The Pension Protection Fund (PPF), which steps in when an employer can no longer support its scheme, caps annual payouts for those who have not yet retired at £35,000, which means those who were expecting bigger pensions may lose out.
But the European Court of Justice has ruled this should change after a employee took the PPF to court when his pension fell by 67 per cent after his former employer became insolvent.
Grenville Hampshire, who was an employee of manufacturing business Turner & Newall, also lost most of his rights to annual increases in his pension, which meant that according to his calculations he received 25 per cent of his accrued pension entitlement.
The court ruled every individual employee must receive old-age benefits corresponding to at least 50 per cent of the value of their accrued entitlement under a supplementary occupational pension scheme in the event of his employer's insolvency.
The court stated the European Union's rules on this, which mean member states must have a body, such as the PPF, which guarantees pension payments in the event of insolvency, would be "seriously undermined" if individual workers were not given minimum protections.
The court said: "It cannot, therefore, be argued that the scope of that interpretation is limited to certain insolvent employers belonging to specific sectors or to certain employees falling within a particular economic and social context."
The PPF, which was established when the UK implemented the EU rules in 2004, pays 90 per cent of pension entitlements to those who have not yet reached retirement age but this is subject to a cap calculated according to a formula in the original legislation.
The ceiling on compensation is therefore not the cap itself, but 90 per cent of the amount of the cap.
Mr Hampshire claimed the provisions the UK introduced in 2004 did not comply with EU rules since they meant some employees received less than 50 per cent of the value of their acquired entitlement to old-age benefits.
In a statement, the PPF said: "We have been working with the Department for Work & Pensions about the changes that may result from this judgment. For those members affected, we will work to implement the judgment as quickly as possible.
"We now need to consider the ruling carefully to understand what action we can take prior to legislative change and/or the conclusion of UK court proceedings. For the financial assistance scheme (FAS) this will involve working particularly closely with DWP colleagues.
"We will update on our approach in due course and will write to affected members as soon as we are able."
Mr Hampshire was employed by Turner & Newall between 1971 and 1998 but the company's pension scheme entered PPF assessment in 2006 after the business became insolvent.
Together with 15 other employees, Mr Hampshire challenged the cuts they were facing to their pensions.
damian.fantato@ft.com
