Court of Justice of the European Union rules that section 11 of the Welfare Reform and Pensions Act 1999 is likely to be discriminatory

In a recent preliminary reference, the Court of Justice of the European Union has ruled that section 11 of the Welfare Reform and Pensions Act 1999 ("WRPA 1999") is likely to be indirectly discriminatory to non-UK EU nationals. Although the UK has formally left the EU, the ruling may have consequences in bankruptcy proceedings which were started before the end of the transition period (i.e. 31 December 2020).

How pension rights are treated in bankruptcy

Section 11 WRPA 1999 provides for rights under 'approved pension arrangements' to be fully excluded from an individual's estate on bankruptcy. Approved pension arrangements include UK-based pension schemes which are registered under s.153 of the Finance Act 2004 and certain 'qualifying overseas pension schemes' within the meaning of s.308A of the Income Tax (Earnings and Pensions) Act 2003. However, many EU-based pension schemes do not meet the criteria of 'approved pension arrangements', even if they are administered in line with all the local member state regulations, and so they are treated differently and in accordance with section 12 WRPA 1999. Under section 12 WRPA 1999, rights under unapproved pension arrangements are excluded only to the extent required to meet the future needs of the bankrupt and their family, with the rest vesting in the trustee in bankruptcy. This creates a dichotomy between what has been described as a 'gold standard' of pension protection under section 11 versus a 'bronze standard' of pension protection under section 12.

Indirect discrimination

Article 49 of the Treaty on the Functioning of the European Union ("TFEU") prohibits member states from restricting the freedom of establishment of nationals of other member states. The Court of Justice has ruled that the two-tier standards of treatment under sections 11 and 12 WRPA 1999 offends the rule of equal treatment laid down in Article 49 TFEU and is indirectly discriminatory because it is intrinsically liable to affect non-UK EU nationals disproportionately (because they are much more likely to have accrued pension rights in other EU member states than UK nationals). However, the treatment is not directly discriminatory because a UK citizen who had accrued rights under an unapproved pension arrangement and then returned to the UK would also only benefit from the 'bronze standard' of protection (in relation to those arrangements) if they were declared bankrupt.

Consequences

The High Court must now decide whether the discrimination is proportionate and justified by an overriding public interest reason. It seems unlikely that the High Court will rule that the unequal treatment can be justified given that the UK Insolvency Service's own guidance (Technical Guidance for Official Receivers at 57.39) states that as a matter of policy, and in order to ensure parity of treatment for any EU national who has exercised their right to freedom of movement in within the EU

"the official receiver should seek to exclude the majority of EU pension arrangements by entering qualifying agreements with the bankrupt".

The case may be significant for bankruptcy cases involving EU nationals as pension entitlements are often one of the largest assets in a person's estate. However, it also invites us to consider the wider issue of the how non-EU unapproved pension arrangements should be treated since the principle of non-discrimination, enshrined in domestic UK law through the Human Rights Act 1998, applies equally to individuals regardless of their citizenship of the UK, EU or any other country.