Background

In November last year the High Court had considered the date by which equalisation of benefits in the Foster Wheeler Pension Scheme had taken effect. It also looked at whether A-day and the flexibility to pay split pensions offered schemes a means of reducing the size of their Barber liabilities.

More detail on the background to the case can be found in our alert issued last year Beware The Implications Of Your Early Retirement Rule.

The appeal - issues arising

In the original judgment, the court decided that the effect of the European case law and the amendments made to the scheme were such that members were able to retire from age 60 with no reduction applied to any part of their pension - even that accrued by reference to a normal retirement age of 65. In reaching this conclusion, the court rejected an argument that the pension accrued by reference to different normal retirement ages could be split with each part taken separately. In consequence of the court's original decision, members were able to take the vast majority[1] of their pension unreduced at age 60 which added approximately £30 million to the scheme's liabilities.

Against this background, the company appealed the court's refusal to allow split pensions. Only the question of whether split pensions were permissible arose on the appeal, the High Court's other decisions being accepted by the parties.

Decision

The company's appeal was successful although the company's argument that split pensions were possible was not the reason for the appeal succeeding. The court decided that, on the proper interpretation of the scheme rules, members' benefits accrued by reference to a normal retirement age of 65 should be reduced if paid before that age even where so paid as part of a single pension.

In reaching this conclusion the court acknowledged that the rules did not specifically state the amount of pension a member should receive in retiring between 60 and 65 with a period of Barber service. Some departure was therefore necessary from the rules to resolve the question and the court decided that where this was necessary in order to give proper effect to the Barber decision, it should intervene in such a way as would represent minimum interference with the existing scheme provisions. In deciding what "minimum interference" was required, the court needed to consider not merely the form but also the substantive effect of the modification. The Court of Appeal therefore rejected the trial judge's solution because it gave a windfall to members imposing an unintended additional cost on the company.

Although split pensions were seen as a possible solution to this problem, ultimately the court concluded that the complexity of that approach involved a more substantial interference with the scheme provisions than was necessary and therefore justified in this case.

On the basis that a member with benefits accrued by reference to a normal retirement age of 65 was only entitled to a deferred pension in respect of that service at age 60, the court decided that the members' Barber rights could most conveniently be given effect to by treating the member as retiring early under the deferred benefit rule. Under that rule, in the Foster Wheeler Pension Scheme, benefits taken early were reduced thereby avoiding the windfall element that resulted from the trial judge's solution.

Implications

  1. The case does not help schemes which did not properly equalise benefits, but where effective equalisation has occurred the decision makes it clear that members should not be able to claim unintended benefits. The very pragmatic approach taken by the court to achieve this result will be welcomed by employers.
  2. Schemes will need to consider their own rules in order to decide how this result is achieved, the court's principle of "minimum interference" making a solution through the existing rules the preferred approach.
  3. Although a solution based on the existing rules was the preferred route, the possibility of paying split pensions is not ruled out. It is only however likely to be needed in exceptional circumstances.
  4. There is encouragement to schemes to identify the sort of pragmatic solution found in this case for themselves with the introduction of appropriate rule amendments. Resorting to the court to justify these actions is not encouraged. Not all trustees will necessarily be comfortable with that approach but for those that are, the need for a rule amendment to give full effect to equalisation within the scheme ought to be noted and taken into account when those rules are next amended.
  5. Schemes with rules similar to those in the Foster Wheeler case which have already allowed members to retire at age 60 with all of their pension unreduced may want to investigate the extent to which it would be possible to reduce those pensions on the grounds of mistake.