Beware the implications of your early retirement rule
The consequences of the Barber decision continue to challenge scheme sponsors and trustees. Did A-day and the flexibility to pay split pensions (an argument suggested by a case in 2007 concerning schemes in winding up) offer schemes a means of reducing the size of the Barber liabilities? This and other issues were considered in the case of Foster Wheeler Limited –v- Hanley (28/11/08), a decision which could have serious implications for many schemes.
Three cases from the early 1990s (Barber, Coloroll and Smith –v- Advel) established that:
- pension benefits are equivalent to pay and therefore subject to the requirement for equal treatment;
- as from 17 May 1990 the equal treatment rule in what is now Article 141 of the European Economic Community (EEC) Treaty (which has direct effect) operates to amend pension scheme rules so as to eliminate the discriminatory effect of different normal retirement ages;
- Article 141 does not though apply to periods of service before 17 May 1990 for which different normal retirement ages can still apply;
- (subject to the following point) it is not permissible to level down benefits accrued from 17 May 1990. Men need to enjoy the lower normal retirement age of their comparable female colleagues;
- amendments can though be made so that benefits are levelled down for future service.
The period between 17 May 1990 and the date on which benefits are equalised by amendment (the effective date of equalisation) is commonly referred to as "the Barber window". The consequence of the three cases referred to was that for the duration of the Barber window male employees who were members of a scheme accrued a pension entitlement on the basis of an earlier normal retirement age than that which applied to their service before 17 May 1990.
The adverse financial consequences of these decisions were compounded for employers in two further respects.
Firstly, the courts have found steps taken to amend scheme rules ineffective where those steps did not comply strictly with the terms of the scheme's amendment power.
Secondly, the Revenue requirement that all pension benefits had to be taken at the same time meant that members were able to access benefits which they might not otherwise have been able to but for employer or trustee consent. Those consent requirements were, in practice, nullified by the Barber decision. This had the potential to be a particularly serious issue for schemes that allowed early retirement from a particular age (usually 60) with consent but then without reduction. The Foster Wheeler Pension Plan was one such scheme and the consequence of this opportunity for members added a third to the cost of the ongoing deficit taking it to approximately £120 million.
Foster Wheeler – issues arising
In the Foster Wheeler case there was a further attempt by the claimant (the company) to persuade the court that equalisation had been achieved at an earlier date than the deed that formally recorded the change to normal retirement age.
The second and key question in the Foster Wheeler case was whether, as had been suggested in a court of appeal case called Cripps (2007) in the context of a scheme wind-up, split pensions would be possible. The claimant argued in favour of split pensions. Split pensions would see the benefits accrued by reference to a normal retirement age of 60 being paid at that age and benefits accrued by reference to a normal retirement age of 65 being paid at that age.
Both of the key arguments for the claimant failed.
The judge decided that the estoppel argument – which relied on announcements and booklets issued to members being effective to raise the normal retirement age at an earlier date – should not succeed. Distribution of the material appeared too random to conclude that all or even most of the members had received it. In any event, something more than passive receipt of that material was needed to show that members accepted that a rule change had occurred.
The judge decided that the argument in favour of split pensions could only succeed if that result was required as a consequence of European law regardless of the rules of the scheme. Having considered the relevant case law he decided that it did not impose such a requirement. The Barber principle required schemes to equalise benefits but provided they did so appropriately, how they equalised was a matter for them. It was accepted by all parties in the Foster Wheeler case that effective amendments to the scheme had been made in 1993 which were Barber-compliant and the judge therefore concluded that there was no justification for imposing a split pension regime.
The company has been granted leave to appeal.
- Equalisation by estoppel looks an increasingly difficult argument to run successfully. The Courts' continuing reluctance to use that principle to avoid equalisation problems may soon see it fall into disuse.
- On the split pensions issue, the case will be an unwelcome surprise to some and a disappointment to many who may have been hoping that the split pension route offered some mitigation in cost terms particularly in cases where equalisation was effected later than was intended;
- Trustees and sponsors will want to check their scheme rules. Schemes which retained a company consent requirement in their early retirement rule in the belief that this might control the cost of Barber equalisation for members retiring without reduction at age 60, will need to consider the implications of this decision urgently. Subject to the outcome of any appeal, past practice will need to be reviewed to ensure that it is consistent with the decision in the Foster Wheeler case.
- With consent requirements overridden by Barber rights, schemes with rules like that considered in the Foster Wheeler case will, based on the court's decision, have to pay members their full pension unreduced at age 60. This will add significantly to the liabilities and, to the extent that it has not previously been recognised:
- will need to be factored into the next valuation. (For schemes about to embark on their second Scheme Specific Funding valuation, this will compound difficulties likely to be faced in that process in the current economic conditions);
- given the sums potentially at stake, schemes between valuations may want to look at whether a separate demand (for additional funding) or earlier valuation is called for;
- where clearance applications are contemplated, the additional liabilities associated with the Foster Wheeler decision could affect the level of mitigation trustees might be looking for.
- Schemes with unreduced early retirement with consent from ages below 65 may want to amend their rules to remove the unreduced benefit in respect of future service not withstanding the prospect of an appeal. This may particularly be the case for the larger schemes although the additional publicity it might bring to the issue may be an inhibitor.
This analysis may contain information of general interest about current legal issues, but does not give legal advice.