The European Court of Justice will decide on 25 January whether the UK Government has to pay substantial compensation to members of pension schemes who have lost all or part of their pensions when their employers became insolvent.
Even if the Government does not have to pay damages to pensioners for past breaches of European law, the judgment may require the Government to give greater protection to pensions in future, perhaps by increasing the compensation paid to pensioners through the Pension Protection Fund.
The ECJ ruling will be the Court's formal judgment in the ASW case. The opinion of the ECJ's Advocate General in the ASW case was published in July last year and is a good indication of the likely outcome. The Advocate General's opinion was that the Government is required by European law to provide full protection of pension rights from the adverse effects of employer insolvency. She considered that the Government had failed to provide "full" protection, but that this failure was not a sufficiently serious breach of European law to make the Government liable to pay damages in this case. The AG's opinion is not binding, but is followed by the ECJ in most cases when it gives its formal judgment.
Background
The proceedings before the ECJ arise from a claim against the Government brought by over 800 members of the Allied Steel & Wire (ASW) pension schemes in the English High Court. Their claim was backed by the unions Amicus and Community.
When ASW became insolvent in 2002, the company's pension schemes were left in deficit with the result that deferred members have suffered substantial reductions in their pension benefits. The ASW scheme members brought a claim before the High Court seeking compensation from the Government. They say that the Government has failed adequately to implement the 1980 European Insolvency Directive (Directive), which they say required it to take necessary measures to protect employees' rights in occupational pension schemes in the event of the company's insolvency. The ASW scheme members say that the Government's failure to implement the Directive is a breach of both European and English law and that the Government is liable to compensate those who have suffered loss as a result.
The Government has denied that it has breached its duty to implement the Directive saying that various measures it has taken provide sufficient protection, including introducing the Minimum Funding Requirement, and requiring scheme funds to be kept separately from those of the employer. Recent measures, such as the new scheme specific funding arrangements and the Pension Protection Fund, were not relevant to this case as they were introduced after the ASW schemes went into winding up.
The High Court referred various questions on the interpretation of the Directive to the ECJ. Specifically the High Court asked whether the Directive required the Government itself fully to fund pensions in the event of employer insolvency, whether the Government had adequately implemented the Directive and, if not, what test the English Court should apply to decide if the Government should pay damages.
The AG's opinion
The AG's conclusion was that the Directive requires the Government to ensure that there is "full" protection of employees' pension rights in final salary occupational pension schemes against the adverse effects of the employer's insolvency. The AG rejected the Government's argument that something less than "full" protection was required by the Directive, but left open the possibility that in exceptional circumstances something less might be justified. The AG did not think that the Directive required the Government itself to cover shortfalls in pensions. She concluded that the level of protection offered to the ASW scheme members was not adequate to comply with the Directive.
The AG set out the test which the English High Court will have to apply when deciding if the breaches by the Government were sufficiently serious to make it liable to pay damages. Although not required to express a view, she doubted whether in the circumstances of this case the breach was sufficiently serious to make the Government liable for damages. This conclusion, which might seem surprising given the serious consequences of the breach for scheme members, appears to rest on the fact that the Directive did not make it sufficiently clear what protection was required and that the Government had taken some steps to implement the Directive. However, even if the ECJ's judgment follows the AG's opinion, this issue will have to be finally determined by the English High Court and, therefore, will be the subject of further argument when the case returns to London.
Thousands of members of other pension schemes in similar circumstances have issued claims against the Government for damages in the High Court in anticipation of the outcome of the ASW case.
Impact
Up to 100,000 pension scheme members are thought to have lost part or all of their pensions in similar circumstances to the ASW scheme members. Many are awaiting the outcome of this case to see if their claims for compensation can proceed.
If the AG's Opinion is followed by the ECJ in its judgment, the Government will have been found to have failed to implement the Directive adequately in the past. Also the Directive will have to be interpreted as now requiring the full protection of pension rights against the adverse effects of an employer's insolvency.
The issue of whether the Government must pay compensation to ASW scheme members will be finally determined by the English High Court, but unless it takes a different view from the Advocate General, the Government may escape liability.
However, if the ECJ follow the AG's opinion and decide that "full" protection is required by the Directive, the Government will need to consider whether the current protection (including the compensation paid by the Pension Protection Fund) needs to be strengthened to comply with the Directive.