EU Court Overrules UK Cap on Pensions Lifeboat Fund

The European Court of Justice (ECJ) has ruled against a UK government cap on pension relief funds offered to workers whose employers have gone bust and are unable to meet pension commitments.

The ECJ found that the Pension Protection Fund’s cap on emergency pension compensation amounted to a breach of European law, which rules that :

“Every individual employee must receive old-age benefits corresponding to at least 50% of the value of his accrued entitlement.”

The case was brought by Mr. Grenville Hampshire and fifteen fellow former employees of Turner & Newall manufacturing company, all of whom had their pension entitlements slashed by the PPF cap when their employer became insolvent.

Mr Hampshire, who worked at the company for 27 years from 1971-1998, had his pension cut by 67% when he transferred into the PPF scheme in 2006, from £60,240 to £19,819.

Fund must pay workers at least 50% of prior entitlement

The Pension Protection Fund is set up as a lifeboat pension scheme, to help members of corporate retirement schemes whose employers become insolvent and are unable to meet pension commitments.

Under UK law, the pensions lifeboat will compensate workers who are still in employment for 90% of the benefits that they would have been owed by their employer under their former corporate pension scheme. However, the government places an annual limit on the amount that any employee can be reimbursed by the scheme – with the cap currently set at £39,000, with a maximum 90% pay-out of £35,000.

In the case of high earners, this figure may not amount to at least 50% of what the worker was originally entitled to claim from their employer. The ECJ found that in such instances, the scheme is in violation of an EU directive, which obliges member states to protect the interests of workers in the event that an employer becomes insolvent.

Previous case law considering the EU directive in question has established that this means that member states must legally ensure that the employees of insolvent employers ultimately receive at least 50% of their previous entitlement benefits.

There are two possible reasons that a PPF member may end up being paid less than half of their previous entitlement under the scheme. Firstly, due to the benefit cap limiting pay outs to £35,000, and secondly, due to the scheme’s extremely unfavourable inflation-proofing compared to most corporate schemes. The PPF applies no inflation proofing at all to benefits accrued by employees before 1997.

PPF: Ruling unlikely to affect employers

The ECJ ruling means that the PPF will be obliged to offer workers an amount at least equal to 50% of their original scheme entitlements, regardless of the scheme’s cap and lack of inflation proofing.

Critics have pointed out that the ruling will largely benefit executives and top earners at companies that went bust, who now stand to be able to claim compensation for reduced pension payments going back years as well as securing higher future compensation.

Frank Field, the chair of Parliament’s work and pensions select committee, noted that the cap which has now been ruled unlawful “has a laudable aim: to focus the minds of highly paid directors on making sure that their pension schemes don’t end up having to be bailed out.”

In the wake of the ECJ judgement, Mr Field added: “It’s now up to the PPF and the government to make sure that aim isn’t compromised by this ruling.”

The PPF has stated that fewer than 1% of the UK’s 236,000 PPF scheme members stand to benefit from the EU ruling. As a result, the fund predicts that any higher pay-outs mandated by the ruling will only add a total of 1% to its current payout responsibilities – equating to an extra cost of £215m.

Thanks to the emergency pension scheme’s ample budget (the scheme is currently 122% funded and has a surplus of £6.7bn), the judgement is unlikely to affect rates for UK employers, who pay levies into the scheme every year.

5,600 employers still sponsor defined-benefit pension schemes, with employers paying in a total of £537m last year.

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