The Court of Justice of the European Union (CJEU) has upheld a ruling by its Advocate General, confirming that all employees are entitled to at least 50% of the total value of their accrued workplace pension savings in the event that their employer becomes insolvent.
The case, Grenville Hampshire v The Board of the Pension Protection Fund, concerns Grenville Hampshire, who worked for manufacturing organisation Turner and Newall between 1971 and 1998, and was a member of their supplementary occupational pension scheme. In 1998, at the age of 51, Hampshire retired with a pre-tax annual retirement income of £48,781.80, with an annual increase of at least 3%.
Turner and Newall became insolvent in 2001. In 2006, the Pension Protection Fund (PPF) opened its assessment concerning the takeover of the organisation’s pension scheme. This assessment found that Hampshire was entitled to £19,819 of PPF compensation a year before tax, as he had not reached the normal age for Turner and Newall’s pension scheme in 2006, and was therefore subject to the statutory compensation cap. This amount was also not predicted to be adjusted for inflation, because Hampshire’s employment was primarily before April 1997. If the organisation had not become insolvent, he would have received £60,240 a year in 2006.Therefore, Hampshire’s pension entitlement was reduced by 67%.
Hampshire and 15 other former employees sought application of the review mechanisms for the PPF valuation under the Pensions Act 2004. They subsequently appealed against the decision ruling in favour of the valuation, citing the EU’s Article 8 of Directive 2008. This directive requires all EU member states to take necessary measures to protect the interests of employees in respect of their rights to retirement benefits in the event of the insolvency of the employer.
The Court of Appeal referred questions to the CJEU in July 2016. These include whether the aforementioned directive requires member states to ensure that every individual employee receives at least 50% of the value of their accrued pension savings in the event that the employer becomes insolvent, and whether it is sufficient for a member state to have a system of protection where employees usually receive more than 50% of the value of their accrued pension, but where some employees may receive less than 50% if they are subject to a financial cap, or to rules limiting the annual increases in compensation paid or the annual revaluation of their entitlements prior to pension age.
The Advocate General handed down an opinion in April 2018, which stated that the directive was to be interpreted that every individual employee is entitled to compensation of at least 50% of the total value of their accrued retirement savings if their employer becomes insolvent. The Advocate General further ruled that it was therefore insufficient to have a system of protection that facilitated employees to receive less than this required 50%.
The CJEU yesterday (Thursday 6 September 2018) published its consequential ruling, which concurred with the Advocate General. It further stated that the directive has a direct effect and may be invoked before a national court by an individual employee in order to challenge a decision of a body, such as the board of the PPF.
The Court document stated: “Member states have considerable latitude in determining both the means employed for purposes of that protection and the level of protection provided, which does not include an obligation to guarantee in full. However, the Court has held that provisions of domestic law that may, in certain cases, lead to a guarantee of benefits limited to less than half the entitlement accrued cannot be considered to fall within the definition of the word ‘protect’ used in that provision.
“The purpose of that directive, which is to provide each employee with a minimum level of community protection in the event of their employer’s insolvency, would be seriously undermined if, in the absence of any abuse of rights by the employee within the meaning of article 12 of that directive, the member states could discharge their obligations under article eight of the directive without granting each individual [employee] such minimum protection.”
A spokesperson at the Pension Protection Fund (PPF) said: “The vast majority of PPF and Financial Assistance Scheme (FAS) members will already receive compensation in excess of 50% of their accrued old age benefits and we expect the number of members affected by this ruling to be very small.
“We have been working with the Department for Work and Pensions (DWP) 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 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.”
Tom McPhail, head of policy at Hargreaves Lansdown, added: “For now at least, the European Court continues to exert control over the UK, something for which some pension scheme members may now be grateful.
“It is to the credit of successive UK governments that we have a robust and reliable lifeboat scheme in place to protect pension scheme members in the event of their employer going bust. The PPF’s healthy surplus means it can take this hit without materially weakening its funding position.”