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Cases for Christmas – some last minute pension treats

  • United Kingdom
  • Pensions

20-12-2019

The run-up to Christmas has seen a couple of important legal cases for pension schemes. Neither should spoil your Christmas celebrations, but they’re worth knowing about for 2020!

Limits on PPF protection

The European Court has reached a decision in the German case of Pensions-Sicherungs-Verein VVaG v Günther Bauer which may have implications for the level of benefits provided by the Pension Protection Fund (PPF).

Background: Before Mr Bauer’s benefits were transferred to the PSV (the German equivalent of the PPF), they had been paid at a reduced level in accordance with German law. The shortfall remained a debt owed to Mr Bauer by his employer. Following his employer’s insolvency, the PSV refused to make good the past underpayments. Mr Bauer complained and ultimately the issue was referred to the European Court.

The Court was asked to consider several questions including whether the refusal to assume liability for the underpayment by the PSV complied with Article 8 of the Insolvency Directive. Article 8 requires Member States to take “the necessary measures” to protect the rights of employees and former employees on an employer’s insolvency to an “immediate or prospective entitlement to old-age benefits, including survivors’ benefits, under… occupational pension schemes...”

Decision: Following the case of Hampshire v PPF, the European Court confirmed that in the event of an employer’s insolvency, Article 8 requires a former employee to receive “at least half of the old-age benefits arising out of the accrued pension rights” under the employer’s occupational pension scheme.

In addition, the losses suffered by an employee as a result of any reduction to their benefits must not be “manifestly disproportionate”. The objective of the Insolvency Directive is to offer protection to employees in circumstances which “represent a threat to [their] livelihood”. It follows from this that a reduction in benefits will be manifestly disproportionate if the employee’s “ability to meet his… needs is seriously compromised”.

The Court went on to say that this is not a subjective test by reference to the employee’s own standard of living but an objective one looking at whether the employee “is living or would have to live below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned”.

Implications: The Eurostat at-risk-of-poverty figures for 2018 for the UK appear to be around £11,150 for a single person. State pension plus pension credit, gives an annual income for a single person of £8,697.

PPF compensation (for someone who was under their scheme’s normal pension age when the scheme entered a PPF assessment period) is 90% of a compensation cap. For 2019/20, the compensation cap is £40,020, 90% of which is £36,018.

This means that members who are affected by the compensation cap are unlikely to receive any more as a result of the decision in Bauer. The members who might be affected by the decision are those who have very low benefits and no other sources of income. For these members, a 10% reduction in benefits might take them below the at-risk-of-poverty threshold, but the amounts involved are likely to be small. This means that the PPF appears unlikely to incur significant additional liabilities as a result of Bauer.

However, if the PPF has to test whether overall income for each member is above a certain threshold, administrative costs are likely to rise. There may also be implications for schemes’ section 179 valuations and the level of liabilities that they should be based on, but we will need to wait and see what the PPF says.

The PPF has not made any allowance for Bauer in the 2020/21 levy determination and has said that it will not be changing the basis of levy calculation this time around to allow for it.

Finally, as the case has been decided before the UK leaves the EU, it seems likely that the right to minimum levels of PPF compensation above a poverty threshold will survive Brexit, but presumably the UK may have slightly more lee-way on how to interpret this if it is not subject to the future jurisdiction of the European Court.

Time limits for discrimination claims

The Supreme Court decision in Miller v Ministry of Justice looked at how long part-time workers have to bring a claim for discrimination. It could also have wider implications for pension schemes.

Background: The Part-time Workers (Prevention of Less Favourable Treatment) Regulations require that a part-time worker must be treated no less favourably by their employer than a comparable full-time worker. So, for pensions, where full-time workers are provided with pension benefits, part-time workers must be too.

The Miller case relates to four judges who worked for periods of time on a part-time fee-paid basis during which they were not eligible to benefits under judicial pension schemes. The judges alleged that this was discriminatory and so asked to have this part-time service included in their pensionable service.

Regulation 8 of the Part-time Workers Regulations provides that a claim for discrimination must be brought within three months “beginning with the date of the less favourable treatment or detriment”.

The court was asked when the less favourable treatment needed to have happened for the claims to be valid:

  • Was it when the benefits should have accrued? This would make their claims invalid as they were made more than three months after the end of their most recent period of part-time fee-paid service; or
  • Was it when the relevant pension benefits would have come into payment? As the judges had not yet retired, this would mean there was still time to bring a claim.

Decision: The court decided that there was less favourable treatment that could give rise to a claim both when the benefits had failed to accrue and when they would have become payable. This meant that the judges’ claims were not out of time. Reliance was placed on the Supreme Court’s reasoning in Walker v Innospec (on rights for civil partners), where it held that the “point of unequal treatment occurs at the time that the pension falls to be paid”.

Implications: A three month time limit applies in relation to other discrimination claims, notably those brought under the Equality Act 2010. This means that members with other forms of discrimination claim may be able to argue that they can bring a claim in relation to matters that happened many years’ ago, such as a failure to be admitted to a scheme or accrue a given type of pension benefits.

Trustees do not need to actively look for potential beneficiaries who may now still be in time to bring a claim. However, both trustees and sponsors should bear this in mind if they receive any complaints from members in the future.