PSV v Bauer – no material change for the PPF and DB schemes
If the CJEU had followed the AG, this could have had material implications for the Pension Protection Fund (PPF) and the funding of UK defined benefit pension schemes.
Mr Bauer had a pension granted by his former employer and payable by the Pensionskasse für die Deutsche Wirtschaft (Pensionskasse), a German supplementary retirement fund. The Pensionskasse experienced financial difficulties shortly after Mr Bauer retired and his monthly pension was reduced in total by 13.8% between the years of 2003 and 2013. German law required his employer to make good the shortfall but in January 2012 his employer entered insolvency proceedings.
The Pensions-Sicherungs-Verein VVAG (PSV), a pension rescue vehicle comparable to the UK PPF, took over payment of his pension on 12 September 2012. PSV declined to offset the reductions applied to Mr Bauer’s pension and continued to pay Mr Bauer a reduced pension.
Mr Bauer brought a claim that the PSV should be required to make good the shortfall arising from his reduction in benefits paid by the Pensionskasse. PSV claimed that it was not liable for assuming responsibility for benefits paid by a pension fund, if the employer was unable to meet its guarantee obligations due to insolvency.
Mr Bauer’s action was dismissed at first instance but successful on appeal. The claim was referred to the CJEU.
The Employer Insolvency Directive
Mr Bauer’s case concerns the application of Article 8 of Directive 2008/94/EC, a directive on the protection of employees in the event of insolvency of an employer (the Employer Insolvency Directive).
Article 8 provides that:
“Member States shall ensure that the necessary measures are taken to protect the interest of employees and of persons having already left the employer’s undertaking of 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 occupational or inter-occupational pension schemes outside the national statutory social security schemes”.
The provision (and a similar provision in predecessor directives) was considered in earlier CJEU/ECJ case-law, including UK cases Robins (C-278/05) and Hampshire (C-17/17), the Irish case of Hogan (C-398/11) and the German case of Webb-Sämann (C-454/15). These established that protecting the interests of employees requires at least 50% of their benefits to be guaranteed (Robins, Hogan, Hampshire), that the employees’ losses must not be otherwise “manifestly disproportionate” (Webb-Sämann) and that claims may be brought against the Member State if there has been a “manifest and grave disregard” of Article 8 duties (Robins).
The AG’s opinion
After re-examining the case-law and noting the objective of Article 8 as full protection of pension benefits on employer insolvency, the AG stated in his opinion 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”. He recommended that compensation should be provided even where benefit losses are less than 50% as such losses may still be disproportionate, particularly if benefits are relatively modest.
The AG’s opinion, if followed, could have required the PPF to provide compensation at 100% of scheme benefits at least in many more cases. This could have impacted the solvency of the PPF, the amount of the PPF levy and ultimately the funding levels required for all UK DB pension schemes.
The CJEU delivered its judgment on 19 December 2019. Contrary to usual practice, the CJEU judgment did not follow the AG’s opinion. Instead, it reaffirmed previous case-law upholding the requirement to provide for compensation of 50% of scheme benefits for every employee as a “clear, precise and unconditional obligation” enforceable by individuals. In a short judgment, the Hampshire case, which most clearly establishes the 50% requirement, is mentioned ten times.
The CJEU nevertheless accepts that, in certain circumstances, a loss of less than 50% of benefits may still be “manifestly disproportionate”. Finding, in the introduction of Article 8, an intention to protect employees from hardship, the CJEU holds that a loss of benefit may still be “manifestly disproportionate” if, “as a result of the reduction, the former employee (…) would have to live below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned”.
This very specific hardship test is additional to the 50% test. It is an absolute test rather than a relative test, framed not by reference to proportionate loss but in terms of the individual’s overall resources and an objective EU measure of financial security (or insecurity). It acknowledges a key point in the AG’s reasoning, namely that small losses can be disproportionate in the context of a limited income.
Implications for the PPF and UK DB schemes
The judgment will come as a relief to the PPF and funders of UK DB schemes as the threat of 100% compensation has been avoided.
The new hardship test may be complex in principle to apply as it requires details of the individual’s other resources, which may include means-tested benefits and earned income. However, in practice, the hardship test may have little impact on the PPF. The PPF currently pays 90% of pensions for members who were under their scheme’s normal pension age at the date of insolvency, subject to a cap that is currently £40,020 at age 65 (and lower at younger ages) and 100% for members over that age at the date of insolvency. Compensation excludes non-statutory increases for all members. The PPF now ensures members receive at least 50% of their scheme benefits.
As the Eurostat figure for the poverty line in the UK is currently £10,230 per year, it is not easy to identify cases where the terms of PPF compensation cause an individual to fall below the poverty line. The application of the cap at £40,020 could not bring anyone close. The 90% factor for members under normal pension age or the removal of increases could cause an individual to cross the £10,230 threshold in marginal cases. This will depend as much on their other resources and social security benefits as on the terms of PPF compensation.
It is currently unclear how far the decision will apply in the UK after the UK leaves the EU and the assumed expiry of the transition period in December 2020.
At the time of writing, the PPF have not yet commented on the judgment.