Thousands of British workers who lost their pension as a result of company insolvency received "inadequate" protection from the Government, a European Court has ruled.
The European Court of Justice (ECJ) said the system in place prior to the establishment of the Pension Protection Fund (PPF) was "incompatible" with European law.
But the ruling fell short of demanding that employees receive direct recompense from the state, with the case now being returned to the UK courts to decide.
The ECJ also stated that employees whose pension schemes go bust will not necessarily be entitled to full compensation - an implication that the current system does offer sufficient protection to workers.
The decision will come as a relief to firms who had feared that their annual contribution to the PPF would rocket if the ECJ ruled that compensation would have to be at the 100% level.
But it will mean that workers whose pension schemes went bust before the PPF came into existence in April 2005 are still in with a chance of some compensation.
The ECJ ruling follows a case bought by trade unions Amicus and Community on behalf of pension scheme members at Allied Steel and Wire, which went bust in 2003. It found that the Government system at that time was "incompatible with community law".
The unions claimed the ruling as a victory. Derek Simpson, Amicus general secretary, added: "This judgment vindicates our decision to take this case all the way to the ECJ.
"We want the Government to reconsider its position. We believe that the ruling demonstrates they 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."
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The case will now return to the High Court in London which will decide if workers who lost out prior to the setting up of the PPF are entitled to compensation. But in a move that will allay the worst fears of UK firms, the ECJ ruling implied the PPF does serve as a sufficient safety net for employees.
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