European Court Rules UK Pension Compensation Cap Unlawful

Ruling expected to cause ‘administrative difficulties’ for UK’s Pension Protection Fund.

The Court of Justice of the European Union (CJEU) has ruled that the Pension Protection Fund’s (PPF) cap on compensation limits is unlawful because those provisions have resulted in some employees receiving less than 50% of the value of their acquired benefits.

“This is a significant decision and there will be a number of wider implications for the PPF, trustees, and members,” UK law firm Eversheds Sutherland said in a release.

Eversheds Sutherland said the decision will cause “administrative difficulties” for the UK’s pensions lifeboat as it will likely have to run the 50% test annually where the PPF compensation level is eroded by inflation. It said the PPF only pays consumer price index increases up to 2.5% and only on post-April 1997 benefits.

“This means that a member with an entitlement to higher increases, for example, 5% increases on pre-1997 benefits, could easily fall below the 50% threshold several years after reaching NRA [normal retirement age],” said the law firm.

The firm added that the ruling may also cause complications for pension plans that are currently going through a PPF assessment period, and those that have in the past not gone into the PPF because they thought they were able to provide benefits beyond PPF levels.

“Trustees winding up a scheme outside of the PPF may also need to look at the implications of this case as legislation reflects the PPF’s current approach but this is now at odds with the CJEU position,” said Eversheds Sutherland. 

In its ruling, the court cited EU law that states that “it is necessary to provide for the protection of employees in the event of the insolvency of their employer and to ensure a minimum degree of protection.”

The court interpreted this to mean that every individual employee must receive benefits matching at least 50% of the value of the accrued entitlement under an occupational pension in the event of an employer’s insolvency. It also said the Pensions Act of 2004 contains a clear definition of who is responsible for the valuation of the assets and protected liabilities of pension plans, and who bears the burden of ensuring the minimum protection.

“In the United Kingdom,” said the CJEU, “the responsibility for fulfilling the obligation on Member States to protect the interests of employees as regards their accrued entitlement to old-age benefits under a supplementary occupational pension scheme lies with the PPF.”

The case was originally filed by Grenville Hampshire, who had been a member of the Turner & Newall pension plan from 1971 to 1998 when he took early retirement. His plan went into a PPF assessment period in 2006 when he was still below its NRA. As a result of a cap the PPF imposes on compensation in such circumstances, Hampshire’s pension was reduced by approximately 67% to £19,819 ($25,787) from £60,240.

Hampshire challenged the lawfulness of the PPF cap, and the reduction in his benefits on the basis of Article 8 of the European Directive on protecting the rights of employees in the event of their employer’s insolvency.

This directive requires EU member countries to protect pension rights in the event of corporate insolvency, and according to Eversheds Sutherland, previous CJEU decisions have held that the minimum level of protection required was 50%. In its defense, the UK argued that there was no requirement for individual members to receive 50% of their benefits.

“The full implications of this judgment in practice—for the PPF, trustees, and those who have in the past or may in the future provide PPF plus-style benefits—may take time to fully work through,” said Eversheds Sutherland.

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