Waterford Crystal balls and Eurovision: could Ireland’s nightmare affect the PPF, the UK and beyond?

Stephen Beattie

Waterford Crystal’s 2009 insolvency has led to broken glass, broken retirements and is symptomatic of Ireland’s broken dreams. The European Court of Justice’s recent decision in the related Hogan case has led some to question the ripple effect on pension protection in the UK and throughout Europe. Peering into my (not Waterford) crystal ball, what will the ramifications be?

Back in the Celtic Tiger heyday of the 1990s, Ireland’s economy was purring/roaring (whatever a tiger does). Success was everywhere – even Eurovision. Winners of the song contest in ’92, ’93, ’94 and ’96, Ireland loved Europe and Europe loved Ireland. Fast forward to today and the last thing the Irish want is to win and have to foot the winner’s bill of staging the event the next year. There can be no other explanation for why Jedward have been wheeled out of late and this year Ireland have just come a resounding last.

The Irish-European love affair is on hold. Some say Ireland’s success relied heavily on handouts from Europe but the recent Waterford Crystal/Hogan case has seen the European Court of Justice bite back. The collapse of Waterford left only 28% of its Irish defined benefit pensions covered. The ECJ admonished Ireland for failing to have in place a pension protection system guaranteeing at least 50% of benefits as the ECJ argued is required under EC law.

So what does this Euro-vision for pension protection mean for other member states? How will it affect, for example, the UK’s Pension Protection Fund (itself borne out of ECJ involvement – in the Robins case – following which the UK sought to adopt a Euro-compliant system)? The PPF provides 100% of benefits if you had reached your scheme’s normal pension age when your employer went bust. However, you only receive 90% compensation capped at £31,380.34 (for 2013/14) per year if you had not reached normal pension age when your employer entered insolvency. For most people the cap is unlikely to bite but, for high earners and those with particularly long service, it may serve to reduce benefits by a significant degree. For the vast majority the EC may well view the system as adequate. Arguments to the contrary for high earners are unlikely to curry much favour in today’s economic climate. But, just yesterday, the UK Pensions Minister, Steve Webb, announced plans for increased PPF compensation for workers with more than 20 years of service. In a written statement to the House of Commons, he stated:

“I propose that the compensation cap will be increased by 3% for every full year of service above 20 years…There will still be a maximum, which will be double the standard cap.”

This proposal will go some way to allay a perceived unfairness in the current system i.e. whether you are subject to the compensation cap hinges on a certain degree of luck as to being a pensioner or not when your employer hits the rocks. One question arises – will PPF levies (akin to insurance premiums) paid by schemes need to rise to fund this increased compensation?

Is the proposal also a nod to the Waterford/Hogan case – trying to improve the UK’s scheme as a result? Perhaps, but it may just be a coincidence. The UK’s offering was already much better than Ireland’s. The ECJ’s 50% compensation test may not be met in the UK when the PPF’s cap bites: query therefore whether the UK is fully in compliance with EC law on this point – it is definitely arguable that it is not but the legal requirement is uncertain. Also, in our post-apocalyptic world of austerity a UK argument that it is doing enough, and as much as possible, may find more sympathy than Ireland’s pleas of poverty which fell on deaf ears in Hogan when trying to justify Ireland’s lack of compensation.

How the Hogan case will be interpreted in other EC jurisdictions is debatable. In the Netherlands, for example, no such pension protection system exists. However, Dutch pensions are a different beast – they can be cut if funds do not exist to cover them. Indeed there is not much of a system in the rest of Europe for Hogan to apply to – European pensions often operate in an insurance-based environment which is governed by different EC insurance laws.

But Ireland’s plight is certainly a reminder to the rest of Europe to obey the relevant pensions law, so far as it is applicable. The evolution of the interpretation of that law will continue to be interesting to watch, whether through a crystal ball or not.

Stephen Beattie is an associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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