Associate General advises that full DB benefits must be paid in insolvency

The European Court of Justice is set to rule on whether insolvency compensation has to cover full defined benefit scheme benefits, and it could be swayed by Associate General Hogan's official opinion that full benefits should be paid.

The Pensions-Sicherungs-Verein VVaG v Günther Bauer case relates to the German equivalent to the UK's Pension Protection Fund (PPF). Last month, Advocate General Hogan said that the European Court was wrong in previous cases, such as Robins and Hampshire - which have to date required a minimum of 50 per cent coverage, and instead full benefits should be paid.

Arc Pensions Law believes that it seems from the Hampshire case that direct enforcement is possible against the PPF in the UK, as well as against the state. If such a ruling were to happen it would mean that the PPF must provide buyout level benefits.

Abolishing PPF 'haircuts' would be great news for members of failed schemes, however, it could be a shock to the solvency of the PPF, and the employers that have to fund it. A dramatic increase in levy for the riskiest schemes could push more employers into insolvency, further increasing the PPF's burden, the law firm noted.

Commenting, Arc Pensions Law senior partner Anna Rogers said that Hogan’s reasoning is “powerful in terms of protecting members, but this is the third time the recommendation has been made and in the past cases the Court balanced social protection against the cost”.

“If full protection is required by the EU Insolvency Directive, Brexit would be relevant but the effect will depend on the timing of the ruling and the terms of withdrawal and the future relationship. No-one understood that full protection was required, in fact, it has been clear that it wasn't. So this may be a case where it is appropriate to change the law for the future only,” she explained.

Rogers noted that this kind of temporal limitation was used in the Barber case in 1990 to soften the impact of the ruling that pensions had to be equal between men and women.

“If the European Court ruled that full protection had to be given for future accruals only, that would dramatically reduce the cost, given that so many DB schemes are closed to future accrual. It's worth emphasising that the opinion is only advisory. The reductions, in this case, were small and the Court might allow them. If it goes for full protection, that could fundamentally change the nature of funding discussions.

“We know from case law that trustees are not allowed to 'game' the PPF but they can hardly ignore its existence. If there is a full safety net with no caps or loss of pension increases on pre-97 service, then there is less to play for in terms of securing PPF plus outcomes. In fact, the PPF plus market could disappear because there would be little or no gap between PPF and full buyout.

“Ultimately, if insolvency protection has to be backed by the state then even the capital adequacy requirements of the insurance regime lose some of their attraction. TPR might want to up the pressure on the pace of funding, with the new funding code coming out.”

“If the Court follows this opinion, it could be like letting Solvency II in by the back door. If the PPF has to provide buyout level benefits that is bound to increase the pressure for DB schemes to be fully funded. It could be September or later before we know, so there may be an opportunity for employers to lobby for a temporal restriction.”

The Bauer case was lodged on the 5 March but a date has not been given for the hearing as of yet.

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