The European Court yesterday provided its ruling on the level of compensation to be provided to individuals who do not receive all of their occupational pension due to the sponsoring employer of their scheme going insolvent.
The European Court ruled that the current EU legal requirement that individuals should be entitled to at least 50% of their benefits can continue - provided the person is not left at risk of an EU poverty measure equivalent to about £11,142 per year (Eurostat 2018).
In the UK, the Pensions Protection Fund, which has 400,000 members, provides 100% benefits to people who are already drawing their pension at the time of the employer going insolvent, and 90% to those who are not yet retired. Prior to the ruling today, many people had thought it might result in the PPF having to pay out 100% of benefits in all cases and that this might result in enormous new costs for employers and, possibly, for the Government.
Today's judgement by the European Court provides a pragmatic solution to the question of how to ensure a minimum level of protection to savers in a company pension where the scheme is underfunded and the sponsoring employer goes insolvent."
It is not clear how it will be possible to assess whether a person who is in the PPF is in receipt of total income (state pension, pensions, other income) above the new minimum level.
Today's case focussed on Gunther Bauer, a former worker of a now defunct German company, could fundamentally alter the UK's only Government-backed pensions safety net. With the ruling now given, the judgement will take affect across EU member states. In light of Brexit, it is not clear to what extent this ruling will apply in the UK.
Nigel Peaple, director of policy and research at the PLSA, said: "Today's judgement by the European Court provides a pragmatic solution to the question of how to ensure a minimum level of protection to savers in a company pension where the scheme is underfunded and the sponsoring employer goes insolvent.
"Under the ruling, if a saver relies on a pensions lifeboat for their retirement income they must receive at least 50% of promised benefits on condition it ensures they have at least a minimum income as defined by an EU measure of poverty. If their income falls below this minimum level, a higher percentage must be paid.
"The UK lifeboat, the PPF, provides between 90% and 100% of former pension entitlements and, given that a full UK State Pension ensures people have around £8,800 of income per year, it seems likely that many people in the PPF will be above the minimum income allowed. However, detailed analysis will need to be undertaken by the PPF before we can be certain about the impact of the judgement on the liabilities of the PPF and on UK pensions. That impact is likely to have two elements.
"First, a substantial administrative challenge for PPF on how to assess whether individuals are above the poverty threshold and, secondly, there may also be shortfall in the funding of the PPF which could result in higher levies for pension schemes. Compared to expectations prior to the ruling, the administrative challenge is greater and the funding challenge probably much less."