If the (compensation) cap doesn’t fit…

Following a referral by the Court of Appeal to the European Court of Justice (ECJ), the Advocate General (the AG) has given her opinion on the application of Article 8 of the EU’s Insolvency Directive (the Directive) in the context of the Pension Protection Fund (PPF) compensation cap (the Cap).

The PPF exists as a lifeboat scheme to pay compensation to the members of defined benefit occupational pension schemes in certain circumstances (broadly, in the event of the sponsoring employer’s insolvency, where the assets of the scheme are less than a certain level). When a scheme is accepted into the PPF, the compensation payable to members is calculated in accordance with the relevant legislation. The Cap is applied to the pension payable to members who are under normal pension age at the start of the PPF assessment period, and to the benefits payable to individuals who are active or deferred members and under the scheme’s normal pension age at the date on which the scheme’s sponsoring employer became insolvent. The Cap is currently £39,006.18 at age 65, which is reduced to £35,105.56 once the 90% has been applied.

The referral to the ECJ was made following an appeal by a scheme member, Mr Hampshire, against the High Court’s decision that the application of the Cap did not contravene EU law.

Article 8 of the Directive requires each EU member state to take “necessary measures” to protect the pension rights of employees and former employees in cases where their employer has become insolvent. In a previous blog post we wrote about Mr Hampshire’s case; he claimed that the Cap contravened EU law because his annual benefits payable by the PPF were reduced to less than 50% of the benefits payable to him under the rules of his scheme, had the scheme been able to pay his benefits in full and not gone into the PPF.

Why was the referral made?

Mr Hampshire’s claim was rejected by the PPF, the PPF Ombudsman and the High Court. The PPF asserted that the Cap only applies to around 0.2% of members receiving compensation, and therefore looking at the compensation system as a whole, the implementation of the Cap did not contravene the requirement for member states to take “necessary measures”, as described above. Mr Hampshire took his case to the Court of Appeal. The questions referred by the Court of Appeal to the ECJ were whether:

  • Article 8 requires member states to ensure that every individual employee receives at least 50% of the value of their accrued rights in the event of the employer’s insolvency;
  • It is sufficient under Article 8 for a member state to have a system where employees usually receive more than 50% of the value of their accrued rights but some individuals receive less than 50%;
  • Article 8 is directly effective in the circumstances of the present case.
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