In the case of Foster Wheeler, the Court of Appeal yesterday provided some helpful guidance on how defined benefit pension schemes can effectively equalise their pension benefits if the scheme rules do not contain effective provisions to help resolve this issue.
The case concerns the equalisation of pension benefits as a result of European sex discrimination law. The ECJ case of Barber (and subsequent case-law) established that, for service from 17 May 1990, men and women must accrue benefits by reference to the same normal retirement date (NRD). Prior to this, it was common for unequal NRDs to apply – so in many schemes there had been NRDs of 60 for women and 65 for men.
From 17 May 1990 until the date that the scheme is amended to comply with Barber (which the Foster Wheeler scheme did in 1993), all benefits have to be “equalised up” – i.e. men had to accrue benefits for that period by reference to the more generous NRD of 60. This period is commonly known as the Barber window. This means that members would have different NRDs for different periods of service – see chart – known as “mixed NRDs”.
The question that the Court of Appeal had to consider was how the Foster Wheeler Pension Scheme was required to pay benefits to these “mixed NRD” members if:
- they choose to retire between those dates (i.e. between 60 and 65); and
- there was no specific provision in the pension scheme which dealt with the situation.
Three options were considered:
- Payment in full of all benefits at the early retirement date (with no reduction for early payment);
- Payment of all benefits but with an early retirement reduction applying to the NRD65 rights; or
- Payment of split pensions – i.e. not allow the member to take their NRD65 rights until they reached 65 (but allow them to take their NRD60 rights earlier).
High Court decision
In the High Court, the judge decided that option 1 (payment in full) was applicable. The judge decided that he should apply an approach of “minimum interference” with the scheme’s rules. On that basis, he said that benefits should be provided under the early retirement rule in the scheme but as the early retirement rule contained a requirement for the consent of the employer, that consent requirement would have to be disapplied.
This also meant that no actuarial reduction factor would apply (because the rule until 2003 did not provide for one and the employer could no longer require one as a condition of giving consent) – so mixed NRD members could take their whole pension at age 60 with no reduction for early receipt (i.e. as if it had all been accrued with an NRD of 60).
This solution made the minimum amendments to the textual rules of the scheme, but had a substantial affect on the benefits to which members were entitled.
For discussion on the implications of the High Court’s judgment see EPB bulletin: 12 December 2008.
Court of appeal decision
The Court of Appeal decided that any of the three options were feasible and then went on to set out the criteria for deciding which solution was appropriate, before applying those criteria to the specific facts of the case.
The guiding principles that they applied were:
- that the Court should, where possible, give effect to Barber rights by adhering to the provisions of the scheme in preference to some other approach. This was consistent with the principle that employers and trustees had discretion as to how to implement Barber rights and their choices should be followed;
- if departure is required from the scheme rules, then it should, so far as practicable, represent the “minimum interference” with the scheme rules;
- in determining what “minimum interference” is, regard must be had to substance as well as form – so not just the extent of the textual amendment but also the substantive effect of the amendment so adopted.
In applying these criteria, the Court of Appeal overturned the High Court’s decision. The Court of Appeal said that the High Court’s decision had failed to comply with the “minimum interference” criteria because the substantive effect of the judge’s solution was to provide a windfall benefit to mixed NRD members far in excess of their Barber rights – and the windfall element was the “fatal flaw” in the solution adopted.
Looking at the remaining options, the Court of Appeal determined that adapting the early retirement rule in the scheme that applied to deferred members in a manner which permitted payment of all benefits but with an early retirement reduction applying to the NRD65 rights was the method which provided minimum interference for these purposes – both in form and in substance.
However (despite the substantial interference resulting to the scheme rules which would have been needed), the Court of Appeal also indicated that it would have still preferred the alternative split pensions route to the first instance “windfall” route.
The Court of Appeal also commented that it was preferable for parties in future cases to resolve similar disputes “without recourse to the courts”. Lloyd LJ said that “parties should not normally need to come to court, once the relevant principles have been established”. Presumably this is intended to indicate that the Court of Appeal’s judgment now provides the necessary guidance on the “relevant principles”.
This is a helpful decision for employers and trustees in that it provides clear guiding principles for determining how to give effect to Barber rights in circumstances where the scheme rules do not have specific provision.
The recognition of the importance of substance over form when considering how inadequate scheme rules should be modified to give effect to those rights indicates that, in general, unintended windfall benefits should not result.
However, the solution chosen by the Court of Appeal was dependent largely on the specific facts of the case – so employers and trustees will need to consider their own schemes carefully.
It is also interesting to note the Court of Appeal’s comments that providing windfall benefits to mixed NRD members in excess of their Barber rights was “unfair to the company and potentially unfair to other members”. This suggests that courts construing scheme rules and trustees exercising their powers in the future may have to also consider the interest of the employer and not just scheme members. This is another clear move away from the notion that trustees should be mainly concerned with looking after the interests of the scheme members and should ignore the interest of employers, unless this potentially has an adverse effect on members.
We have examined the scope of trustees duties to employers in a previous client seminar and a copy of the accompanying paper is available on request. Please email Magda Flynn if you would like a copy.