PPF compensation: European court confirms no 100% guarantee

The Court of Justice of the European Union (CJEU) has today (19 December 2019) handed down its judgment in Pensions-Sicherungs-Verein VVaG v Gunther Bauer, also known as the Bauer case. The Bauer case relates to the level of pensions guarantee that must be provided by the Pensions-Sicherungs-Verein (PSV), the German and Luxembourg equivalent of the Pension Protection Fund (PPF). However, the outcome will also affect the PPF.  After the Advocate General's opinion sparked concern that the CJEU would require a 100% guarantee, we are pleased to see that the court has taken a more proportionate approach.

What is the Bauer case about?

Mr Bauer's pension was made up of two types of payment: a monthly pension supplement and an annual Christmas bonus paid by his former employer; and a pension paid by the Pensionskasse (pension fund), to which the employer had contributed.

A few years after Mr Bauer started to receive his benefits the Pensionskasse experienced financial difficulties and, with regulatory approval, reduced the level of pension it paid to Mr Bauer. To begin with, and in line with German law, Mr Bauer's former employer made up the difference. However, the employer later became insolvent.

After the insolvency, the PSV assumed responsibility for paying the pension payments the employer had been making. However, it did not agree to make up the difference on the payments being made by the Pensionskasse. The question for the CJEU was whether the PSV was obliged to make up the shortfall on the payments being made by the Pensionskasse.

 What did the European Court decide?

The CJEU ruled that:

• Article 8 of the Insolvency Directive does apply "to a situation in which an employer, which provides occupational old-age pension benefits through an inter-occupational institution cannot, on account of its insolvency, offset losses resulting from a reduction in the amount of … benefits paid by" that institution, where that reduction was approved by the relevant regulator. (Article 8 provides that Member States are obliged to take the necessary measures to protect the interests of employees and former employees at the date of their employer’s insolvency, in respect of rights under an occupational pension scheme which were built up prior to the insolvency.)
• Member States have "considerable latitude in determining … the means and the level of protection" afforded by bodies like the PSV and Article 8 "cannot … be interpreted as requiring a full guarantee of the rights in question".
• Earlier case law, including Hampshire, confirms that a former employee should "receive, in the event of the insolvency of his or her employer, at least half of the old-age benefits arising out of … accrued pension rights".
• However, employees and former employees must not suffer losses which are "manifestly disproportionate" to the aim of Article 8.
• The intention behind Article 8 is "to protect the employee from particular hardship caused by the loss of rights conferring immediate entitlement to benefits under a … pension scheme".
• A reduction in a former employee's pension benefits will be "manifestly disproportionate where it follows from that reduction and, as the case may be, from how it is expected to develop, that the former employee's ability to meet his or her needs is seriously compromised. That would be the case if … a former employee … as a result of the reduction, is living, or would have to live, below the at-risk-of-poverty threshold determined by Eurostat for the Member State concerned".
• As such a Member State must ensure not only that a former employee receives at least half of their accrued pension, but also that the compensation they receive is sufficient to prevent them from falling below Eurostat's at-risk-of-poverty threshold for that Member State.
• For these purposes, Article 8 can have direct effect on an institution like the PSV provided that "the task of providing a guarantee with which the institution is vested actually covers the type of old-age benefits in respect of which the minimum degree of protection provided for in Article 8 is sought".

Osborne Clarke comment

We welcome the CJEU's judgment. The PPF has already completed a lot of work in response to the CJEU's decision in the Hampshire case and can now proceed to implement this despite the ongoing judicial review of how it intends to implement the outcome of Hampshire.  While it is clearly in the best interests of members to receive compensation for 100% of scheme benefits in the event of their employer's insolvency, imposing such a requirement on the PPF would have a serious impact on its operation. This would lead to significantly higher PPF levy payments for solvent employers and putting into doubt the future of PPF+ buyouts and the operation of defined benefit superfunds.