FOCUS ECJ ruling on pension compensation sees no clear victory for either party

FOCUS ECJ ruling on pension compensation sees no clear victory for either party

	Published : Thu, 25 Jan 2007 14:51 By : Agencies Print this Story

LONDON (AFX) - The ruling by the European Court of Justice today on compensation for members of UK defined benefit pension schemes whose employer goes bust has left no clear victory for either side in the case, according to pensions experts.

The ECJ ruled that there is no obligation for such DB scheme members to be fully compensated, thereby avoiding a scenario which could have led to a huge increase in corporate levies for the UK Pension Protection Fund.

However, the ECJ was unequivocal on the other main issue, saying the UK government had failed to protect their pension funds under the EU insolvency directive, and stating that the level of pension protection provided for workers before the PPF was 'inadequate'.

The PPF, set up in 2005, now guarantees 90 pct of entitlements for workers and 100 pct for retirees in failed schemes.

Other questions on what an adequate level would be and whether the government should compensate the members have been left unanswered.

The court was ruling on a case taken by former employees of ASW Holdings PLC, which went into liquidation in April 2003. Under UK legislation at the time, pension scheme claimants received less than half of their overall benefits.

Stephen Yeo, a senior consultant at consultant Watson Wyatt, said: 'It is good news for companies providing an occupational pension scheme as the ruling does seem to indicate that levies (for the PPF) can stay where they are.

'There is also some small encouragement for the claimants but it's certainly not a victory for them.'

Donald Duval, chief actuary at Aon Consulting, said the claimants had won on the 'first point' that their pension benefits provided at the time were indeed inadequate.

'The clear thing from this is that the directive does require protection, and that the UK government has been saying that it did not need protection or the type of protection provided was enough. So [the government] lost on that,' he said.

Crucially though, Duval noted that the court had decided full compensation and full protection of pension rights is not required. What this means is that levies paid by employers into the PPF will not rise as a result, since the court has said full benefits do not have to be provided.

There was some speculation that if the court had ruled that members should be fully compensated, annual payments to the PPF could have risen by 3-4 bln stg.

'There is some comfort in this judgment for both sides. When it says the compensation has not been adequate it certainly is comfort for one side, but then when it goes on to look at what has to be done on that, there is comfort on the other side.

'The ruling certainly doesn't say you have only given X, you should now give Y. Had that been what they thought, it would have said that,' Yeo added.

He noted that a 'key issue' would now be whether, on the back of the ruling, the PPF decides to cut the level of benefits it pays out.

The ECJ ruling has now referred the case back to the UK High Court which could decide that if benefits provided were inadequate, the UK government will have to provide a higher compensation.

Yeo, however, does not hold out much hope that the government will be induced to pay more: 'The government has been fairly resolute to date in the face of a very vociferous lobby, so I am not expecting them to come out with a better offer in the short term.'

Colin Mouque, director of actuarial services at Alexander Forbes Financial Services, said the directive could be a 'terrible blow' for the PPF.

'If the High Court orders full compensation, the PPF will be bust within two years,' he said.

'The best outcome for the government is that the High Court will back the PPF's existing payout structure - but this could be a test of the UK's willingness to stand up to the EU in the interests of UK business.'

By Raji Menon: +44 (0) 20 7422 4954; raji.menon@thomson.com

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