Equalisation has been an area ripe for litigation ever since the European Court of Justice held, in the 1990 case of Barber, that in order to comply with European sex equality legislation, it was necessary for the normal retirement ages (NRAs) of men and women under a pension scheme to be equal. The decision sounds straightforward to comply with but in practice has proven not to be, and Capital Cranfield Trustees Limited v. Beck and Foster Wheeler Limited v. Hanley are the latest in a long line of court cases concerning equalisation. They aptly demonstrate the difficulties inherent both in seeking to equalise NRAs and in administering a successfully equalised scheme. The cases explore which powers may validly be exercised in order to equalise NRAs and whether a pension can always be split (so that some is paid at the lower NRA of age 60 and the rest at the higher NRA of age 65).
Capital Cranfield Trustees Limited v. Beck
Here the Court considered whether NRAs had been equalised by means of the employer exercising its power under the scheme’s definition of NRA, to determine that NRA would be something other than the “standard” NRAs detailed elsewhere in the definition.
What was the power?
When the scheme was established in the 1970s, the NRAs of men and women were age 65 and 60 respectively. In 1993, the definition of NRA was amended to age 60 in the case of women who joined the scheme before 30 September 1992 and age 65 in the case of any other member, or “such [age] as the Employers shall determine in any particular case and notify in writing to the member concerned”. In October 1994, a member announcement to all members who had joined the scheme before 30 September 1992 advised that the “Company as sole trustee” had decided to equalise NRAs at age 65 with effect from 17 November 1994. The announcement did not operate to equalise NRAs as an amendment under the scheme’s amendment power, as it did not comply with the prescribed formalities.
Did the announcement equalise NRAs?
The Court held that the announcement did not equalise NRAs, on the basis that the power in the definition of NRA was only to be used in the “particular case” of a member (for example, on joining the scheme) and therefore not in relation to a class of members (here, all members who had joined the scheme before 30 September 1992) or all members. By construing the power more widely, one would create a power which could amend the scheme rules in regard to the important question of NRA but without complying with the safeguards incorporated in the scheme’s amendment power.
The Judge commented that even if the definition of NRA had conferred a power to alter the NRA of all members or a class of members, the announcement would still not have been an effective exercise of that power because the announcement was made by an employer in a different capacity, namely its capacity “as sole trustee” of the scheme not as an employer. Additionally, the announcement was only made by one employer, not by both of the scheme’s two employers.
The Judge also suggested that there was a “strong and persuasive” argument that the power could only be used at the commencement of a member’s employment, not to modify NRA for the future accrual of benefits by existing members (here, all members who had joined the scheme before 30 September 1992).
Foster Wheeler Limited v. Hanley
In this case, the Court was asked to interpret an early retirement rule in the context of the requirements of Barber. One of the key issues that the Court considered was whether pensions should be split (when the scheme rules did not expressly provide for this).
What did the early retirement rule say?
The case concerned ‘Mixed NRA’ members i.e. members who had accrued pension by reference to different NRAs at different periods (e.g. before and after equalisation). The scheme’s NRAs had been equalised at age 65 in August 1993 and the evidence showed that (as is often the case) female Mixed NRA members were intended to receive their benefits accrued by reference to an NRA of age 60 via the early retirement rule. That early retirement rule purported only to permit retirement before age 65 with employer consent and provided for an actuarial reduction only in respect of any period by which pension was taken before age 60 (in relation to pension accrued prior to April 2003).
It was acknowledged by the employer and the trustees that members with any pension accrued by reference to an NRA of 60 could not be prevented from taking those benefits from age 60, irrespective of consent. That was because the right to a pension from age 60 by reference to which the pension had been accrued and earned could not retrospectively be taken away or circumscribed (both because of the restrictions on the amendment power by which the equalising amendments had been made and as a matter of European law). Any woman with pensionable service before equalisation, and any man with pensionable service in the ‘Barber window’ from 17 May 1990 up to equalisation, thus had an unrestricted right to some pension from age 60. The question in relation to these members was what to do about any other pension which they had accrued by reference to an NRA of 65 (i.e. the pension accrued by men before 17 May 1990 and by both sexes after equalisation).
Could pensions be split?
It was argued on behalf of the employer that, although the rules purported only to permit a unitary pension (with all accrual coming into payment at one time), Mixed NRA members could lawfully be required to take their NRA60 pension at age 60 and their NRA65 pension at age 65. The Court disagreed, holding that Mixed NRA members were entitled to take their whole pension at age 60 (because the rules only provided for a unitary pension and the NRA60 pension could not be withheld from age 60, despite the purported consent requirement). Further, the Court held that, because of the way in which the early retirement rule had been drafted, Mixed NRA members could take all their accrued benefits from age 60 without any actuarial reduction (save in respect of NRA65 pension accrued from April 2003, as the rules had been amended to allow such a reduction).
The rationale for the Court’s decision was that the European Court of Justice had conferred a wide discretion on pension scheme trustees to determine how equalisation should be implemented. It was not the case that allowing NRA60 and NRA65 benefits to be taken separately was the only proper method of implementing the equal pay principle. One therefore had to give effect to what had actually been done to equalise the scheme. As a matter of construction of the rules under English law, having regard to the restrictions on the amendment power by which equalisation was effected, female Mixed NRA members retained a right to take their NRA60 pension from age 60 without consent; and with it all the rest of their accrual, because the rules only permitted a unitary pension. European law merely required male Mixed NRA members to be afforded the same rights in relation to their ‘Barber window’ accrual. European law did not require a worsening of the rights otherwise provided by the rules for female Mixed NRA members (as a matter of construction of the rules entirely under English law). The rules of the particular pension scheme needed to be modified no further than was necessary to comply with Barber. This could be achieved by disapplying the employer consent requirement under the scheme’s early retirement rule for male Mixed NRA members just as that consent requirement was disapplied for female Mixed NRA members. It was not necessary to impose a split pension regime.
What are the implications of the Capital Cranfield and Foster Wheeler cases?
Both cases warrant consideration by employers and trustees. An appeal in Foster Wheeler was heard by the Court of Appeal on 17 and 18 March 2009, so it would be prudent to wait until the outcome of the appeal is known before taking any action in reliance upon the High Court’s decision. However, some points of note include:
- The Capital Cranfield case will increase scheme liabilities if it means that an attempt to equalise NRAs using a power ‘inappropriately’ was unsuccessful. Furthermore, the decision may call into question other scheme-wide changes purported to have been made in accordance with a power or discretion, rather than using an amendment power. For example, the purported closure of a scheme to new members in reliance upon a power under an eligibility rule may not, in light of Capital Cranfield, have been effective.
- If the current practice of a scheme is to pay split pensions, the Foster Wheeler decision may also increase scheme liabilities (if NRA60 and NRA65 benefits can be required to come into payment at the same time) unless the rules provide for all early retirement benefits to be reduced on a cost neutral basis. Even if a reduction does apply, a requirement to pay the whole of a pension at age 60 may affect the scheme’s cashflow to some extent.
- If a scheme’s liabilities will increase, trustees should take account of this if the scheme is undergoing a valuation. Outside of the triennial valuation process, trustees could seek to demand increased employer contributions. The decisions increased the Capital Cranfield scheme’s liabilities by around £1 million and the Foster Wheeler scheme’s liabilities by up to about £30 million.
- If a scheme offers unreduced early retirement pensions and relies upon a requirement for consent to control the number of unreduced early retirements, there is a risk that consent cannot be withheld in respect of the NRA65 benefits of Mixed NRA members and that in consequence those benefits will be payable at 60 as of right. The employer should consider amending the early retirement rule to allow early retirement pension attributable to future service to be reduced.
- The Foster Wheeler employer and trustees agreed that the Court’s finding meant that it was not possible to change members’ benefit entitlements by introducing a new rule at this stage to allow accrued pensions to be split so as to deny Mixed NRA members access to their NRA65 benefits along with their NRA60 benefits. This point was not considered by the Judge but it is likely that he would have reached this conclusion. It would be possible to amend rules to permit pensions to be split in payment where Mixed NRA members wanted this, provided that this was an additional alternative for such members and not simply an attempt to take away an accrued right to have all accrual unreduced from age 60.
- It is not clear how Foster Wheeler will apply to schemes in a Pension Protection Fund (PPF) assessment period. Guidance issued by the PPF prior to the case on dealing with Barber window benefits suggests that benefits may be split or may be paid at age 60. Once the outcome of the appeal is known, we expect that the PPF will update its guidance as necessary. If the PPF discards the split pension option, Foster Wheeler may reduce the normal pension age (the earliest age at which a member has the right to draw his benefits on an unreduced basis) of members for the purposes of PPF compensation, thereby potentially increasing the compensation to which they are entitled. This should be borne in mind when an audit of the scheme’s admissible rules is carried out before/upon entering a PPF assessment period.