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06 January 2020

10: PPF can pay reduced compensation provided members don’t fall below the poverty threshold

Sponsoring employers of defined benefit schemes may well breathe a sigh of relief at the recent ECJ decision that has implications for Pension Protection Fund (PPF) benefits and the consequent costs to sponsoring employers of those schemes.

The case of Pensions-Sicherungs-Verein VVaG v Günther Bauer was brought by Gunther Bauer, a former employee at a now-insolvent German company, in which he claimed that government pension bailout funds have no right under EU law to reduce pension compensation below the level an employee would receive from their employer’s pension scheme had the employer not suffered insolvency.

At present the PPF provides employees with compensation equal to 90% of their scheme pension on the sponsoring employer’s insolvency date if they haven’t reached their scheme’s normal pension age at that date. This compensation is subject to a cap which can mean significant reductions in pension for some higher earning employees, albeit they are guaranteed PPF compensation of at least 50% of their scheme benefits.

The judgment could have seen the PPF required to provide compensation equal to 100% of scheme pension entitlements which may have seen significant increases in the PPF levy paid by employers with defined benefit schemes.

The European Court of Justice (ECJ) judgment on 19 December 2019 determined that ‘member states have considerable latitude in determining both the means and the level of protection of employees’ accrued entitlement to old-age benefits’, confirming that bailout schemes such as the PPF will not be required to increase benefits for members to 100% and only require them to meet the 50% threshold that was previously determined in a separate ECJ ruling last year.

However, that 50% threshold and any reductions in benefits paid by bail out schemes could be ‘manifestly disproportionate’ if it results in that member being at risk of poverty as measured on the EU basis. Where this risk exists, the bailout scheme will be required to increase member benefits.

In the UK the poverty threshold equates to around £10,000 pa and the PPF compensation cap is around £40,000 pa (at age 65) and £30,000 (at age 55) so in most cases PPF compensation will be more than adequate. However, for some lower earning members there is potentially a risk that their compensation falls below the threshold as a result of the 90% payment level and changes in increase rates.

This is likely to raise administrative issues for the PPF as it seeks to ensure that compensation (past and future) is consistent with the judgment because it will now require an assessment of a member’s income to determine whether they are at risk of poverty. The fears of a meaningful financial impact however appear to be resolved for now.

The decision is likely to be a financial positive for sponsoring employers of defined benefit schemes because a requirement for the PPF to fund at 100% of scheme benefits would almost inevitably have seen a tightening of scheme funding obligations in order to protect the solvency of the PPF and an increase in the PPF levy in the short term.

Hopefully, this can now be avoided and PPF members can continue to receive adequate compensation. How this will operate when the UK leaves the EU is another matter, especially as the agreed poverty threshold is measured by Eurostat, a Directorate-General of the European Commission.

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