knowledge 1 August 2019 |

Pension Obligations: PSV v Bauer – Advocate General’s Opinion May Lead to Consequences for Ireland

The Bauer case

In essence, the question in the Bauer case centres on the extent of the obligations on Member States arising from Article 8 of the Insolvency Directive (2008/94/EC). Article 8 provides that:

“Member States shall ensure that the necessary measures are taken to protect the interests 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 entitlements to old-age benefits, including survivors’ benefits, under supplementary company or intercompany pension schemes outside the national statutory social security schemes”.

The CJEU have indicated in previous cases that a scheme which does not ensure that individuals receive at least 50% of the pension benefits to which they are entitled was not sufficient to comply with a Member States’ obligations under the Directive (Robins v Secretary of State for Work and Pensions (C-278/05); Hampshire v The Pension Protection Fund (C-17/17)).

However, Advocate General Hogan in his opinion in Bauer called for a “full re-appraisal of the case law…to date”. He noted his view that “there is no special magic in the 50% found by the Court in Robins as the minimum figure which an employee should receive” and that he found it “difficult to see how the obligation provided for in Article 8 could in principle concern anything less than full satisfaction of the employee’s pension entitlements”(emphasis added).  While this would not mean that an individual who received less than their full pension entitlements under a pension scheme could automatically require that the Member State concerned offset the reduction, it would mean that individual would be entitled to seek redress if they could show that such Member State did not adopt measures that could reasonably be considered sufficient to protect their interests.

Ireland & the Insolvency Directive

It is worth noting at the outset that Ireland has previously been held to be in breach of its obligations under the Insolvency Directive both at home and at EU level. In its decision of Glegola v. Minister for Social Protections & Ors [2018] IESC 65, the Supreme Court found that limitations on the circumstances in which employees could access the Insolvency Protection Fund (which does not generally encompass pension entitlements) amounted to incorrect transposition of the Directive. At EU level, in the case of Hogan & Ors v Minister for Social and Family Affairs (C-398-11), which concerned the pension entitlements of Waterford Crystal workers, the CJEU found Ireland to be in breach of its obligations to guarantee a minimum portion of pension entitlements in the manner set out in the Robins case. As such, this is a case to which the Irish Government is likely to pay particular attention.

Reform in Ireland?

While the decision of the CJEU may well depart from the Advocate General’s Opinion, in the event it does not, the Irish Government is likely to find itself in a situation where it must ensure that necessary measures are taken to guarantee 100% of all accrued benefits under DB schemes on an employer’s insolvency. This may in turn to lead to amendments to the statutory funding regime for DB schemes and an increase in the Minimum Funding Standard or the Funding Standard Reserve under the Pensions Act 1990 (as amended). Furthermore, it could lead to the establishment of a Pension Protection Fund, similar to that operating in the UK, the establishment of which has already been suggested by Willie O’Dea in the context of the  Fianna Fáil sponsored Pensions (Amendment) (No 2) Bill 2017 which has recently been the subject of debate before the Dáil.

The Pensions (Amendment) (No 2) Bill is one of a series of opposition Bills seeking to amend the nature of DB arrangements by providing for mandatory obligations on the part of employers in relation to funding and their contributions to DB schemes. Similar proposals have also been made by the Government in the General Scheme of the Social Welfare and Pensions Bill 2017, and the Department of Employment Affairs and Social Protection has recently indicated that these will be fast tracked to Committee Stage as soon as possible. While employers may have funding obligations under the trust deed and rules of a pension scheme, there are currently no statutory obligations on employers to contribute to DB schemes or to make up the deficit in such a scheme. These proposals, therefore, represent a significant change which is likely to have far reaching consequences for employers. Arguments against these proposals have focused on the fact that those consequences could place employers operating DB schemes at a competitive disadvantage, inhibit restructuring, and may lead to job losses and/or salary reductions as employers seek to find resources to continue funding a scheme or to reduce the deficit of the scheme in order to wind it up. It is also possible that such proposals may run into constitutional difficulties given their potential to retrospectively affect vested property rights of employers.

As such, whether or not the decision of the CJEU in Bauer acts as a catalyst in the short-term, the topic of pension reform is likely to raise its head once again and employers of DB schemes should very much “watch this space”.

How can we help?

The Employment, Pensions & Incentives Group has significant experience in advising trustees and employers on the operation of defined benefit schemes, particularly in relation to restructuring and funding of such schemes. We would be happy to assist with any queries you may have in this regard. Your usual contact would also be pleased to provide further information.