The Government came one step closer to being landed with a £15bn bill to compensate workers who have lost their pensions after a European court ruled yesterday that Britain does not provide adequate protection for employees' retirement benefits.
The long-awaited judgment from the European Court of Justice will now be referred back to the UK courts, and could result in the Government being forced to pump billions of extra pounds into the Financial Assistance Scheme, which it set up in 2004 to provide basic support to those affected. So far, it has pledged just £400m to the fund.
The FAS's payouts are capped at £12,000 a year, and only around a quarter of the 125,000 people affected are expected to qualify for money from the scheme. However, the court said it was unacceptable that some people were being compensated with less than 50 per cent of the pension they were owed, leaving it up to the UK courts to decide what would be a reasonable level of protection.
The ruling also has consequences for companies with existing final salary schemes, which are now likely to see yet another significant increase in the levy they pay to the Pension Protection Fund (PPF). The decision could result in the PPF being forced to scrap its cap of £26,050-a-year on payouts to individuals, adding tens of millions of pounds to the amount it would need to raise via its corporate levy.
Last month, the PPF said the levy would be doubling for most companies this year after it failed to gather enough the previous year. However, with an increasing number of better-capitalised companies now paying down their pension deficits, thus reducing their levy, there is a growing concern that the PPF may struggle to raise adequate funds again unless it raises the levy even further for stronger companies.
The European case was taken by 835 former workers of Cardiff-based Allied Steel & Wire, which went into receivership in 2002. They were supported by the union Amicus. Commenting on the ruling, Derek Simpson, the union's general secretary, said: "We believe that today's ruling demonstrates they [the Government] have a moral obligation to reimburse the many thousands of people who, through no fault of their own, have lost all or substantial parts of their pension savings."
However, the Government hailed yesterday's ruling as a victory. Although the court said the level of protection for UK workers was inadequate, it stopped short of ruling that the Govern-ment is obliged to guarantee in full private sector pensions.
A Department for Work and Pensions spokesman said: "Whilst we have every sympathy for those who have lost their pensions, and understand the distress this has caused to them and their families, this is a common sense judgment."
Tim Keogh, a partner at Mercer, said he estimated that the cost of removing the payout cap from the PPF would increase the levy by 6 per cent. He also acknowledged that the recent increase in companies paying down their deficits was likely to leave an unmangeable burden on the weakest businesses.
"[If this continues], the risk-related idea starts to break down, and leaves a hard core of employers that are in big trouble, and with big deficits," he said. "If they can't be paid for on a risk-related basis, then the PPF will have to find some other means of raising the money."
John Cridland, the CBI's deputy director-general, said that any additional compensation the Government had to pay as a result of the ruling should be met by the public purse and not business.Reuse content