And, breathe …
16th January, 2020
At the end of a tumultuous year for Britain’s relationship with the rest of Europe, it seems appropriate that the European Court of Justice (CJEU) had the last word on 19 December, when it gave its judgement on a number of questions raised in the Bauer case. Of most interest was the question of whether or not an employee could be said to have suffered ‘manifestly disproportionate losses’ as a result of the insolvency of his employer, even though the losses do not amount to more than 50% of the pension benefit.
The CJEU ruled that the current 50% minimum level of protection is too low in circumstances where the member is below the ‘at risk of poverty’ income level as measured by Eurostat. In the UK this means an income of around £10,000 a year.
As trustees we should be feeling some relief. After all, the decision could have sent DB pension funding into a major spin if the court had decided that the PPF needed to guarantee every member’s benefits in full.
So, a major crisis has been averted. However, there are a great many unanswered questions. The ruling could mean additional complexity for the PPF and the wider pension industry even if the financial impact may not be material. Assuming the Department of Work and Pensions accepts the judgment it will need to provide guidance on how it should be implemented, and the relationship with the State pension and means tested benefits.
With Brexit now in sight, the actual impact is a ‘known unknown’. The CJEU ruling will continue to apply to the UK until the transition period ends in December 2020. After that the situation is unclear.
In two camps
I find that my feelings are mixed on this issue. On one hand, it is obviously positive news that the financial threat to the UK pension industry of 100% PPF compensation has been lifted. Suggested knock-on effects included a £160bn bill if compensation was to be backdated, the possible closure of the PPF and the final nail in the coffin for defined benefit schemes.
On the other hand, I believe that everyone in the UK pensions industry should aspire to secure a future for all members that looks beyond a minimum poverty threshold in the event that the sponsor fails and there are insufficient resources in the scheme to meet the cost of members’ benefits in full.
As ever (unless your business is fortune telling), the future is uncertain. With that in mind, it is important that trustees develop and maintain a dialogue with their scheme sponsors to discuss PPF levies and with advisers to consider the possible wider implications of the Bauer case once the known unknowns are clarified.