Two days before Christmas the High Court handed down the latest in a number of decisions about the validity of the Government’s Pension Protection Fund (PPF) compensation regime. This month we look at that decision in the context of the cases that preceded it, and the Government’s wider approach.
The legal background: protecting members on insolvency
Article 8 of the EU Insolvency Directive requires Member States to “ensure that the necessary measures are taken” to protect the interests of employees and ex-employees in relation to occupational pension rights on a company’s insolvency.
In 2007, in Robins v Secretary of State for Work and Pensions[1] , the European Court of Justice held that the UK insolvency protection regime, before the PPF was established in April 2005, did not “protect” under article 8 in cases where members received less than half their promised pension entitlement. The ECJ did however accept that member states had “some latitude” as to how member rights were protected, and that the Directive did not demand a “full guarantee” of pension rights on insolvency.
Although the PPF legislation generally protects 90% or (for members over normal retirement age) 100% of ‘core’ pension benefits, there will be circumstances in which far smaller proportions of a member’s actual scheme benefit are protected. For example, members below normal retirement age may be caught by the “compensation cap” (currently equating to a maximum PPF pension of £32,761 per year): others may lose out as a result of the PPF providing smaller survivor pensions or pension increases than they were entitled to under their scheme.
The cases so far
The first High Court challenge to the PPF regime came in Independent Trustee Services Limited v Hope[2]. That case concerned a number of senior managers of an insolvent employer, two of whom stood to lose more than 50% of their contractual pension entitlement if the scheme entered the PPF.
On the basis of Robins the judge accepted that a loss of more than 50% of a member’s entitlement would normally infringe Article 8, at least if it occurred on a systematic basis. He noted that although the senior managers’ pensions (around £40,000 p.a.) were much higher than most members, they were still “relatively moderate” and that “it may well be a difficult question whether their prospective level of PPF compensation does in all the circumstances comply with Article 8...” In the event, however, the judge said that he was not entitled to depart from the provisions of the UK legislation, and so did not need to decide that question.
More recently, in Hogan v Ireland[3] the Court of Justice of the EU held that Ireland seriously breached its Directive obligations by not sufficiently protecting pension rights on insolvency. Again, many of the plaintiffs in that case would receive less than half the value of their accrued pension benefit. The Court stated that since Robins, “Member States were informed that correct transposition of Article 8… requires an employee to receive… at least half of the old-age benefits arising out of the accrued pension rights for which he has paid contributions under a supplementary occupational pension scheme.”
Hogan prompted renewed speculation as to whether the PPF regime complied fully with the Directive. Read literally, the Court’s comments supported the idea that correct implementation of the Directive required each employee to receive “at least half” of his accrued pension.
The latest High Court decision
Hampshire v The Board of the PPF[4] sought to test this theory. It began as a complaint to the PPF Ombudsman by another member whose PPF compensation was less than half his scheme entitlement. The member claimed that this reduction in his rights breached the ruling in Robins, and the PPF should not have approved a scheme valuation reflecting a level of compensation in breach of European law. In February 2014 [5] , the Ombudsman rejected the complaint, holding that article 8 could not be relied upon to establish a direct right against the PPF. Like the judge in Hope, he determined the complaint on the basis of the UK legislation, concluding that the PPF was not at fault in approving the valuation.
In the High Court hearing in December, which was part of the member’s appeal from the PPF Ombudsman’s finding, the judge rejected the submission that the Directive required the UK to ensure that every individual employee received a minimum of 50% of their scheme benefits from the PPF. In the EU cases, said the Court, the CJEU was considering a legislative scheme that might affect substantial numbers of ordinary members, rather than laying down a member by member test. “On that basis… any case for the Directive to have the direct effect of entitling Mr. Hampshire to that level of protection, or of requiring the national legislation to be construed to produce that result, must fail.” The judge declined the invitation to make a further reference to the European courts.
The Government’s approach
The Government’s view throughout all this has been that the PPF regime complies with European law. This view arguably draws support from Supreme Court dicta in Houldsworth v Bridge Trustees [6] which hinted, like the judge in the newest case, that the outcome of Robins should be seen in the context of the tens of thousands of members affected by the lack of a PPF-style safety net before 2005.
However, the Government has sought to respond to wider criticism that the compensation cap was unfair to long-serving members. Last year, in Parliament, the Pensions Minister defended the existence of the cap by explaining that it was designed to exclude high earners who might have been involved in decisions about the future of a company. Nevertheless, he acknowledged that the cap caught some members who were not “gratuitously rich”, but who had built up a substantial pension e.g. by working for one employer for their entire working life. The Government therefore agreed to extend the cap so that, for pensionable service above 20 years, it would increase at a rate of 3% per additional year (up to a maximum of twice the existing cap). This change was enacted in the Pensions Act 2014, although we still await it being brought into force.
Conclusion
The case still leaves the door open for challenge: the High Court judge noted that in principle it was open for the disappointed member to bring the matter before the CJEU himself, by bringing proceedings against the UK Government alleging that the PPF regime did not comply with the Directive. As recently as mid-January the topic was discussed in the House of Lords, with the Government saying that no further improvements to PPF compensation were proposed. As such, it remains to be seen whether this is the end of the story!
----------------------------------------------------------
1. Case C-278/05 Robins v Secretary of State for Work and Pensions [2007] Pens LR 55
2. [2009] EWHC 2810 (Ch).
3. Case C-398/11 Hogan v Ireland[1] [2013] Pens LR 185
4. [2014] EWHC 4402 (Ch)
5. In determination PPFO-750 Mr G H Hampshire
6. [2011] UKSC 42
.jpg)