The UK’s Pension Protection Fund (PPF) could have to scrap its compensation limit if the European Court of Justice (ECJ) rules in line with a legal opinion published this week.

In an assessment delivered to the ECJ, Advocate General Juliane Kokott said “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 was advising on the case of Grenville Hampshire versus the board of the PPF. If the ECJ were to rule along the lines of her assessment then the PPF could be forced to drop its current annual limit of £35,000 (€39,890) in compensation.

Hampshire launched his case after his expected annual pension was slashed by 67% following the insolvency of Turner & Newall, formerly a manufacturing business, and the transfer of the plan to the PPF.

However, while a move by the ECJ to follow Kokott’s assessment would have implications for state bodies across Europe, Stephen Schofield, senior partner at law firm Pinsent Masons, said the actual impact on the PPF might be limited. 

“There would be only a relatively small amount of people affected,” he said.

Any costs implications for the PPF were likely to be soaked up by recalibrating the existing levy the PPF charges to UK defined benefit schemes, Schofield added.

“All things being equal, it will impact the levy but any impact will be relatively small and no doubt they will collect it over a number of years, rather than in one lump sum,” Schofield said.

UK compensation versus EU law

The UK’s lifeboat scheme pays 100% of a member’s pension up to the annual cap if they are beyond retirement age.

However, benefits accrued prior to April 1997 are not indexed, and post-April 1997 benefits can only increase by 2.5% a year maximum. If a member has not retired, they will receive roughly 90% of their pension, up to the annual cap.

The European directive at the centre of the Grenville Hampshire case dates from 2008 and states: 

“Member States shall ensure that the necessary measures are taken to protect the interests of employees and of persons having already left the employer’s undertaking or business at the date of the onset of the employer’s insolvency in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors’ benefits, under supplementary occupational or inter-occupational pension schemes outside the national statutory social security schemes.”

Anna Rogers, senior partner at ARC Pensions Law in the UK, said the PPF was likely to still impose a cap – albeit a higher one. The ECJ was likely to agree with Kokott’s assessment, she said, “and improve the rights of executives with big pensions that are currently subject to swingeing cutbacks”. 

Rogers continued: “The Advocate General has said that it isn’t fair that the PPF compensation caps ‘establish a kind of general suspicion in respect of senior executives who have not yet attained the pension age… a general presumption of the existence of abuse is unlawful’.”

A spokesperson for the PPF said the body was watching the outcome of the Hampshire case “with close interest”.

“Members are currently receiving benefits from the Turner & Newall scheme at the levels set out in the Pensions Act,” the spokesperson said. “They can be reassured that this is the minimum that they will continue to receive.”

European impacts

European governments and state-funded compensation bodies would also be monitoring the eventual ruling – expected within three to four months’ time – very carefully, said Hans van Meerten, a professor of international pensions law at the University of Utrecht.

He pointed out that Kokott had specifically mentioned in her assessment that any ruling would affect any further challenges “against a body such as the Pension Protection Fund”. 

“‘Such as’ means that this can be invoked against every body in the member states, which makes it very interesting for the other [EU countries] such as the Netherlands, which does not have a PPF,” he said. “It is not just a question for the UK.”

The assessment comes as the UK prepares to leave the EU in March 2019. However, most experts expect any ruling by the ECJ to be rolled up within a possible ‘Withdrawal Bill’ and then enshrined into UK law.

“How this will work after Brexit, no one knows,” added Van Meerten, “but if this was judged when UK was still part of the EU, then I would say yes, it would still hold.”

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