Anna Rogers comments in Pensions Expert on advocate General Hogan advising that full DB benefits must be paid in insolvency
The European Court 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.
Anna Rogers commented: “The European Court may or may not be persuaded by the Hogan Opinion. 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.
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. Again, nothing has happened yet. The European Court may decide to go the other way or set a level of protection that the PPF already meets. If not, there could be a different kind of climate change ahead.
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.”
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