Hampshire -v- Pension Protection Fund: every individual member entitled to compensation of at least 50% on employer's insolvency

The Advocate General Kokott (AG) has given her opinion in Grenville Hampshire -v- The Board of the Pension Protection Fund [2018] (Case C-17/17). This challenges the level of compensation offered by the Pension Protection Fund (PPF) and could result in increased payments for members.

Background

Mr Hampshire initially brought the case to the Court of Appeal in July 2016, claiming that his pension was cut by 67 per cent when his company scheme was transferred into the PPF.

Article 8 of the EU Insolvency Directive 2008/94/EC (the Directive)

The Directive addresses the protection of employees in the event of the insolvency of their employer. Article 8 of the Directive states that member states should ensure that ‘necessary measures are taken to protect the interests of employees and of persons having already left the employer’s undertaking or business at the date of the onset of the employer’s insolvency’ in respect of accrued rights under occupational pension schemes.

PPF compensation

In the UK, the Directive is implemented by the Pensions Act 2004, which established the PPF. The general principle is that the PPF will pay compensation to members of a qualifying scheme where a ‘qualifying insolvency event’ has arisen in relation to the scheme’s employer, and a section 143 valuation under PA04 has determined that the scheme’s funds are insufficient to pay at least the PPF levels of compensation.

Members who reached their scheme’s normal pension age receive 100% of their pension entitlement. For members who have yet to reach normal pension age, the PPF compensation is capped at a level of 90% of the statutory compensation cap and adjusted to reflect the member’s age. Once in payment, compensation is increased annually under a statutory formula, but only in relation to pensionable service on or after 6 April 1997.

The facts

Mr Hampshire was a member of the T&N Retirement Benefits Scheme (1989) (the scheme), a defined benefit pension scheme. In 1998, aged 51, he was made redundant and took an early retirement pension from the scheme.

On 19 September 2011, after conclusion of the assessment, the PPF found that, as at 10 July 2006, the scheme was sufficiently funded to grant at least PPF compensation to members. Mr Hampshire calculated that he would face a reduction of about 67% from his scheme entitlement under the PPF cap.

Mr Hampshire applied to the PPF for a review of the scheme’s section 143 valuation. His application was dismissed by the board of the PPF, and then subsequently dismissed by the PPF ombudsman, so he appealed to the High Court.

The High Court did not agree with Mr Hampshire that article 8 had not been implemented correctly and stated that it was ‘inconceivable that the ECJ would hold that it was unlawful per se to impose a cap on protected benefits’.

Mr Hampshire appealed to the Court of Appeal, which held that the proper meaning of article 8 was not clear enough, and therefore referred the matter to the ECJ, alongside the question of whether article 8 has direct effect on the PPF.

The AG’s opinion

The AG concluded that:

• The Directive was to be interpreted as ‘every individual employee – subject to specific cases of abuse – is entitled to compensation of at least 50% of the total value of his accrued rights or entitlements to old-age benefits in the event of the insolvency of his employer’
• Consequently, the ‘exclusion of individual employees from that minimum standard is therefore unlawful’ as it is unsatisfactory to have a system of protection that facilitated employees to receive less than this required 50%
• Article 8 is directly effective and capable of having direct effect against the PPF as a state authority as it is both unconditional, and sufficiently precise. Further, the AG determined that the PPF performs a task in the public interest, and possesses ‘special powers’ (here, imposing its levy, amongst other powers), and therefore article 8 may be relied upon directly by an individual against the PPF

Next steps

The ECJ will consider the AG’s opinion, and whilst it is not binding, it is unusual that the ECJ would not follow it. We understand that the ECJ will give its ruling within the next four months. The case will then return to the UK’s Court of Appeal.

If the ECJ agrees with the AG, there are two potential issues that would arise:

• There could be an increase in the cost of providing PPF compensation (i.e. the compensation caps may need to be revisited by the government to ensure they comply with article 8), which would impact on the PPF levy
• Until the courts have reached a conclusion, it will be difficult for trustees to buy-out benefits at ‘PPF-plus’ level i.e. if an employer insolvency, a scheme is funded above PPF compensation levels. This is due to the ambiguity of what ‘standard’ PPF compensation may be. If trustees buy-out below the level members may eventually obtain from the PPF, there is a risk of claims arising that they have not applied the scheme funds correctly when the scheme winds up.