The CJEU judgment in PSV v Bauer (Case C-168/18) was finally handed down today, with many in the industry having held their breath in anticipation since Advocate General Hogan published his Opinion, in May this year. In that Opinion he concluded that Article 8 of the Insolvency Directive requires Member States to protect an employee’s pension benefits in full on the insolvency of their employer.

The CJEU has rejected Advocate General Hogan’s argument and reaffirmed that Member States are not required to guarantee employees’ pension benefits in full on their employer’s insolvency. It also reiterated the fact that Article 8 only requires Member States to ensure that an employee receives at least half of the accrued pension rights to which they were entitled under a supplementary occupational pension scheme, unless any reduction in their benefits may be regarded as being “manifestly disproportionate”.

However, the CJEU went on to say that any reduction which “seriously compromises” a former employee’s ability to meet his or her needs must be regarded as manifestly disproportionate. That would be the case, it said, if a reduction in an individual’s pension meant that they would have to live below the at-risk-of poverty threshold determined by Eurostat for the Member State concerned.

Whilst this judgment will come as a relief to the industry because it does not require the UK Government or the PPF to guarantee every members’ benefits in full, it still raises a number of issues that will now need to be considered.

Background

Article 8 of the Insolvency Directive (2008/94) 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.”

Facts

Prior to the insolvency of his former employer, Mr Bauer was entitled to:

  • 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, PKDW experienced financial difficulties and Mr Bauer’s supplementary pension from PKDW was consequently reduced. Mr Bauer suffered loses of around 13.8% from his monthly pension and 7.4% from his supplemental pension. 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 the 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’s complaint was dismissed at first instance and, on appeal, the German Federal Labour Court referred the following questions to the CJEU (broadly):

  1. Is Article 8 of the Insolvency Directive applicable where, as in this case, a supplementary pension fund, such as the PKDW, legitimately reduces the benefits payable to a member and although the employer is required to make good that reduction under national law it is unable to do so owing to its insolvency?
  2. In what circumstances can the losses suffered by a former employee on account of the insolvency of their former employer, be regarded as manifestly disproportionate, even though the former employee receives at least half of the pension benefits to which he was entitled?
  3. Does Article 8 of Directive 2008/94 have direct effect?
  4. If Article 8 does have direct effect, can it be relied upon against an institution designated by a Member State as an insolvency insurance institution responsible for occupational pensions, such as PSV?

CJEU judgment

In answering the first question, the CJEU held that Article 8 does apply “to a situation in which an employer, which provides occupational pension benefits through an inter-occupational institution, cannot, on account of its insolvency, offset losses resulting from a reduction in the amount of those benefits paid by the inter-occupational institution”.

In response to the second question, the CJEU rejected the approach adopted by Advocate General Hogan, and reaffirmed that:

  • Article 8 gives Member States considerable latitude in determining both the means and the level of protection of employees’ pensions under supplementary pension schemes,
  • Article 8 cannot be interpreted to require a full guarantee of the rights in question, and
  • the correct transposition of Article 8 requires an employee to receive at least half of the old-age benefits arising out of the accrued pension rights under a supplementary occupational pension scheme, provided that any reduction applied to an individual’s pension benefits is not “manifestly disproportionate”.

The CJEU went on to say that any reduction which “seriously compromises” a former employee’s ability to meet his or her needs must be regarded as manifestly disproportionate. According to the CJEU, this would be the case where, even though a former employee is receiving at least half of the amount of the pension benefits to which they were entitled, the individual is already living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned, as a result of the reduction in their benefits. (Note: We understand that the Eurostat at-risk-of-poverty threshold for a single adult in the UK was £11,044 in 2018).

On the final two questions, the CJEU held that Article 8 contains a clear, precise and unconditional obligation on Member States that is capable of having direct effect and that it may be relied upon against an institution such as the PSV.

Comment

This decision will come as a relief to many in the pensions industry because the CJEU has rejected the arguments put forward by Advocate General Hogan and stopped short of interpreting Article 8 in a way that would require Member States to guarantee employees’ occupational pension benefits in full on their employer’s insolvency. If the ruling had gone the other way it is likely that this would have had significant implications for the PPF, the PPF levy and the funding regime for defined benefit schemes in the UK.

That said, the fact that the CJEU has held that any reduction to an individual’s benefits must not result in the individual having to live below the Eurostat at-risk-of-poverty thresholds raises a number of issues that will now need to be considered. In particular:

  • Does this mean that the PPF is required to assess and monitor the income levels of members to ensure that they are above the Eurostat threshold and, where necessary, to adjust their compensation levels accordingly? If so, how should it do this?
  • How does this interact with the UK’s state pension system and an individual’s entitlement to state benefits in retirement such as Pension Credit?
  • What does this mean for schemes in an assessment period?
  • What are the implications for PPF+ buy-outs (past and future)?
  • Is it right that the CJEU has been so prescriptive over the measure of poverty in retirement that should be used? Should this not be a matter for Member States to determine as part of their “considerable latitude” over the means and level of pension protection for employees?

Looking ahead, assuming Boris Johnson delivers on his promise to “get Brexit done” and passes the Withdrawal Agreement Bill before 31 January, the CJEU ruling will continue to apply to the UK and the PPF until the end of the transition period, currently set for the end of 2020. However, after that the situation is less clear. In particular, will the Eurostat threshold still be an appropriate measure of poverty when the UK has left the EU? And will there be scope both politically and under the terms of our future relationship with the EU for the UK Government to adopt an alternative approach at the end of the Brexit transitional period if they want to?

Tim Smith
Tim Smith
Professional Support Lawyer, London
+44 20 7466 2542
Francesca Falsini
Francesca Falsini
Paralegal, London

 

 

 

 

 

 

 


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