UK – The UK government could be open to legal claims for failing to implement an EU directive protecting the pensions of employees of firms that become insolvent.

The situation has been brought to light with the insolvency of Cardiff, Wales-based steel maker Allied Steel and Wire (AWS). Its employees face losing a large part of their pensions as the company is being wound up while the final salary scheme is in deficit.

Adam Price, treasury spokesman for the Welsh nationalist party Plaid Cymru, said that the UK government has neglected to comply with Article Eight of EC directive 80/987 regarding company insolvency. The article, dating back to 1980, requires member states of the European Union to establish a guarantee body to guarantee payment of employees' outstanding claims, such as pensions, in the case of insolvency.

Price says the workers of ASW could sue the UK government through the European Court of Justice in Luxembourg for failing to protect their pensions by not adhering to EU law.

The ISTC steelworkers’ union, which represents AWS employees, is looking into the case. Says Ken Penton, head of communications at the union: “We are in the very early stages of looking into the situation. It is a complicated process and we need to look at the implications involved before we can decide on whether a test case is required.”

Mark Blythe of law firm Linklaters agrees that a test case could ensue: ”The question is ‘what has the government done to comply with Article 8 of the directive?’ There are issues here for the government to answer.”

But the government’s Department of Work and Pensions (DWP) insists that EU law has not been broken.

It says: “We meet our obligations under Article 8 of the Insolvency Directive, as successive governments have done since it was adopted in 1980. For example, the Pension Schemes Act 1993 provides that certain unpaid pension scheme contributions can be claimed from the National Insurance Fund, through the Redundancy Payments Service, if an employer becomes insolvent. If a claim is successful, funds are paid to the trustees of the scheme being wound up.

“In addition, the Pensions Act 1995 requires every salary-related scheme to meet the Minimum Funding Requirement, and provides for a statutory priority for the distribution of a scheme's assets when a scheme winds up.”

The DWP admits, however, that more needs to be done to protect the rights of members in schemes that are winding up, and that the ASW story has raised the question of adequate protection. The government’s Green Paper on pension reform, expected this week, will be tackling the issue says the DWP.

Although the government now appears to be addressing the situation, if it is proved that the EU directive has been ignored, then the UK could be facing damages bills from the last 20 years – a figure which may run into billions of pounds.