The European Court of Justice (ECJ) has ruled that pension lifeboats, such as the Pension Protection Fund (PPF), should ensure that ex-employees of insolvent companies do not fall below the poverty line.

It stated that a reduction in the amount of retirement benefits provided to a former salaried employee leading to them being below the EU poverty threshold due to the insolvency of a previous employer is “manifestly disproportionate”.

In the case, Pensions-Sicherungs-Verein VVaG v Günther Bauer, a German worker challenged the German equivalent of the PPF over the amount of benefits he received when his employer fell into insolvency.

However, the ECJ did not rule in favour of the worker, and stated that pension lifeboats would not be required to pay 100 per cent of pension entitlements to every member entitled to compensation.

Despite this, the PPF may have to raise the annual levy it charges employers as it may have to increase the percentage of benefits provided to those deemed to be in danger of falling below the poverty threshold.

A PPF spokesperson commented: “The recent ECJ judgment in the case of PSV v Gunther Bauer has restated that, as a minimum, every individual must receive at least 50 per cent of their accrued benefits.

"We consider that the implementation methodology we announced following the ECJ’s judgment in Hampshire, which will make sure that all our members receive at least 50 per cent of the value of their accrued benefits, meets this requirement.

"There are other details of the judgment that we’ll need to work through with the Department for Work and Pensions. In the meantime, we’ll continue to make payments in line with the existing levels, and to assess and increase payment to those members affected by the Hampshire ruling.”

If the decision results in the PPF having to backdate its compensation payments, employers could face “multi-million pound” bills to ensure that the PPF can meet its liabilities, according to Royal London director of policy, Steven Webb.

“This is a decision that could have huge implications for British business and the pensions industry,” he said.

“Paying full benefits, with retrospective effect, could lead to a huge increase in the liabilities of the PPF. Unless the government intervenes, this full cost could fall on employers who could face multi-million pound bills”.

Pinsent Masons pensions partner, Alastair Meeks, explained that it may be difficult to comply with the ruling: “Many in receipt of PPF compensation will have entitlements that are far below the at-risk-of-poverty threshold determined by Eurostat for the UK.

"The PPF will not have direct access to information about each individual’s total income levels. Many will argue the simplest way for the government to comply with this judgment would be to ensure that those in receipt of PPF compensation are entitled to a minimum income from the state that ensures that they are above the risk-of-poverty threshold.

"However, overhauling social security structures in this way could be challenging.”

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