Government to compensate workers for loss of pension following High Court ruling

The government’s position on the winding-up of company pension schemes and the subsequent loss of pension benefits for thousands of workers has come under renewed criticism. In January 2007, the European Court of Justice ruled that successive UK governments had acted unlawfully in not implementing the European insolvency directive properly. In February, as a result of an unprecedented legal challenge, the government has been forced to reconsider what action to take in response to the Parliamentary Ombudsman’s findings of government maladministration.

European Court of Justice ruling

On 25 January 2007, a European Court of Justice (ECJ) judgement stipulated that UK pension rules offer inadequate protection for workers whose final salary pension schemes collapse.

The trade unions Community and Amicus had sued the UK government for compensation on behalf of 1,000 members formerly employed by Allied Steel and Wire in Cardiff in Wales and Sheerness in Kent. The unions argued that the protection afforded by the Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS), set up by the government to assist workers who lost their pensions, was inadequate. The PPF only protects workers in schemes of companies that have wound up since April 2005 and the FAS is limited to those people who were within 15years of the scheme’s normal retirement age on 14 May 2004.

While the ECJ ruled that successive UK governments had failed to properly implement Article 8 of the European insolvency directive (Directive 80/987/EEC), it stopped short of ruling that the government should pay compensation, arguing that this was up to the British courts to decide.

High Court ruling

The government has subsequently come under further pressure to take action to compensate workers. On 21 February 2007, in a High Court ruling, Mr Justice Bean said that the Work and Pensions Secretary, John Hutton, had acted unlawfully in rejecting totally the March 2006 report of the Parliamentary Commissioner for Administration or Parliamentary Ombudsman (UK0604019I). This report found that government maladministration had unfairly misled people into feeling reassured that their company pension was secure.

The four named claimants represented up to 125,000 people nationwide who had lost their pensions when their company schemes were wound up. The claimants maintained that they relied on information provided by the government, which led them to believe their pensions were completely safe and their retirement income was assured after 1997. In practice, they lost most or all of their pensions when their schemes collapsed. The claimants, who were not union members, had little financial backing and so initially took their case to the Parliamentary Ombudsman rather than to the courts.

The judge told the government to reconsider the Ombudsman’s recommendation of restoring the core pension and non-core benefits promised to the pensioners.

Government response

In his budget statement on 21 March 2007, the Chancellor of the Exchequer, Gordon Brown, announced that the government will greatly increase the money available under the FAS from GBP 2.3 billion (€3.4 billion as at 2 April 2007) to GBP 8 billion (€11.8 billion). All those who lost their pensions before May 2004 will now qualify for payouts from the FAS, as opposed to just 45,000 workers as originally intended. The maximum annual cap on assistance has also been raised from GBP 12,000 (€17,736) to GBP 26,000 (€38,428). The government estimates that, as a result, the number of people who will be helped under the scheme will treble.

Trade union response

While trade unions see the budget announcement as a major step forward, they have warned that the changes do not go far enough. According to government statistics, only just over 1,000 workers of those affected are actually receiving payments from the FAS. The applications process is cumbersome and complex, and a number of people have already died before managing to secure their payments from the scheme. Moreover, payments will not rise in line with inflation, which means that their real value will decrease each year. The unions argue that, based on past inflation experience, after 10 years the value of a pension will fall by a third, after 20 years by half, and after 30 years by three quarters. The fund will also still only pay out 80% rather than 100% of people’s lost pensions.

Commentary

The government believes that the protection offered by the package announced in the budget complies with the terms of both the High Court and the ECJ judgments and that the matter is now resolved. Community and Amicus, on the other hand, think that there is widespread public and political support for the view that those who qualify for the FAS should receive the same as those who are covered by the PPF. They will, therefore, continue to campaign for these changes.

Helen Newell, IRRU, University of Warwick