Hampshire v PPF (Advocate General’s Opinion)

Advocate General Kokott (“the AG”) has given her opinion to the CJEU in relation to a case regarding the level of PPF compensation.

Mr Hampshire had challenged the level of compensation he was entitled to from the PPF, following the insolvency of his employer. In the opinion of the Court of Appeal, several issues of EU law needed clarification, and therefore it referred certain questions to the CJEU.

The AG’s opinion, if followed, will create issues for current PPF compensation levels, but will also have knock-on effects on employer insolvency for schemes close to current PPF funding levels.

Background

Article 8 of the EU Insolvency Directive

Directive 80/987/EEC (“the Directive”), now superseded by Directive 2008/94/EC (which is materially identical) deals with the protection of employees in the event of the insolvency of their employer.

Article 8 of the Directive requires that Member States ensure that “necessary measures” are taken to protect the interests of employees and former employees “in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors’ benefits, under supplementary company or inter-company pension schemes outside the national statutory social security schemes.”

PPF compensation

The PA04 provides for compensation to be paid by the PPF to members of a qualifying scheme, amounting to either 90% (for deferred members, or those below the pension scheme’s normal pension age at the PPF assessment date) or 100% of the pension payable under a scheme’s rules (see our summary of PPF benefits for details). Those who have not attained normal pension age by the PPF assessment date are also subject to the PPF’s compensation cap. The cap is set annually and currently stands at £39,006.18 (equating to £35,105.56 when the 90% level is applied). In addition, the PA04 limits the indexation of PPF compensation payments to pension entitlement attributable to pensionable service post-1997.

The facts

Mr Hampshire was four years from being able to take his benefits unreduced, when his employer, Turner & Newall Limited (“T&N”), became insolvent. The T&N pension scheme entered PPF assessment on 10 July 2006.  Mr Hampshire calculated that, under the PPF’s capping system, he would be liable to a reduction of about 67% from his scheme entitlement.

He complained to the board of the PPF (“the Board”), and then to the PPF Ombudsman, who rejected his appeal. Mr Hampshire then brought High Court proceedings against the Board, arguing that Article 8 of the Directive, as interpreted by the earlier cases of Robins v Secretary of State for Work and Pensions [2007] (“Robins”) and Hogan v Minister for Social and Family Affairs [2013] (“Hogan”), obliged Member States to ensure that measures were in place to guarantee that compensation to members would represent at least 50% of the benefits to which they were entitled under their schemes.

The High Court in Mr Hampshire’s case did not agree that these cases now meant that a minimum level of compensation had to be guaranteed by Member States, finding it “inconceivable that the ECJ would hold that it was unlawful per se to impose a cap on protected benefits”.

Mr Hampshire appealed. The Court of Appeal decided to refer the following questions to the CJEU before it gives its judgment:

• whether Article 8 and relevant EU case law conferred universal minimum entitlement in terms of pension protection (of at least 50% of the value of their accrued entitlement to old-age benefits)
• whether Article 8 protected envisaged growth in the pension entitlement
• whether the Directive conferred direct rights on individuals of EU Member States (“direct effect”).

AG’s Opinion

The AG concluded that:

• It is not sufficient that employees receive on average 50% of the value of their accrued entitlement to old-age benefits. Article 8 (following its interpretation by case law, and examining its drafting and drafting history) establishes an individual minimum guarantee for each individual employee, of at least 50%. “The exclusion of individual employees from that minimum standard is therefore unlawful”.
• In her view, it is unlawful for compensation paid by the PPF not to reflect inflationary increases to which the employee would otherwise be entitled if this meant a member would fall below the 50% level.
• While Member States “can and must take into consideration the need for balanced economic and social development in transposing the Directive”, balance cannot be achieved by denying certain individuals protection. And while Member States can take “measures necessary to avoid abuse”, the capping went “beyond what is necessary to combat moral hazard”. Therefore, there was no justification on these grounds for a lower level of protection for any individuals.
• For the provisions of a Directive to have direct effect, they must be both unconditional, and sufficiently precise. The AG concluded that Article 8 fulfils these requirements. Further, the AG determined that the PPF performs a task in the public interest, and possesses “special powers” (here, of imposing its levy, amongst other powers), and therefore that Article 8 may be relied upon directly by an individual against the PPF.

Next steps

The AG’s opinion is not binding on the CJEU, merely advisory. We understand that the CJEU’s verdict will be given within the next four months. When the CJEU has given its judgment, the case will return to the UK’s Court of Appeal.

The AG’s opinion clearly has the potential to increase the cost of providing PPF compensation, with a knock-on impact on the levy. Although reports suggest that a relatively small percentage of people entering the PPF are impacted by the compensation cap, more are likely to be affected by the “overall value” test if higher pension increases and revaluation they would have enjoyed in their original schemes are included in the calculation.

Further, until the Courts have reached a conclusion on this, it looks quite difficult for trustees to buy-out benefits at “PPF-plus” level (eg if on employer insolvency a scheme is funded above PPF compensation levels), because of the uncertainty of what “standard” PPF compensation is going to be.  Trustees will be reluctant to secure a buy-out based on current PPF compensation if in fact there is a real risk PPF compensation will need to increase for some members (unless perhaps a scheme is well enough funded that it could be confident all members can be bought out at 50% or more of their benefits in any event).  If trustees buy-out below the level that members would ultimately receive from the PPF, there is a risk of claims that they haven’t acted in the members’ best interests.