UK – Claims that the UK government is failing to implement an EU directive protecting the pensions of employees of firms that become insolvent could result in a cost to UK companies of 15 billion pounds (23.4 billion euros), says HighamNobbs Consulting.
The government’s failure to comply with the European Union directive was brought to light following the insolvency of Cardiff, Wales-based steel maker Allied Steel and Wire (ASW). 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.
A test case was being considered against the UK government through the European Court of Justice in Luxembourg for failing to protect their pensions, and by not adhering to EU law. Article 8 of the European directive 80/897, 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.
In the similar case of Francovich versus the government of the Republic of Italy in the 1990s, the European courts ruled that as long as sufficient mechanisms of protection were in place, the State was not required to act as a guarantor. As the UK has such mechanisms as the Minimum Funding Requirement (MFR), it is therefore unlikely that the UK government will be fined.
Instead, believes HighamNobbs, however, the government will “undoubtedly seek to transfer the risk to companies by requiring them to provide the necessary funding for their schemes.” This could mean that UK company pension contributions have to rise by 50% to protect employees’ pensions.
Says Anthony Miller, partner at HighamNobbs Consulting: “We have calculated that UK companies will need to pay another 15 billion pounds a year into their company schemes to ensure that payments to members are protected, by securing comparable entitlements with insurance companies, in the event of insolvency.
“Even then, that assumes that they are allowed 15 years to put the problem right – at a total cost of 200 billion pounds.”
Few companies can afford such contributions, says Miller, which could lead to many winding up their final salary schemes.
It is hoped that the MFR mechanism will be addressed in the UK government’s “Green Paper” proposals on pensions reforms due on December 17, as it is largely felt to be inadequate in protecting employees’ pension benefits in the event of insolvency