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ECJ finds member states not responsible for funding insolvent employers

UK - The European Court of Justice (ECJ) ruled that member states are not obliged to fund old-age benefits of companies in case of insolvency, but left it to the UK High Court to decide whether in the case of ASW employees compensation is to be paid.

In the ruling on a case brought forward by employees of Allied Steel and Wire (ASW) the ECJ also found that the EU Insolvency Directive does not require a full guarantee of pension rights. The court stated that the directive gives member states "considerable latitude" in relation to the level of protection.

Nevertheless, the judges ruled that a protection system that guarantees less than 50% of the benefits "cannot be considered to fall within the definition of the word ‘protect' used in the directive" and was therefore "incompatible with Community law", which includes the Financial Assistance Scheme (FAS).

But the ECJ stated that in order to rule in favour of compensation payments for the ASW employees the UK High Court will have to find evidence of  "manifest and serious disregard" of the directive by the UK government.

Tracey Akerman, associate at international law firm Baker & McKenzie, says the interesting question following the ruling is what the adequate percentage of protection of benefits is enough to be compliant with the Insolvency Directive.

According to her, the ruling will not have immediate effects on the Pension Protection Fund (PPF) which generally provides between 80 and 90% protection.

Claire Carey from law firm Sacker & Partners agrees: "There will be no knock-on effects at the moment for the PPF." She added that the ECJ was looking at levels of benefits provided prior to the existence of the PPF. 

Others are, however, less optimistic. Alastair Meeks, partner at Pinsent Masons, said: "The government will in any event need to review the levels of compensation provided b the FAS and the scope of the FAS. This may also have an impact on compensation payable under the PPF, under which low levels of compensation may also be payable in certain circumstances."

Colin Mouqué, director at Alexander Forbes Financial Services, even goes as far as saying: "This could be a terrible blow for the PPF. If the High Court orders full compensation, the PPF will be bust within two years."

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