CJEU judgment could require larger pension payouts on insolvency

Out-Law News | 19 Dec 2019 | 1:39 pm | 2 min. read

The UK's Pension Protection Fund (PPF) could be required by EU law to make larger pension payments to certain former employees of insolvent businesses as a result of a Court of Justice of the EU (CJEU) decision.

The CJEU, in a German case, ruled that compensation payable to members of occupational pension schemes would be "manifestly disproportionate" if it "seriously compromised" the individual's ability to meet their needs. The CJEU ruled that this would be the case if the result was that the individual is "living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the member state".

The EU Insolvency Directive imposes an obligation on member states to protect old age benefits affected by an employer's insolvency, including pension rights under an occupational pension scheme.

Scholefield Stephen

Stephen Scholefield

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The decision looks set to make pension compensation much more difficult to calculate and administer.

The decision follows last year's judgment by the same court that the PPF could not cap compensation at less than 50% of what the individual would have otherwise been entitled to. The PPF is the UK's pension 'lifeboat' scheme, which pays compensation to members of defined benefit (DB) pension schemes when a sponsoring employer goes bust and is unable to pay members the full benefits to which they are entitled.

Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law, said that the decision "adds further gloss" to the 50% minimum compensation requirement previously confirmed by the CJEU.

"In addition to that minimum, the reduction to benefits must not cause a member to be at risk of living in poverty, as measured on the EU basis," he said.

"In the UK, that equates to an income of around £10,000 a year. Given the state pension, and 'triple lock' protection, it seems unlikely that the poverty threshold will apply in many cases – but it looks set to make the compensation much more difficult to calculate and administer," he said.

German pensioner Günther Bauer had challenged a decision by Pensions-Sicherungs-Verein (PSV), the German equivalent of the PPF, to pay him a smaller amount than he was receiving from his former employer before the business became insolvent. Bauer continued to receive more than 50% of his previous pension entitlement, meeting the threshold confirmed by the CJEU in the Hampshire case last year.

The CJEU ruled that the wording of article 8 of the Insolvency Directive, which requires member states to take "the necessary measures" to protect old age benefits payable by insolvent businesses, meant that while compensation could be capped, it could not be "manifestly disproportionate".

"[E]ven if article 8 ... requires at least half of the old age benefits to be guaranteed, that does not mean that, in certain circumstances, the losses suffered by an employee or former employee may not also be regarded as being manifestly disproportionate in the light of the obligation referred to in that provision to protect the interests of employees," the CJEU said in its judgment.

"[Article 8] must be interpreted as meaning that a reduction in the amount of occupational old age pension benefits paid to a former employee, on account of the insolvency of his or her former employer, is regarded as being manifestly disproportionate, even though the former employee received at least half of the amount of the benefits arising from his or her acquired rights, where, as a result of the reduction, the former employee is already living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the member state concerned," it said.

The CJEU also ruled that Bauer had a direct right of action against the PSV, as the wording of the directive was "unconditional and sufficiently precise".

Pensions expert Alastair Meeks of Pinsent Masons warned that the ruling could add considerable complexity to the way in which the PPF calculates compensation due to former employees of insolvent businesses.

"The PPF will not have direct access to information about each individual's total income levels," he said.

"Many will argue that the simplest way for the government to comply with this judgment would be to ensure that those in receipt of PPF compensation are entitled to a minimum income from the state that ensures that they are above the risk-of-poverty threshold. However, overhauling social security structures in this way could be challenging," he said.