Law & Regulation

The government is looking to remove the effects of the Bauer ruling, impacting the Pension Protection Fund, from UK law and will introduce primary legislation in the near future, according to a letter sent to various industry stakeholders.

The Bauer ruling, handed down by the European Court of Justice in 2019, held that lifeboats such as the PPF must ensure that ex-employees of insolvent companies do not fall below the poverty line when their company pension failed. The poverty line was determined by Eurostat.

As Pensions Expert reported at the time, the consensus in the industry was that the ruling would have little material impact on the PPF, which already aims to pay out benefits in full. Additionally, Eurostat’s definition of poverty was only slightly higher than the existing state pension.

The judgment was nonetheless thought to be difficult to implement, as the PPF does not typically collect data for household income. As reported in May last year, the lifeboat was planning to rely on the Department for Work and Pensions for a potential solution.

The onus for claiming top-up compensation from the PPF would have been on the individual. The government could in theory comply by guaranteeing those in receipt of PPF compensation a minimum state income that takes them above some poverty threshold – but that is hardly likely to happen

Anna Rogers, Arc Pensions Law

However, according to documents seen by former pensions minister and LCP partner Sir Steve Webb and shared with Pensions Expert, the government is keen to remove the Bauer ruling from UK law.

The DWP is inviting stakeholders to air their views at a virtual roundtable on December 10, and has promised to introduce “primary legislation as soon as parliamentary time becomes available”.

It is as yet unclear whether the DWP proposes to remove protections for those potentially affected in future or if it plans to make retrospective changes, so that no one would have the protection offered by the judgment.

A PPF spokesperson told Pensions Expert: “We’re aware DWP will be liaising with key stakeholders about a proposal to remove the effects of the Bauer judgment. Our compensation levels are set by government and we await the outcome of these discussions in due course.”

A DWP spokesperson confirmed that the government is “seeking views from a select group of industry representatives to help inform future measures regarding the Bauer judgment, which is likely to only benefit a limited number of people in the UK”.

They added: “Some affected members might be worse off due to the interactions between the judgment, social security benefits and taxation.

“The percentage of pensioners living in poverty has fallen dramatically over recent decades and we are committed to ensuring pensioners are financially supported, including through the new state pension, automatic enrolment, pension credit, and the 50 plus: choices offer.”

Administrative headache avoided?

Responding to the news, experts said that the difficulties posed by the Bauer ruling may now be avoided, but cautioned that the government must be careful about how it proceeds.

Webb said: “More than 400,000 people are already receiving, or set to receive, compensation for pension scheme failures from the PPF, and these arrangements offer valuable protection.

“But there are limits and gaps in protection which can leave some people at risk of ending up below the poverty line, and the Bauer judgment offers hope to these people. If DWP can come up with a more efficient way of achieving the same outcome then this might be acceptable, but it would raise serious issues over pension protection if the ruling was simply scrapped now that the UK has left the EU.”

Angela Sharma, lawyer at Taylor Wessing, said that removing the Bauer ruling would “remove the many tricky issues which the judgment raised” and potentially avert “a real administrative headache”.

“For example, [under the Bauer ruling] the PPF would have to examine the income of each member and assess, on an individual basis, the level of PPF compensation required for the prescribed minimum income standard to be met and how it would be monitored and adjusted over time,” she said.

Anna Rogers, senior partner at Arc Pensions Law, cautioned that any future arrangement would still have to comply with broader EU insolvency law unless that too is repealed, as acting in breach of that law could “have a wider effect on the future trading relationship”.

PPF only needs to hike benefits if member faces poverty risk 

The European Court of Justice ruling on the Bauer case has been described as a “welcome relief” for the Pension Protection Fund, as the lifeboat will only have to up member benefits if the individual is living below the at-risk-of-poverty threshold.

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“It was never going to be easy for the government to ensure that PPF protection complied with the Bauer ruling. It’s one thing to say the compensation has to be at least 50 per cent of pension, as required by the Hampshire ruling, and quite another to keep the member above the poverty level,” she explained. 

“There is a Eurostat measure of the ‘at-risk-of-poverty’ level but it’s not obvious how the UK would reproduce that. Only HMRC has information about combined income, and then only if the member is within the tax system.”  

Rogers continued: “The onus for claiming top-up compensation from the PPF would have been on the individual. The government could in theory comply by guaranteeing those in receipt of PPF compensation a minimum state income that takes them above some poverty threshold — [but that is] hardly likely to happen.”