European Parliament – explanation of case for Petitions Committee – Ros Altmann

    Ros is a leading authority on both private and state pensions,annuities and
    retirement policy. Numerous major awards have recognised her work to
    demystify finance and make pensions work better for people.

  • Ros Altmann

    Ros Altmann

    European Parliament – explanation of case for Petitions Committee

    European Parliament – explanation of case for Petitions Committee

    European Parliament – explanation of case for Petitions Committee

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)


    Petition 1107/2003, by Maurice Jones (British) on company pension entitlements after an insolvency

    1.         Summary of petition
    The petitioner accuses the British Government of failing to implement the Council Directive on insolvency 80/987/EEC. He paid into a company pension scheme for 38 years and has lost his entitlement owing to the insolvency of his company. He was made redundant at that point. Moreover, he alleges discrimination because the Government protects pensions in the public sector, but not in the private sector.

    2.       Admissibility
    Declared admissible on 30 April 2004. Information requested from Commission under Rule 192(4).

    3.       Commission reply, received on {10/02/2005}10 February 2005

    The Facts

    The petitioner is a 64 years old UK citizen who has been made redundant after many years of service in a textile company, when the latter went into administration and closed. Before that, the petitioner had contributed for 38 years to the company’s final salary pension scheme and expected to receive, from the age of 65 years, a pension of £34,000 per year. He has recently been informed that he will not receive a company pension and will only get a percentage of the national Guaranteed Minimum Pension. This national Guarnateed Minimum Pension is the pension that is derived from the compulsory state pension scheme.  Uniquely in the world, the UK Government has encouraged citizens to privatise their social security rights and put their national insurance contributions into a private pension scheme, thus trying to offload responsibility away from the State.  Before 1997, these ‘contracted out’ state pension rights were properly protected in law and, members of pension schemes which wound up were all reinstated back into the state earnings related pension scheme, so that they did not actually lose this ‘Guaranteed Minimum Pension’.  After 1997, however, this state ‘guarantee’ for the ‘Guaranteed Minimum Pensions’ was removed and the security for these state rights came via the newly introduced ‘Minimum Funding Requirement’ (MFR).  There was a fallback mechanism called ‘deemed buyback’ in the legislation, which has not worked properly and does not reinstate members back into the state scheme in full or automatically, so that in practice this system has not worked.  Although the reasons for the non-payment of his company pension are not explicitly explained, it appears that this regrettable fact is solely due to the insufficient assets of the scheme.The reasons for the non-payment of his company pension can be explained as follows:  firstly the 1995 Pensions Act in the UK introduced a ‘priority order’ from 1997, which prescribes how assets of winding-up schemes must be distributed.  This ‘priority order’ overrides any trustee discretion or scheme rules, which would have been used before 1997.  It is because of this  ‘priority order’ that the measures introduced in 1997 actually substantially reduced pension protection for members of pension schemes in the UK.  In essence, anyone already drawing a pension has first priority for all assets in the scheme.  This means that a 64 year old who has contributed for 38 years can actually be left with no pension at all.  If all the assets of the scheme are required to buy out index-linked annuities for those already drawing a pension, then all other members get no pension at all, regardless of their age, how long they contributed to the scheme, whether they transferred money in from other schemes etc.  This situation would not have prevailed under the pre-1997 rules where trustee discretion could be used and would have ensured a much fairer distribution of assets.  In the case of Mr. Jones, the cost of purchasing index-linked annuities for pensioner members of his scheme is so high that there are no assets left to cover any of his pension entitlement at all.  He may also get a reduced entitelemtn to the state ‘Guaranteed Minimum Pension’, whereas, before 1997, this would have been taken back into the state national insurance scheme.
    The petitioner claims that, by establishing a Pension Protection Fund only with effects pro futuro, the UK had failed to properly implement Article 8 of Council Directive 80/987/EEC on the protection of employees in the event of the insolvency of their employer (a). Moreover, he is of the opinion that the adoption by the UK of several measures allegedly taking away assets from pension funds, such as taxes on pension fund surpluses, the creation of guarantee obligations, the introduction of a minimum funding requirement, the introduction of new priority order rules the removal of tax relief on pension fund dividend tax relief in 1997, the fact that Uk law did not permit people to have any other pension, so they could not diversify their pension holdings and that members were not informed about the changes that had been introduced from 1997, would infringe the same Article 8 of the Insolvency Directive (b). Finally, the petitioner takes the view that, by providing financial and other assistance to selected private companies, considered by the UK Government as “cases of special need”, and not to others, the UK had violated the principle of non-discrimination (c).

    Legal Assessment

    1. Establishment of a Pension Protection Fund with effects only pro futuro:

    To comply with Article 8 of Directive 80/987/EEC, Member States have to provide for regulations, with regard to the private sector, ensuring old-age benefits in the long term. This means in particular that the fate of insurance schemes must not be bound up with the fate of insolvent companies and that safeguards or any other regulation governing the management and operation of pension schemes have to be introduced. Such prudential supervision may consist of regular enquiries about the scheme’s financial situation, limitations of the availability of assets for financial operations, the establishment of reserve funds, insurance requirements, strict actuarial supervision, etc. Taken together, these measures have to ensure the solvency of pension schemes with a reasonable amount of certainty.  In fact, there was strict actuarial supervision, but the rules that actuaries were asked to implement were never designed to achieve solvency.  When the UK Government introduced the Minimum Funding Requirement (which began operation in 1997) Parliament and the public were told that this would mean there would be sufficient assets in pension schemes to pay pensions, whatever happened to the employer.  However, behind the scenes, the independent investigation by the Parliamentary Ombudsman in the UK, has discovered that, in truth, the Government actually only intended that the MFR would give workers a 50/50 chance of getting their full pension.  The members had no idea about this.
    While the need to adopt measures ensuring appropriate prudential supervision of supplementary pension schemes seems, in the light of the object and purpose of the Directive and particularly of its Article 8, difficult to contest, the same does not appear to be true with regard to the argument that the latter provision creates a strict financial liability of the Member States for outstanding pension claims.  The financial liability arises because the UK Government misled members of pension schemes into believing their pensions were completely safe, although they were not.  The government failed to tell members about the risks to their pensions, if their scheme wound up.  Indeed, public information leaflets, produced by the Department for Social Security in 1996, told members that the new laws put in after the Maxwell scandal of the early 1990’s would make sure that their pensions were safe, whatever happened to their employer and failed to  mention that they had only a 50% chance of getting their full pension.  It also did not point out to older workers that the priority order would have a harsh cliff-edge effect which could mean that workers just a few days away from retirement might lose their entire pension.
    An interpretation in this sense would contradict the clearly expressed will of the legislator, who, in a declaration made together with the Commission at the occasion of the adoption of Directive 80/987/EEC, stated that Article 8 does not impose to the Member States financial liability by reason of the non-payment of contributions. A fortiori, the same has to apply for the non-payment of pension payments.
    Article 8 of Directive 80/987/EEC gives Member States a wide margin of discretion on how to protect the interests in respect of rights conferring immediate or prospective entitlements to old-age benefits.  Surely, a wide margin of discretion does not extend to misleading citizens into believing pensions were fully safe, allowing them to rely totally on this pension for their entire private pension needs, encouraging them to put some of their state pension rights into this same scheme too and never warning them of any risk.
    Without prejudice to the potential relevance of the Directive does not oblige Member States to provide full compensation in cases where losses of pensions nevertheless occur. To the extent that a Member State has taken other appropriate measures to protect the interests in respect of entitlements to old-age benefits, the limitation of a newly established Pension Protection Fund’s interventions to situations which have occurred after its establishment does not, as such, violate Community law.

    1. Several measures allegedly taking away assets from pension funds:

    With regard to the measures referred to by Mr. Jones allegedly endangering the solvency of pension funds, the Commission services take the view that they amount to legitimate choices of public policy, which cannot be seen as defeating the objective to protect the interest of employees and of persons having already left the employer’s undertaking or business at the date of the onset of the employer’s insolvency in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors’ benefits, under supplementary company or inter-company pension schemes outside the national statutory social security schemes.   Is it a legitimate choice of public policy to tell the public that its pensions are safe, fail to mention any risk, assure them that the new laws are being designed to protect pensions on insolvency, but then behind the scenes to design the ‘protection’ to only deliver an even chance of actually getting full pensions?
    Some of the incriminated measures, like the introduction of the minimum funding requirement, even aim, quite at the contrary, at an enhanced protection of these interests and thus contribute to the fulfilment of the obligations following from the Directive.  The Minimum Funding Requirement was said to be designed to provide enhanced protection, however, the measures actually reduced protection, in particular when combined with the priority order on wind up.  The Minimum funding Requirement also removed the protection that had previously been in place for members’ state contracted out pension rights, so that people have now lost a significant part of their state pension entitlement, as well as their own occupational pensions.  Before the new legislation in 1997, the trustees would also have had discretion over division of assets.  Other European countries have proper protection for their defined benefit pensions.  This is highlighted vividly in the case of a company called Richardson’s IFI which has factories in Southern Ireland and one in Northern Ireland.  All the members of its pension scheme in Southern Ireland have received their pensions after the company failed, but the members of the Northern Ireland factory have all lost their pensions.  Some have dreadful health problems and are getting no pension.
    The Commission services therefore fail to see an infringement of Community law in this respect.

    1. Financial and other assistance to selected private companies:

    With regard to the petitioner’s claim that, by providing financial and other assistance to selected private companies, considered by the UK Government as “cases of special need”, and not to others, the UK had violated the principle of non-discrimination, it has to be recalled that, according to well established case-law of the Court of Justice, the principle of equality is one of the fundamental principles of Community law (1). This principle requires that comparable situations not be treated differently and different situations not be treated alike unless such treatment is objectively justified (2) .
    However, it is also apparent from the Court’s case-law that the latter has no power to examine the compatibility with fundamental rights of national measures which concern an area which falls within the jurisdiction of the national legislator (3).
    The petition lodged by Mr. Jones does not provide the information necessary for the Commission services to asses with certitude whether the measures he is referring to (which are not described further) fall under the scope of application of Community law. More importantly, it does not contain any precisions on the criteria applied by the UK to determine the beneficiaries of such measures. Commission services are therefore not in a position to take a view on this claim.
    When the Government set up the Financial Assistance Scheme, it announced that it would only assist pension scheme members who were within 3 years of their scheme retirement age last May and only restore 80% of their pension, without any inflation linking.  All members will have to wait until they are age 65, even if their scheme pension age was 60 and all those who were over 3 years from scheme pension age will get nothing at all.  Not even a reinstatement of their state pension rights.

    With regard to his submission that pensions in the public sector were better protected than pensions in the private sector, the petitioner does not provide any explanation on differences pertaining to these different categories of employees. Within that context, it also has to be recalled that the breach of the principle of equal treatment may only be pleaded if the compared situations are comparable as regards all the elements which characterise them (4). The legal situation of employment in the public sector tends to differ, for a variety of reasons, from that normally obtaining in the private sector. The mere fact that the State, or a legal entity depending from the State, are themselves liable for pension claims of their employees against them, as well as the fact that the public authorities are normally always in the position to provide assets to meet these obligations, would not suffice to establish a violation of the principle of equal treatment.

    (1) Judgement of the Court in case C-309/96, Annibaldi, ECR 1997, I-7493, point 18

    (2) Judgement of the Court in case C-292/97, Karlsson et. al., ECR 2000, I-2737, point 39

    (3) Judgement of the Court in joined cases 60 and 61/84, Cinéthèque et. al., ECR 1985, 2605, point 26

    (4) Judgement of the Court in case C-375/99, Spain v. Commission, ECR 2001, I-5983, point 27

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