In a keenly anticipated pension guarantee ruling the European Court of Justice (ECJ) today rejected a previous argument that all defined benefit pension rights must be protected on employer insolvency, which had led to speculation UK DB employers could be faced with a huge new bill.
In a judgement in the case of the Pension-Sicherungs-Verein v Günther Bauer, the ECJ instead ruled that the current EU legal requirement that individuals should be entitled to at least 50% of their benefits still stood as long as this level of compensation would not put them at risk of living below the poverty line.
As explained by the Pensions and Lifetime Savings Association (PLSA), in the UK many people had thought the ruling might spell a requirement for the country’s pension lifeboat fund to increase compensation to 100% of benefits in all cases, potentially with ensuing “enormous new costs” for employers and possibly the government.
The Pension Protection Fund (PPF) provides 100% of defined benefits to members already drawing their pension when the sponsor goes insolvent, and 90% to those who are not yet retired.
Earlier this month Edmund Truell, founder of commercial consolidator Pension Superfund and former chair of the London Pension Fund Authority, said the Superfund estimated a potential cost to the UK of over £160bn (€187bn) as well as the potential forced closure of all UK defined benefit funds.
Today Superfund CEO Luke Webster argued that although the ECJ had not ruled that 100% of benefits must always be paid, “the administrative cost is likely to be very significant, and an increased PPF levy will place further burden on the resources available to the pensions system as a whole”.
At the PLSA, director of policy and research Nigel Peaple described today’s ruling as “a pragmatic solution,” an assessment that was echoed by David Everett, partner and head of pensions research at consultancy LCP, who welcomed the judges taking “a sensible approach”.
Their take was that, from a PPF financial perspective, the ruling represented a relief.
“[I]t seems likely that many people in the PPF would be above the minimum income allowed,” said Peaple, although he warned the PPF would need to carry out detailed analysis before there could be certainty about the impact of the judgement on the liabilities of the PPF and on UK pensions.
He noted there could be a shortfall in PPF’s funding, which could result in higher levies for pension schemes.
“Compared to expectations, the administrative challenge is greater and the funding challenge probably much less.”
Nigel Peaple, director of policy and research, PLSA
Earlier this week the PPF confirmed its levy estimate for 2020/21 would be £620m, and IPE understands it will not be changing this as a result of this week’s ruling.
A PPF spokesperson said: “The recent ECJ judgment in the case of PSV v Gunther Bauer has restated that, as a minimum, every individual must receive at least 50% of their accrued benefits. We consider that the implementation methodology we announced following the ECJ’s judgment in Hampshire, which will make sure that all our members receive at least 50% of the value of their accrued benefits, meets this requirement.
“There are other details of the judgment that we’ll need to work through with the Department for Work and Pensions.”
Anna Rogers, senior partner at ARC Pensions Law, said the financial impact on the PPF would be mitigated but that the minimum income test “looks like a nightmare to implement for the PPF”.
Peaple put it this way: “Compared to expectations prior to the ruling, the administrative challenge is greater and the funding challenge probably much less.”
This article was updated on 20 December with additional comments from the PPF.