The CJEU has decided that the EU Insolvency Directive “requires Member States to guarantee each individual employee, without exception, compensation corresponding to at least 50% of the value of their accrued entitlement” under their occupational pension scheme.
Directive 80/987/EEC (“the Directive”), now superseded by Directive 2008/94/EC (which is materially identical) deals with the protection of employees in the event of the insolvency of their employer.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.”
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.
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  and Hogan v Minister for Social and Family Affairs , 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 referred the following questions to the CJEU:
Following the AG’s opinion, the CJEU ruled that:
The decision states that the minimum protection afforded by the Directive “must be calculated taking into account the envisaged growth in the pension entitlement throughout that period, in order to prevent, as a result of the passage of time, the amount guaranteed falling below 50% of the initial value accrued for one pension year”.
The case will return to the UK’s Court of Appeal to conclude matters and make any decisions as to costs. However, the CJEU’s ruling means that the PPF must now review its compensation levels.
Responding to the judgment, the PPF commented that “the vast majority” of PPF and FAS members already receive compensation in excess of the 50% level and that it expects the number of members affected by this ruling to be “very small”. It has been working with the DWP about the changes that may result from the judgment and states that it will work to implement it “as quickly as possible”.