Pension benefits received by plan participants from insolvent or struggling companies should not be lowered by more than 50%, according to a ruling in a German case Thursday by the European Court of Justice.
The European court upheld the current EU-wide legal requirement that plan participants should be entitled to at least half of their benefits, provided that participants don't fall under a poverty threshold, estimated in the European Union at €13,229 ($14,635) a year.
The case, Pensions-Sicherungs-Verein VVaG vs. Gunther Bauer, followed a German worker whose benefits were reduced 13.8% over a 10-year period after his workplace pension provider, the Pension Fund for the German Economy, or PKDW, experienced financial difficulties. German authorities subsequently mandated a reduction in benefits paid by the company.
The ruling could have implications for the £32 billion Pension Protection Fund, London, for as long as the U.K. is part of the European Union, possibly prompting an increase in the fund's levy.
The lifeboat pension plan for insolvent companies provides 100% of benefits to participants drawing pensions at the time of their employers' insolvency.
"We note the Court of Justice of the European Union has issued its judgment," the fund's spokeswoman said in response to the ruling. "This is a complex judgment and we are considering it with the U.K. Department for Work and Pensions."
Tim Middleton, director of policy and external affairs at the Pensions Management Institute, said the institute was concerned at the implications this judgment could have on the PPF levy.
"The PPF was never intended to pay benefits in excess of the cap and requiring it to honor the benefits of high earners will have implications for the way it is funded, which in turn implies higher levy payments," he said.
The PPF spokeswoman said the fund won't increase the levy in fiscal 2020-'21 beyond rates announced Dec. 16.
Lynda Whitney, partner at Aon PLC added in an email that the interpretation of the court ruling is not clear in terms of "not leaving workers in poverty given it is the highest earners who currently see their PPF benefits cut back most."
Ms. Whitney warned that should the ruling lead to "a significant increase in PPF benefits and levies, then it could (affect) behavior in a number of areas, including damage to the commercial consolidators, change in behavior in bulk annuity (market) and impact on funding negotiations."