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When The Safety Net Fails

When The Safety Net Fails

It may be difficult to find fault with the intentions behind the Pension Protection Fund (PPF) - a safety net for pension scheme members in case their employers go insolvent. It is funded by an annual levy from each eligible employer in the UK, with those most at risk of insolvency paying the highest levy. Furthermore, the PPF hopes to be self-sustainable by 2030, and a self-sustainable safety net is the best kind of safety net.

But, it is easy to find fault with the PPF’s practical reach, particularly following the Court of Appeal decision in Trustees of the Olympic Airlnes SA Pension & Life Assurance Scheme v Olympic Airlines SA [2013] EWCA Civ 643.

With the ever-increasing globalisation of modern business, it ought to be a vital consideration when setting up a fund to protect the pensions of UK employees, to recognise that not every employer will be based in the UK. Unfortunately, whether by oversight or by design, the PPF rules do not allow the insolvency of an overseas employer to trigger a scheme entering the fund - the insolvency event must occur in the UK to bring about PPF entry. This position may appear concerning, however the reality is less severe.  EU Regulations provide that secondary insolvency proceedings can be brought against an overseas company, provided it has an “establishment” where these secondary proceedings are raised.

Because of this, when Olympic Airlines went into insolvency in Greece and discontinued its operations in the UK, the trustees of its UK pension scheme (which had a deficit of at least £115m) applied for entry into the PPF, making a petition for secondary winding-up of the company against its London branch (on the basis that it remained in possession of its London office and retained the ad hoc services of two employees). The trustees’ position was supported by the High Court; however Olympic Airlines appealed the decision.

The Court of Appeal decision

The Court of Appeal decision was essentially a fair one, albeit with unfair consequences. The EU Insolvency regulations were not developed with pension schemes in mind – they were introduced to protect creditors in their dealings with an overseas company. Therefore the definition of “establishment” uses terms like ‘place of operations’ and ‘non-transitory economic activity’, rather than whether the company simply has continuing obligations in the country.

On this basis, the Court of Appeal ruled that there was no such “establishment” in the UK by the time the winding-up petition was made (ruling the subsequent winding-up of the airline in England did not amount to "economic activity" under the insolvency regulations). As a result, no secondary proceedings could be raised, no UK insolvency event occurred, entry into the PPF was refused, and the members of the Olympic Airlines scheme were forced to settle for a significantly reduced pension.

The Pension Protection Fund failed to protect the pension fund.

Lessons to be learned

Following this decision, it is difficult to reconcile the current PPF rules with its original objective. Whether the rules will be changed to allow the insolvency of an overseas employer to trigger PPF entry remains to be seen - it is certainly something which should be looked at. In the meantime, the trustees of such schemes would be wise to remain alert to any signs that their employer is heading towards insolvency, particularly if operations in the UK are winding down – secondary proceedings must be raised before the “establishment” is removed.

As a result of this decision, the PPF rules will continue to be a source of genuine concern where overseas employers withdraw from the UK before primary insolvency proceedings are raised against them. As things stand, members of such pension schemes will not have the benefit of the very safety net set up to protect them.

Liam Young
Trainee Solicitor

LChalmers