The Court of Appeal yesterday issued its judgment in Foster Wheeler v Hanley. In allowing the company's appeal against the original High Court decision, the Court of Appeal held that the implementation of Barber principles fell to be considered on a scheme-specific basis. It also held that, where a complete solution to equalisation issues cannot be found in scheme documentation, the equalisation mechanism adopted should involve the "minimum interference" with the substance of the scheme's provisions.

Broadly, for the Foster Wheeler scheme, this means that members with pensionable service attributable to different normal retirement ages (NRAs) (and who wish to retire between the ages of 60 and 65) are entitled to receive a single pension; but the element of pension which is based on an NRA of 65 can be treated as a deferred benefit and reduced for early payment.

Equalisation: principles

The European Court of Justice cases of Barber and Coloroll established that:

  • It was unlawful sex discrimination to have unequal NRAs for men and women; and
  • In respect of the period between the Barber judgment (17 May 1990) and the date when NRAs were actually equalised in any particular scheme, that scheme had to be administered as if the more favourable (i.e. lower) NRA applied to both sexes. This became known as the "Barber window".  

Pre-Barber, the typical NRA structure was to have an NRA of age 60 for women but an NRA of age 65 for men. Following Barber, many schemes then chose to level down NRAs so that both sexes had an NRA of age 65. Barber and Coloroll had the following implications for such schemes:

  • On retirement, pensions for men had to be based on:
    • An NRA of age 65 for pre-Barber window pensionable service;
    • An NRA of age 60 in respect of pensionable service completed during the Barber window; and
    • An NRA of age 65 in respect of post-Barber window pensionable service.  
  • On retirement, pensions for women had to be based on:
    • An NRA of age 60 for pre-Barber window pensionable service;
    • An NRA of age 60 in respect of pensionable service completed during the Barber window; and
    • An NRA of age 65 in respect of post-Barber window pensionable service.  
  • However, the implementation of Barber policies was left to individual schemes; there was no prescribed method of compliance and, hence, no universal approach to equalisation issues.

The issues in Foster Wheeler

Pre-Barber, the Foster Wheeler scheme had unequal NRAs: 65 for men and 60 for women (in the language of the Court, they had "mixed NRAs"). Following Barber, the scheme sought to equalise NRAs by levelling down to an NRA of 65 for both sexes. The scheme closed the Barber window in 1993. Up until 2003 the Foster Wheeler scheme's rules provided for an unreduced pension on early retirement at age 60 with the employer's consent.

The employer and trustees chose to implement their Barber policy by the employer consenting to early retirement at age 60. However, changing financial circumstances prompted the employer to rethink its approach to granting early retirement which, in turn, left a question mark over how the scheme should equalise benefits when the scheme rules do not provide specifically for pensions based on split service.

In addition, the earlier cases of Trustee Solutions v Dubery and Hodgson v Toray Textiles seemed to establish that both men and women had an unrestricted right to retire at age 60 in respect of benefits accrued during the Barber window. In light of this, the trustees of the Foster Wheeler scheme decided to apply to the High Court for directions.  

In the High Court, three options were considered:

  1. Pension could be taken as a single tranche without any reduction for early retirement (other than that accrued after a rule change in March 2003);
  2. Pension should be taken as a single tranche, but subject to reduction for pension referable to an NRA of 65;
  3. Pension could be taken in more than one tranche (members would take that part of their pension which accrued by reference to an NRA of age 60 at that age, and the portion of pension accrued by reference to an NRA of age 65 at age 65 - the so called "split pension" solution).

The High Court concluded that members with mixed NRAs could take the whole of their pension, unreduced, at age 60 (option 1), without employer consent, notwithstanding the requirement for the employer to consent to early retirements in the scheme rules.

Essentially, the High Court held that a requirement for employer consent to early retirement in the scheme's rules was overridden by the Barber principle in respect of all pensionable service, on the grounds that in the Court's view this involved the least formal change to the scheme's rules.

The Court of Appeal's decision

The Court of Appeal overturned the High Court's decision that the scheme had to allow members with mixed NRAs to take early retirement with an unreduced pension in respect of all service.

In reaching its conclusions, the Court of Appeal considered a number of key principles, including:

Equalisation should be imposed with "minimum interference"

The Court followed and elaborated on the principle set out in Bestrustees v Stuart, to the effect that pension benefits in these circumstances should be delivered in a way which involved "the least interference with the modifications to the scheme for which the company and trustees had opted when the Barber window closed".

The concept of "minimum interference" requires consideration to be given to the substantive effect of any amendment imposed to give effect to equalisation principles. The Court noted that, under the High Court judgment, affected members were given rights far in excess of their basic entitlement under European law and that the effect on the company had also been significant, in that its right to consent to early retirement was taken away. The Court of Appeal was of the view that, by conferring a windfall on members with mixed NRAs, the High Court's solution contained a "fatal flaw".

The Court stated that it had to compare possible options and consider in relation to any particular option whether equalisation could be given effect in some other way, involving less interference with the rights of any party. Hence, the preferred option in this case was to use the early leaver rule, instead of the early retirement rule.

A scheme-specific approach

The Court emphasised that equalisation solutions to schemes in a Foster Wheeler type situation will vary depending on the particular circumstances of the scheme at issue. In Foster Wheeler, the deferred pension solution was to be preferred; it may be different in relation to other schemes. In any event, "the guiding approach should be that of making the least substantive alteration to the provisions of the scheme that is compatible with the required equalisation"

Split pensions are one way of implementing equalisation, but may not be appropriate in every case

The Court of Appeal stopped short of endorsing split pensions as an automatic or universal solution to equalisation issues of the Foster Wheeler type. The split pension solution was one option which may be appropriate, depending on the circumstances of the particular scheme at issue. However, the Court did think it best to analyse affected members' rights as if he or she had two separate pension entitlements, whether or not they are to be given effect by way of a split pension.

Implications

The decision will be welcomed by employers and trustees who attempted to give effect to equalisation principles through the operation of their scheme's early retirement rule, but have since become concerned about the cost of that method. It is clear from this judgment that, where scheme rules require employer consent to early retirement, Barber principles will not necessarily override that consent requirement.

It is implicit in the judgment that, in considering whether a scheme has implemented Barber through its early retirement rule, that rule should not be considered in isolation; other rules may be significant.

The Court of Appeal endorses a scheme-specific (and, therefore, relatively flexible) approach to implementing equalisation in circumstances where there is ambiguity in scheme documents or where the employer's and trustees' policy was unclear for any other reason. It also leaves the door open to infer split pensions where appropriate.

In particular, the Court's endorsement of the concept of "minimum interference" (and its forceful dicta that this is a matter of substance, rather than form) will be a very helpful guiding principle for trustees and employers when grappling with this issue.