The Pension Protection Fund will have to pay each participant of defined benefit pension funds of insolvent sponsors at least 50% in retirement benefits, following a preliminary ruling by the European Court of Justice published Thursday.
The European court did not permit the U.K. PPF's cap on the retirement payments in the ruling, following a 2011 case that was referred to the ECJ by the Court of Appeal of England and Wales.
A participant in the T&N Retirement Benefits Scheme filed a claim that the provisions of the U.K. Pensions Act 2004 did not meet the objectives by the Article 8 of the European directive 2008/94. According to the U.K. Pensions Act 2004, some plan participants could individually receive less than 50% of the value of their accrued pension benefits but a majority of the plan participants should on average receive at least 50%.
EU countries are by law obliged to establish a body which guarantees the payment of pension to any employees who left the employer or retired prior to the insolvency. In the U.K., the PPF is the lifeboat fund for defined benefit pension funds of insolvent companies.
The PPF contended that the directive simply required that employees are collectively guaranteed a supplementary occupational retirement plan with average compensation of at least 50% of the value of their accrued entitlement, the ruling said. The ECJ was asked by England's court to interpret whether it is sufficient that such compensation is guaranteed for the great majority of employees.
However, the ECJ ruled that under Article 8 retirement systems are required to ensure that every individual employee receives at least 50% of the value of his or her accrued entitlement to old-age benefits if their employer becomes insolvent.
"The compensation corresponding to at least 50% of the value of their accrued entitlement must be calculated taking into account the envisaged growth in the pension entitlement throughout that period, in order to prevent, as a result of the passage of time, the amount guaranteed falling below 50% of the initial value accrued for one pension year," the ruling said.
Following the ruling, the PPF said it will work with the U.K. Department for Work and Pensions about any changes to PPF compensation structure will now be required.
"We note the judgment of the Court of Justice of the European Union today and are considering it. We have already been in discussions with the Department for Work and Pensions about what changes to PPF compensation will now be required. We will work to implement the judgment as quickly as possible but first need to consider the judgment further to understand what action we can take prior to legislative change and the conclusion of the U.K. court proceedings. Participants can be reassured that we will update them further as soon as we are able," a PPF spokeswoman said in response to the ruling.
However, according to the PPF, the vast majority of participants already receive compensation in excess of 50% of the value of their accrued old-age benefits.