UK Pension Protection Fund Cap Unlawful, Says Advocate General

A final decision will now be decided on by the European Court of Justice.

The advocate general of the European Court of Justice has issued an opinion stating that the UK’s Pension Protection Fund’s limit on payouts to high earners goes against EU law and should be removed.

The Pension Protection Fund (PPF) pays compensation to eligible defined benefit pension plan members when the companies they work for become insolvent, and when the assets in their pension plan are not enough to cover PPF levels of compensation. The maximum PPF annual compensation for people yet to retire is currently capped at £35,000 ($47,653).

The case in question was initiated against the PPF by Grenville Hampshire, who was an employee of Manchester-based manufacturing company Turner & Newall from 1971 until 1998, when he took an early retirement at the age of 51.

Hampshire’s pension entitlement was set by the trustees of the Turner & Newall pension at £48,781.80 ($66,383.49) per year before tax, with a minimum annual increase of 3%. But after the company was taken over by US-based auto parts supplier Federal Mogul in 1998, an insolvency application was filed for Turner & Newall in the US in 2001, and in 2006, the PPF opened the assessment in the UK concerning the takeover of the supplementary occupational pension plan.

The amount of compensation the PPF set for Hampshire was £19,819 per year before tax, as he had not yet attained the normal pension age, and was therefore subject to the statutory cap. The new assessment amounted to just under 41% of his original entitlement, which equaled a loss of £28,962.80 a year to Hampshire.

In her opinion, Advocate General Juliane Kokott said that every individual employee “is entitled to compensation of at least 50% of the total value of his accrued rights or entitlements to old-age benefits in the event of the insolvency of his employer.”

Kokott added that because only a few employees are affected by the cap “the possible financial effects are thus negligible compared to the overall costs of the system.”

One of the reasons the UK government gives for the existence of the cap is to protect a company from financially risky conduct by management-level employees whose pension claims are guaranteed. The rationale behind this is that senior executives might be tempted to take high-risk decisions that could result in the company’s insolvency since they don’t have to worry about losing their pension.

However, Kokott shot down this reasoning saying it was “bold” to assert “that a senior executive who has taken early retirement, with a correspondingly high pension entitlement, is in all likelihood responsible for the insolvency of the undertaking.”

She also said that senior executives who have already attained the normal pension age are not covered by the cap, even if they were possibly involved in high-risk business decisions that contributed to the downfall of the company.

“Therefore, the national rules do not in any case pursue the objective cited by the United Kingdom government in a consistent and systematic manner,” said Kokott, “as age is clearly not a suitable criterion to which a risk of abuse can be attached.”

The European Court of Justice will now consider the case, although it is not obligated to follow the advocate general’s opinion.

“We note the advocate general’s opinion and await the outcome of this case with close interest,” said a PPF spokesperson, according to the Financial Times. “Members are currently receiving benefits from the Turner and Newall scheme at the levels set out in the Pensions Act. They can be reassured that this is the minimum that they will continue to receive.”

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