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Waterford Crystal: shattered illusions of safety

When famed manufacturer Waterford Crystal went into insolvency in 2009, it set in motion events that affected pension funds in Ireland and the UK. The Pension Protection Fund saved the UK scheme – claiming a collection of antique china to resolve the fund’s deficit, much to Waterford’s dismay. But Irish pensioners were left with an underfunded defined benefit (DB) plan unable to cover more than 28% of the benefit promise.

Following a court case in Ireland and its referral to the European Court of Justice
(ECJ), the Irish government has now been cited for a “serious breach” of its obligation as an EU member state over its failure to guarantee at least half of the DB fund’s pension promise – excluding any entitlements members might have had under the state pension system. As a result, many expect that the government will now come under pressure to allow a pension guarantee arrangement – or at least consider such a step – if Ireland’s highest court rules in favour of Waterford workers.

A guarantee arrangement is problematic on several levels for the country, not least because of the absence of ‘debt upon the employer’ legislation. Under Section 75 of the UK’s 1995 Pensions Act, any deficit crystallises when a UK company ceases to be a sponsor. Irish companies, however, can wind up underfunded schemes without a second thought.

“Official Ireland – the government, the politicians – has always taken a stance against debt upon the employer,” notes James McConville, partner at Dublin-based law firm McDowell Purcell.

He says that while debt-upon-the-employer legislation had previously been considered, it was felt such a step would be unduly onerous. Following an earlier UK judgement that reprimanded the UK government for failing to protect pensions – as demanded by existing European Directives – McConville said the Irish government appeared to hope it would not become an issue.

When the issue arose once again, the banking crisis was causing the country problems.
“What they said at that point was that the economic conditions don’t stand for a pension protection fund, they don’t stand for putting in place a statutory debt upon the employer – which is pretty much the economic argument they took into the Waterford case.”

Following the ECJ’s ruling, however, EU member states have been reminded that they have a duty to protect pensions, a duty that Dutch MP Pieter Omtzigt warns will lead to an ever-widening definition of guarantee above the minimum 50% threshold set by the judgement. “By crossing the bridge that there has to be a guarantee scheme, that bridge will become wider,” he says. “For instance, why limit it to when a firm goes bankrupt? Why not for everyone and why limit it to 50%? Before you know it, you have a guarantee scheme.”

Omtzigt’s belief and fear that it will lead to a pensions union, with stronger funds supporting insolvent weaker ones, is not shared by Hans van Meerten of Clifford Chance’s Amsterdam office. “Member states [have known they] should protect the wages of employers since Francovich,” he says, referring to the Francovich vs Italy case from 1990 that led to the country being warned over its failure to fully transpose the European Community’s insolvency directive into national law.

Van Meerten adds: “I do, however, think it would not be unwise to establish a pension protection fund – a second-pillar state fund – in the Netherlands, and maybe even a European one.” He argues that a Europe-wide protection scheme would simply be a natural expansion of the single market, one that largely shares its currency and already sees country-specific problems affect neighbours. “Better to make an EU-wide agreement on how to handle these situations so every member state can contribute according the principles of subsidiarity and proportionality,” he says.

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