Defined Benefit  

Landmark court case clarifies protection fund responsibility

Landmark court case clarifies protection fund responsibility

A European Court of Justice brought a “welcome relief” for the Pension Protection Fund, as the lifeboat will only have to pay higher benefits if the individual is living at risk of poverty following the demise of their employer.

Pension experts have argued there is a very low chance of this judgment impacting the PPF, as the PPF pays out benefits in full up to a £36,000 cap for non-pensioners, and the Eurostat threshold for poverty in the UK is set at about £10,230 per year.

The case, Pensions-Sicherungs-Verein VVaG v Günther Bauer, centred on Gunther Bauer, a former worker of a now defunct German company who argued that he should have been given full employees' pension entitlements under the EU Insolvency Directive.

But the ECJ stated that “member states have considerable latitude in determining both the means and the level of protection of employees’ accrued entitlement to old-age benefits,” and that this “provision cannot therefore be interpreted as requiring a full guarantee of the rights in question”.

The judgment made reference to the Hampshire case, handed down in September 2018, which 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.

However, the ECJ judges stated if this means the individual has to live below the at-risk-of-poverty threshold determined by Eurostat then the reduction of their benefits must be regarded as being "manifestly disproportionate" and a higher rate might apply.

The judgment contradicted the opinion of ECJ’s advocate general Gerard Hogan delivered in June, which stated that lifeboats should pay full benefits in the case of a defined benefit scheme sponsor going bust.

Mr Hogan had 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.

A PPF spokesperson said: “We note ECJ has issued its judgment in the case of PSV v Gunther Bauer.

“This is a complex judgment and we are considering it with the department for Work and Pensions. We will make a further statement in due course.”

According to Stephen Scholefield, partner at law firm Pinsent Masons, the judgment “will be a welcome relief for the PPF, for levy payers and for those looking to get consolidators off the ground – whose business models may otherwise have been threatened”.

He said: “It confirms that the PPF need not provide full benefits, but adds further gloss to the ’50 per cent minimum’ compensation requirement previously confirmed by the Hampshire judgment.”

David Everett, partner and head of pensions research at consultancy LCP, said “it is pleasing to see the judges take a sensible approach in this case”.

“No doubt there will be plenty who have been watching this case unfold with interest, and who will have welcomed today’s decision – rejecting the key aspect of the earlier advocate general’s opinion – as in keeping with the fundamental aims of the Insolvency Directive.”