This article was first published on Lexis®PSL Pensions on 11 July 2014.
Pensions analysis: David Hosford, a partner specialising in Pensions at Pitmans, analyses the government's review of survivor benefits in occupational pension schemes and suggests that ultimately the law will be extended, so beginning funding for additional survivors' benefits now may be a sensible step with an eye on the longer term.
Research and analysis: Occupational pension schemes: review of survivor benefits, LNB News 27/06/2014 84
The government has published a review which investigates differences in benefits provided in occupational pension schemes to different groups of survivor following the death of the scheme member. The review, which is a requirement of the Marriage (Same Sex Couples) Act 2013, s 16, also considers the costs and other effects of eliminating those differences.
What did the Department for Work and Pensions (DWP)/HM Treasury joint review highlight in terms of the inequality of survivors' benefits between same sex and opposite sex survivors?
The review highlighted significant differences in the approach taken by the public sector and private sector to benefits for opposite sex survivors, with the public sector basing these on benefits earned by the member after 1988, and the vast majority of private sector schemes providing benefits sufficient to comply with the law and no more. Particularly in the private sector, there are significant differences as to how different schemes provide benefits for opposite sex survivors, and the basis for calculating a survivor's pension (whether for same sex or opposite sex) varies from scheme to scheme depending on the particular benefit design.
What do you foresee will be the main challenges and risks facing the government in preparing its response to the review?
The review highlights the anticipated additional liabilities flowing from alternative approaches to the provision of survivors' benefits. In the private sector, sponsoring employers have been struggling to contain deficits in funding defined benefit (DB) (and particularly final salary) benefits, resulting in closure of DB schemes to new entrants or, increasingly, to both new entrants and any further benefit accrual with benefits provided on a defined contribution (DC) basis instead.
There has also been considerable lobbying for greater flexibility to be introduced in the legislation to allow a benefit design which gives a fairer share of risk between employer and member (eg defined ambition/collective DC) and also lobbying to allow guarantees introduced by legislation (eg as to minimum levels of pension increase once in payment to be reduced). The public sector has followed suit with changes to retirement ages and introduction of CARE as a benefit design.
Against this context of employers seeking to manage the cost of pension provision by reducing the level of guaranteed benefits, extending the current guarantees in respect of survivors' benefits seems a step back. At the same time there has been a rapid and significant shift in society's attitudes to same sex relationships and so, from a political perspective, I suspect the desire to eliminate inequality will prevail over concerns about imposing additional cost.
From a risk perspective, leaving the law as it stands--particularly the temporal limitations on what historic benefits need to be available to same sex survivors--is likely to continue to be challenged and reference to the European Court seems a possibility, notwithstanding the Employment Appeal Tribunal's decision this February in Innospec Ltd and others v Walker  All ER (D) 64 (May) that the backstop did not breach the terms of the EU Equal Treatment Directive 2000/78/EC.
The review also highlights that absent levelling up survivors' benefits to the most favourable (typically those of an opposite sex widow so that the same benefits are provided for male and female survivors regardless of whether they are in a same sex or opposite sex relationship), there is potential for particular groups to say that they are being treated less favourably, so measures half way between where the law stands today and this gold standard are not guaranteed to be free from the risk of challenge.
Has the publication of the review changed how legal advisers may now advise their clients?
The review suggests that two-thirds of private sector schemes have provided the statutory minimum benefits for same sex survivors. This is a liability weighted percentage, reflecting that more of the biggest schemes have gone beyond the statutory minimum. However, experience of smaller schemes is that more like 90% provide only statutory minimum same sex survivors' benefits.
In terms of legal advice, many clients will still wish to avoid increasing liabilities unless legally required to do so, and will not wish to change this stance, but advice is likely to be caveated that there is a real prospect that this will be looked at again and ultimately the law will be extended, in which case grasping the nettle now and beginning funding for additional survivors' benefits may be a sensible step with an eye on the longer term.
What should lawyers take from the Review, in terms of brushing up on the law and advising clients?
An interesting point concerns the different strands of discrimination law which arise--sex equality and equality in same sex and opposite sex relationships. The sex equality laws include a firmly enshrined temporal limitation such that it is only benefits earned after 17 May 1990, when the Barber decision was made, which have to be equal between the sexes (see Barber v Guardian Royal Exchange C-262/88,  2 All ER 660). The same sex/opposite sex debate also focuses in part on a temporal limitation, and if the argument is won that no temporal limitation should apply in that context, then that could be used to try and attack the temporal limitation on sex equality claims. The law will continue to evolve.
What are your predictions for future developments?
If I had to make a prediction, it would be that the law would change to require a 1988 temporal limitation such that all benefits built up after then would have to be available to survivors regardless of whether they are male or female or in a same or opposite relationship, but that pre-1988 benefits would remain outside of scope, thereby ensuring greater equality for same sex survivors, without opening the door to attack the 1990 backstop for sex equality given the vast costs that would flow from the sex equality cut-off being removed.