections are:

  • The requirement that pension scheme funds must be held in an independent trust and as such are not available to the employer’s creditors.
  • The statutory minimum funding requirement (now replaced by the scheme funding requirement).
  • Employer debt requirement which provides that the employer owes a debt to the scheme calculated on the prescribed basis when the scheme winds-up in deficit.
  • The Financial Assistance Scheme applicable to schemes where employer liquidation proceedings began between 1 January 1997 and 5 April 2005.
  • Buy-back of contracted-out rights back into the State scheme.
  • The Pension Protection Fund.

The claimants in this case cannot benefit from the Pension Protection Fund because of the date ASW became insolvent.

Why was the case referred to the ECJ?

The ECJ has jurisdiction to rule finally on matters of EU law. At the same time, many EU law issues come before the Member States’ courts. The domestic court in question may not be clear about a point of EU law which is necessary to determine the case. EU law allows the domestic court to refer various questions, including those of interpretation of Directives, to the ECJ. The ECJ does not decide the final outcome of the case. Instead it rules on the domestic court’s questions and then refers the case back to the domestic court to decide the case.

The ASW case was originally considered by the High Court. It decided the case raised issues of EU law which needed clarification by the ECJ. As a result it referred the case to the ECJ.

What did the ECJ decide?

The ECJ decided the following:

  • On the proper construction of Article 8 of the Insolvency Directive, where an insolvent employer has an underfunded pension scheme, accrued pension rights need not necessarily be funded by the Member State either in part or indeed be funded in full. The Directive’s wording allowed some latitude for Member States concerning the best way to protect members’ benefits.
  • UK legislation which results (in this case) in the provision of less than 50 per cent of benefits for affected members does not adequately implement the requirements of the Insolvency Directive. The ECJ came to this conclusion despite the fact that the Insolvency Directive does not establish with any precision the minimum level of protection required to protect pension benefits.
  • The question as to whether the UK was liable to pay damages to the claimants because it had not adequately implemented the Insolvency Directive in this respect had to be decided by the High Court. The High Court could find the UK liable for damages where it found that the UK had behaved with “manifest and grave disregard” in deciding how to implement the Insolvency Directive.
  • No temporal limitation (to preclude claims being brought by individuals outside the stated time limits) was granted by the ECJ.

What happens next?

The case will be re-considered by the High Court which will decide whether or not the claimants are entitled to compensation from the government.

Comments

The ECJ decided that the Insolvency Directive does not require full protection of employees’ pensions. However, the Insolvency Directive is silent as to the level of protection actually required. Unfortunately, the ECJ does not provide any guidance as to the appropriate level of protection. The ECJ’s comments that protection needs to be better than 50 per cent of the anticipated benefits but where between 50 per cent and 100 per cent is unclear.

It is important to note that the ECJ appears to take a dim view of a situation where some members would receive appropriate protection at the expense of other members of the same scheme. If this is the case there may be implications for the Pension Protection Fund as well as the Financial Assistance Scheme.

The Financial Assistance Scheme is available to provide compensation to members of an underfunded scheme where employer liquidation proceedings began between 1 January 1997 and 5 April 2005. As such the Financial Assistance Scheme deals with claims which pre-date the Pension Protection Fund. The level of compensation provided by the Financial Assistance Scheme is low and the amount of compensation which it can provide for all members is capped at a total of £400 million. The government may have to revisit this in the light of the ECJ decision.

The Pension Protection Fund caps the level of compensation provided both in terms of benefit as well as the salary which is used to calculate the benefits. High earners are likely to receive a larger reduction to their benefits because of this cap than lower paid members. At the same time where the scheme provides for higher pension increases than allowed by the Pension Protection Fund, members’ benefits will be cut back from the level they would have otherwise received from the scheme. It is conceivable in that circumstance that there may be cases where the level of compensation provided by the Pension Protection Fund may be lower than the minimum level of benefit required to be provided under the Insolvency Directive. The result of this would be greater Pension Protection Fund liability and increased levies.

The claimants in the ASW case argued that the government should pay them compensation because it had not properly implemented the requirements of the Insolvency Directive. The ECJ set out the test which needs to be satisfied for such a claim to succeed: that the UK had behaved with “manifest and grave disregard” in deciding how to implement the Insolvency Directive. It is not for the ECJ to comment on whether or not this test has been satisfied. However, the ECJ gave strong indications of the evidence which the High Court could use to find that there has been no such disregard. Those indications suggest that individual claims remain problematic. The government will still need to decide how to implement the Insolvency Directive even if individual claims will ultimately fail.

The ASW case is only one of the ways in which the government’s protection of underfunded DB benefits has been attacked. As a result of complaints, the Parliamentary Ombudsman has investigated the actions of various Governmental bodies regarding the security of DB benefits. The Parliamentary Ombudsman found that official information about the security of DB benefits provided over many years by the DWP, OPRA (the Regulator’s predecessor) and others was inaccurate, incomplete, unclear and inconsistent. Among the recommendations made were that the government should consider whether it should make arrangements for the restoration of benefits to the members covered by the report. The government has rejected the Parliamentary Ombudsman’s findings.