The Pension Protection Fund may end up having to pay full benefits in the case of a defined benefit scheme sponsor going bust, if the European Court of Justice follows an opinion issued on an ongoing case.
In Pensions-Sicherungs-Verein VVaG v Günther Bauer, a court case that relates to the German equivalent of the UK pensions lifeboat, advocate general Hogan argued that member states should provide full employees' pension entitlements when following the EU Insolvency Directive.
Under this rule, member states need to protect the interests of workers in the event of the insolvency of the employer.
Currently, the PPF is changing the way it calculates its members pension entitlement, following a ruling from the ECJ, handed down in September.
This determined that PPF members should not receive less than 50 per cent of their entitled benefits in the event of the insolvency of their employer.
UK law already establishes that the pensions lifeboat will pay 90 per cent of a scheme member's benefits if they are not retired when they are transferred into the pensions lifeboat.
But there is a cap on the total amount to be paid each year – set by government – which is currently £39,000 at age 65.
This means high-earners could end with a big pension cut.
Mr Hogan noted that the court was wrong in previous cases like Robins and Hampshire – the latter being the one PPF is responding too.
According to Arc Pensions Law, it "would be great news for members of failed schemes" if the ECJ followed Mr Hogan’s opinion.
However, it could be a shock to the solvency of the pensions lifeboat, and the employers that have to fund it.
"A dramatic increase in levy for the riskiest schemes could push more employers into insolvency, further increasing the PPF's burden," the law firm stated.
According to Anna Rogers, senior partner at ARC Pensions Law, there is a chance the ECJ isn’t persuaded by Mr Hogan’s opinion.
She said: "Mr. Hogan's reasoning is powerful in terms of protecting members, but this is the third time the recommendation has been made and in the past cases the court balanced social protection against the cost."
Furthermore, if full protection is required by the EU Insolvency Directive, Brexit would be relevant, but the effect will depend on the timing of the ruling and the terms of withdrawal and the future relationship, she noted.
There may also be a case where it is appropriate to change the law for the future only.
Ms Rogers said: "If the European Court ruled that full protection had to be given for future accruals only, that would dramatically reduce the cost, given that so many DB schemes are closed to future accrual."
However, if the PPF has to provide buyout level benefits, these will "increase the pressure for DB schemes to be fully funded," she concluded.
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