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Requirement to ensure adequate funding of occupational pensions

European Court judgment in Robins v Secretary of State for Work and Pensions on pensions responsibilities arising on insolvency of employer.

ASW Ltd sponsored two occupational pension schemes. On 24 April 2003, insolvency proceedings were initiated in relation to ASW Ltd. It was apparent at that time that the two schemes were insufficiently funded to secure the payment of all of the benefits provided for under them. The members of those schemes (one of whom would receive approximately 20% of his benefits, and the other, approximately 49%) were supported by their trade unions in an application to the High Court for compensation from the Government for the shortfall in their pension benefits. In support of their application, the members sought to rely on Article 8 of the EU's Insolvency Directive of 1980. Article 8 broadly provides that EU Member States must ensure that necessary measures are taken to protect, on an insolvency of an employer, the interests of employees and former employees who have immediate or prospective entitlement to old age benefits in occupational pension schemes. The High Court referred three questions to the European Court of Justice. On 25 January 2007, the ECJ answered those questions as follows:

1.	On a proper construction of Article 8, on an insolvency of an employer, the accrued rights of members of occupational pension schemes need not be funded by the Member States themselves, nor need they be funded in full.
2.	However, such rights need some level of protection. Whilst the Insolvency Directive allowed for a level of discretion as to the balance between members' interests and economic and social development, the protection provided for by the law in England and Wales, as it applied to the members, was insufficient to satisfy the requirements of Article 8. (It was difficult to square a system that could lead to members receiving 49%, or even only 20%, of their benefits with the requirement that their rights be protected on an employer's insolvency.) In considering this question, the ECJ did not consider the extended ambit of the Financial Assistance Scheme (as amended in scope in December 2006), or the provisions of the Pension Protection Fund (which was not relevant to this case).
3.	It was for the High Court to determine whether any compensation was payable as a result. The answer was contingent on finding that the UK had had "manifest and grave disregard" for the limits set on its discretion when effecting the obligations of Article 8 into UK law.

The ECJ has, therefore, referred the case back to the High Court to determine the third question. When doing so, however, it pointed out that none of the members, the UK Government or the EU Commission had been able to suggest the minimum degree of protection that should have been provided, and that the Commission had previously suggested (in 1995) that the UK had met the requirements of Article 8. Therefore, it is perhaps unlikely that the High Court will make any finding of "manifest and grave disregard" or that any compensation will be paid. For more information or advice, please contact: Carolyn Saunders +44 (0)20 7300 4752 or email Mark Smith +44 (0)20 7300 4090 or email Ewan Horn +44 (0)20 7300 4860 or email.