Does the PPF have to guarantee 100% of members' benefits?

Potentially, yes. If the judges in the Court of Justice of the European Union (CJEU) follow the Opinion of Advocate General Hogan in the German case of PSV v Bauer (Case C-168/18).

This case, once again, raises the question of the extent to which an individual's workplace pension benefits should be protected under EU law by an institution set up by a Member State to provide protection where the individual's employer or former employer has become insolvent.

Background

Prior to the insolvency of his former employer, Mr Bauer was entitled to a range of pension benefits, including:

• a pension paid through a supplementary occupational pension institution (PKDW) on the basis of contributions paid by his former employer
• a monthly pension supplement, paid directly by his former employer, and
• an annual Christmas bonus, which was also paid directly by his former employer.

In mid-2003, the PKDW experienced financial difficulties and, as a result, Mr Bauer's supplemental pension from the PKDW was reduced. Under German law, Mr Bauer's former employer was required to make up this shortfall (of around €82 per month).

On 30 January 2012, Mr Bauer's former employer entered into an insolvency procedure. The defendant, PSV (the German pension insolvency insurance institution), subsequently assumed responsibility for the payment of the monthly pension supplement and Christmas bonus, but it refused to take over the amount paid by Mr Bauer's former employer to cover the pension benefit reduction.

Mr Bauer is contesting this and the German Courts have referred various matters to the CJEU.

In essence, the German Court is asking whether the German Government (through the PSV) is required to compensate Mr Bauer for the top-up payment which his former employer paid to cover the pension benefit reduction. This raises a number of questions, including the extent of the protection that needs to be afforded to individuals in respect of their pension rights on the insolvency of their employer or former employer for the purposes of Article 8 of the Insolvency Directive (2008/94/EC).

Article 8 provides that:

"Member States shall ensure that the 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 rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors' benefits, under supplementary company or intercompany pension schemes outside the national statutory social security schemes."

Advocate General's Opinion

The question of how much protection Article 8 requires Member States to provide has been considered before by the CJEU in a number of cases, such as Robins and Hampshire v The PPF.

Most recently, in Hampshire, the CJEU indicated that in order to fulfil their obligations under Article 8, Member States are required to ensure that individuals receive at least 50% of the pension benefits to which they are entitled, in the event of their employer's insolvency. In the UK, the PPF has been taking steps to implement this judgment.

However, a few weeks ago Advocate General Hogan issued his Opinion in Bauer and stated that the question of how much protection should be afforded under Article 8, "calls for a full re-appraisal of the case law of the [CJEU] to date".

In his view, while Article 8 "leaves considerable latitude to Member States regarding the means employed for the purpose of ensuring that protection, this provision is nonetheless quite clear regarding the level of protection to be provided". Accordingly, he says that he "find[s] it difficult to see how the obligation provided for in Article 8 could in principle concern anything less than the full satisfaction of the employee's pension entitlements".

He continues, "there is no special magic in the 50% found by the Court in Robbins [and relied on in Hampshire] as the minimum figure which an employee should receive". And he concludes that "Article 8 imposes an obligation on Member States to protect all of the old-age benefits affected by an employer's insolvency and not just part or a designated percentage of these benefits".

Potential impact

There is no guarantee that the CJEU will follow the Advocate General's opinion. Indeed Advocate General Kokott expressed the same views in her Opinion in Robins, but the CJEU reached a different conclusion in that case.

However, there is a risk that the judges in this case will be swayed by Attorney General Hogan's conclusions. If they are and they conclude that Article 8 requires pension benefits to be protected in full, it is likely that this will have very significant implications for the PPF and for DB schemes and sponsors in the UK more generally. In particular, it is very likely that this would:

• mean that the UK Government, either directly or via the PPF, will be required to provide 100% compensation for all occupational pension benefits under DB schemes on an employer's insolvency
• result in a significant increase in the PPF levy for all eligible schemes if PPF compensation levels are increased as a result
• lead to an overhaul of the statutory funding regime for DB schemes, which (presumably) would need to be funded at or close to a buy-out finding level, and
• lead to a significant increase in the deficit recovery contributions payable by sponsors of DB schemes.

A requirement to protect benefits in full would also call into question the business models of some or all of the new DB consolidators and it would raise questions about PPF+ buy-outs that have previously been entered into.

Therefore, all eyes will be on the CJEU's decision. The timing of which could be very significant with Brexit on the horizon because, depending upon the nature of the UK's departure and the terms of our future relationship with the EU, the UK Government may have scope, in a post-Brexit world, to preserve the status quo regardless of any change in the approach adopted by the CJEU.

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