LIGHTENING THE LOAD IS RETROSPECTIVE 'LEVELLINGDOWN' OF BENEFITS A SAFE WAY TO EQUALISE?
26 OCTOBER 2017 London
Table of Contents
Benefit equalisation might just be about to
1. Equalisation why and how
take a much-needed haircut. In its recent decision in Safeway the Court of Appeal has
Why equalise? How to (and how not to)
opened up a new 'Barber Window of opportunity' by questioning the longestablished principle that benefits cannot be levelled-down retrospectively in order to align male and female retirement ages.
2. The Safeway case
Equalisation and the 1990s Round One the High Court Challenging assumptions the
Court of Appeal
3. What EU law actually requires
The recent decision of the Court of Appeal in Safeway v Newton has thrown open the possibility that a principle to which the pensions industry has subscribed for many years namely that equalisation cannot properly be achieved by retrospectively increasing retirement ages to members' detriment may not be as wide-ranging or categorical as has long been thought. The court is
Obligation to equalise "Levelling up" and "levelling down" How far to go Overall objective
4. What's not so clear
Defeasible and indefeasible rights Smith v Avdel Systems misconstrued?
now, in order to resolve what it considers to be an
uncertainty of EU law, referring to the Court of Justice of the European Communities the question of whether equalising in this way is actually unlawful. If the CJEU decides that in Safeway's case these steps were in fact lawful, the outcome may then be relevant to those schemes which attempted to
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equalise retrospectively by "levelling down"
members' benefits (by raising retirement ages) but were subsequently advised, as was widely understood at the
time, that this was impermissible as a matter of European law.
1. Equalisation why and how
Why equalise? By way of brief background, the European Court of Justice (as it was then known) decided in the seminal case of Barber v GRE that from 17 May 1990 the effect of Article 119 of the Treaty of Rome (again as it was then called), and its requirement of 'equal pay for equal work', was that men and women had to be treated in the same way in respect of their pension rights. It had long
LIGHTENING THE LOAD...
been customary at the time for occupational pension schemes in the UK to set their normal retirement age, or NRA, by reference to the state pension age 65 for men, and 60 for women. In practical terms the judgment in Barber meant that men automatically began accruing pension benefits by reference to the lower (and more generous) female NRA from 17 May 1990. As a consequence women became entitled to continue accruing benefits (again calculated by reference to an NRA of 60) right up to the male retirement age of 65, instead of having their benefits automatically brought into payment from age 60 as was often previously the case.
How to (and how not to)
A period of great legal uncertainty then followed as the judgment in Barber left as many questions unanswered as it had resolved. It was not until September 1994, in a series of decisions including the well-known case of Coloroll (and sometimes referred to colloquially as the 'six-pack'), that the ECJ provided the clarifications necessary for schemes to formally equalise benefits as between men and women. By far and away the most common measure then taken was to prospectively amend the scheme so that, from the date of the amendment onwards, women's NRAs were raised to 65 (and benefits "levelled down" as a consequence). Such a step of formally implementing equality as between NRAs is known as "equalisation", whilst the period between 17 May 1990 and the date on which benefits are equalised is commonly referred to as the "Barber Window".
Whilst many schemes had therefore awaited the outcome of Coloroll et al before attempting to equalise, others took steps to introduce equality in the meantime whether on an interim basis, or (in what was perhaps quite a brave move given the climate of uncertainty at the time) definitively. Some for example attempted to
Introducing James Rickards...
We are pleased to announce that James Rickards has joined our pensions disputes team. James is a barrister by training and a well-known 'senior junior' who previously practised from the leading set known as Outer Temple Chambers. He has over a decade of experience in pensions litigation and appeared in a number of recent leading cases including Carrington Wire and Industrial Acoustics Ltd v Crowhurst. In addition to acting as the standing counsel to the Determinations Panel of the Pensions Regulator for many years James has appeared (both led and unled) in cases spanning rectification, construction and the jurisdiction of the Pensions Ombudsman. He has been ranked as a leading junior counsel in the directories for a number of years with market sources lauding his "tremendous tactical knowledge" and "commercial acumen".
equalise by using the power of amendment to raise women's NRAs
to 65 (for past service as well as future service) such that there was no inequality during the Barber Window. Others were
permitted by their rules to make amendments simply by announcement, generally in conjunction with a later deed of
amendment to give effect to the terms of what had initially been communicated to members. These schemes, through the use
of a retrospective amendment, therefore attempted to close the Barber Window (retroactively) before it had even opened.
However, in the September 1994 judgment of the ECJ in Smith v Avdel Systems (one of the half-dozen accompanying, and decided on the same day as, Coloroll), it was held that the use of a retrospective amendment to "level down" benefits that members had already earned offended EU law even if the scheme's own power of amendment ostensibly permitted retrospective change, as many did. Since then the received wisdom within the pensions industry has been that retrospective attempts to equalise are invalid to the extent they attempt to raise women's NRAs, whatever the scheme's own power of amendment might suggest.
And this, for precisely 23 years and 7 days, was the generally-accepted position. Until now...
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2. The Safeway case
Equalisation and the 1990s
The Safeway Pension Scheme, sponsored by the well-known supermarket chain (re-branded as Morrisons just over a decade ago but anticipated to be making a comeback to British high streets during 2018), was one such scheme that took preliminary steps to equalise benefits before Smith v Avdel Systems, and further steps to formalise the closing of the Barber Window some time later. It did so by a combination of steps, clearly (it would seem) permitted by its retrospective power of amendment.
Safeway Pension Scheme power of amendment (extract)
"...may exercise such powers so as to take effect from a date specified in the [deed of amendment] which may be the date of such deed or the date of any prior written announcement to members of the alteration or addition ... so as to give the amendment or addition retrospective ... effect"
IS RETROSPECTIVE 'LEVELLING-DOWN' OF BENEFITS A SAFE WAY TO EQUALISE?
These steps included (i) announcing to members during September 1991 that as from the coming December female NRAs would be increased to 65, and (ii) formalising that change via an alteration to the scheme's rules, during May 1996, with retrospective effect on and from 1 December 1991. Since that time (in fact since December 1991), right through to the present day, the Safeway Pension Scheme has been administered on this basis.
Round One the High Court
In the High Court early last year, Safeway sought a declaration that its scheme had equalised benefits and closed the Barber Window (by raising female NRAs to 65 and thereby "levelling down") back in 1991. Broadly speaking it argued that the scheme had been amended by way of the 1991 written announcement. Alternatively, Safeway continued, if the written announcement was not effective, then (as a matter of EU law) the May 1996 deed of amendment was.
The judge, however, disagreed with Safeway on both counts and most relevantly confirmed that even if a scheme had a retrospective power of amendment it could not be used to "level down" accrued benefits. He cited and followed the 2006 decision of the High Court in Harland & Wolff in reaching this conclusion. His view was that the position under EU law was acte clair or "clear enough", such that no further clarification from the CJEU was necessary. The High Court's position in Safeway, as with that in Harland & Wolff a decade previously, was considered by the vast majority of legal commentators to be correct and an accurate implementation of the over-arching requirements of EU law to equalise pension benefits as between men and women.
Challenging assumptions the Court of Appeal
On appeal, Safeway challenged the High Court's decision on two distinct grounds: whether it was possible to amend the scheme by announcement alone, and whether (if not) it was possible to retrospectively equalise (by deed) by increasing women's NRAs and thereby worsening their benefits to align them with those of men.
The Court of Appeal agreed with the High Court regarding the construction of the scheme's power of amendment, namely that it could not be exercised simply by way of the written announcement explaining to members that, with effect from 1 December 1991, the NRA of both sexes would be 65. The reasons for the court holding that the scheme's power of amendment could only be exercised by deed (rather than just by a written announcement) turned on the usual principles of construction, and are not of much wider interest. More notably, however, if Safeway had by contrast succeeded on this point, then there would have been no need for the Court of Appeal to consider its (Safeway's) second ground of appeal.
But as it happened this was indeed necessary; and it is the Court of Appeal's decision on this second ground of appeal that has the potential to upset an applecart that has lain happily undisturbed for in excess of 23 years. That second ground of appeal involved Safeway challenging the long-held EU principle (stemming from Smith v Avdel Systems) that benefits cannot be "levelled down" retrospectively. And, to a certain extent, it succeeded. Whilst the Court of Appeal had no jurisdiction to overrule an over-arching principle of EU law, it was persuaded that there was sufficient uncertainty about the point in issue namely whether Smith v Avdel Systems did in fact lay down such an allencompassing principle to refer it back up to the CJEU for a decision.
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3. What EU law actually requires
The Court of Appeal judgment sets out some useful reminders of various uncontentious aspects of EU law, insofar as they apply in the pensions context, that are worth repeating here.
Principle 1: obligation to equalise
Article 119 of the Treaty of Rome (also formerly known as Article 141 of the Treaty of Amsterdam (or simply "Article 141 EC"), and now referred to as Article 157 of the Treaty on the Functioning of the European Union or just "Article 157 TFEU") makes it unlawful for a pension scheme to provide unequal benefits as between men and women (something which can most easily be brought about by their having different NRAs), in respect of benefits accrued on/after 17 May 1990. There is an attendant obligation on employers and trustees to give effect to this principle; and this, in turn, is now backed up by the provisions of our own domestic legislature (contained in sections 62 to 66 of the Pensions Act 1995 of which, more later).
Principle 2: "levelling-up" and "levelling-down"
Employers and trustees are permitted to take measures in accordance with the rules of their scheme to equalise benefits for future service by "levelling down". This generally involves increasing the NRA of women (in respect of benefits not yet earned), but from a more conceptual standpoint means 'decreasing the rights of the advantaged class, to the level enjoyed by the disadvantaged class'. However, in relation to the period from the opening of the Barber Window (being the date of the Barber
LIGHTENING THE LOAD...
judgment, 17 May 1990) until the taking of those measures (i.e. the closure of that Barber Window), employers and trustees are required to confer the same rights upon the disadvantaged class as are already enjoyed by the advantaged class (commonly known as "levelling up"). In practice this has involved giving men an effective NRA of 60 whilst also allowing women, as men were already able, to continue earning benefits until age 65.
Principle 3: how far to go
The benchmark for ascertaining the rights of 'the advantaged class' (to which the rights enjoyed by 'the disadvantaged class' are to be increased during the period for which the Barber Window is open), is to be found in the governing provisions of the scheme in question.
Principle 4: overall objective
The objective of Article 119 is to give the disadvantaged class the same rights as the advantaged class. It is not, by contrast, concerned with giving the advantaged class more generous rights then they enjoyed in the first place (or, by extension, extending the new rights of the disadvantaged class to a level in excess of those originally enjoyed by the advantaged class). It is from this principle that the crucial part of the Court of Appeal's reasoning in Safeway, and the potential upsetting of the pensions industry's 23-year-old applecart, then derives.
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4. What's not so clear
Matters now get a little esoteric, but please bear with us...
Defeasible and indefeasible rights
In its judgment, the Court of Appeal drew an important distinction between "defeasible" and "indefeasible" rights.
Defeasible rights are those which are subject to being changed retrospectively (in other words, even once earned, they can be taken away). In the Safeway scheme any right or benefit (e.g. the NRA of members) was always, pursuant to the scheme's power of amendment, subject to the possibility of retrospective change (so long as a written announcement had first been issued) they were, accordingly, merely defeasible rights.
By contrast, if a right such as the NRA of members is not susceptible to retrospective amendment (such that, having accrued to the member, it cannot then be taken away) then it is an indefeasible right or 'cast in stone'. Whether a right is sufficiently entrenched to become indefeasible is a question that depends on the precise terms of the relevant scheme's power of amendment (and any statutory overlay such as section 67 of the Pensions Act 1995, which of course did not exist at the time that most schemes were equalising benefits during the mid-1990s).
The Court of Appeal took the view that it was no surprise that the obligation under Article 119 (to equalise benefits as between males and females) operated to protect rights that were indefeasible, i.e. which were not susceptible to the retrospective exercise of a power of amendment. Conversely, it expressed some surprise that rights which were merely defeasible were protected by Article 119.
Given the existence of a retrospective power of amendment in the Safeway scheme (and the fact that the earlier announcement made to members about the forthcoming change to their NRAs satisfied the requirements of that power), the Court of Appeal felt that it was potentially at odds with principles of EU law if men were given an indefeasible right to an NRA of 60 during the Barber Window and therefore placed in a better position than women whose rights to an NRA of 60 were merely defeasible. Moreover, once men were given an indefeasible right to an NRA of 60 women could also make a 'piggyback' claim for an indefeasible right to that same NRA, given that this was now what their male counterparts enjoyed. This further improvement of the benefits attributable to those who were already 'the advantaged class' clearly gave the Court of Appeal some difficulty.
Smith v Avdel Systems misconstrued?
It was these concerns that prompted the Court of Appeal to look closely at the ECJ case law which, according to the High Court, established that a retrospective power of amendment could not be exercised to reduce the 'past service' NRA of women, even though such rights under UK law were merely defeasible ones. In this respect it queried whether Smith v Avdel Systems does indeed establish a principle so categoric that it requires defeasible rights to be rendered indefeasible where the power exists to raise NRAs (and therefore essentially reduce benefits) in respect of past service.
Essentially the Court of Appeal felt it was a real possibility that Smith v Avdel Systems (and related cases such as Coloroll) were decided on the basis that there was no power in the relevant schemes to retrospectively amend benefits, in direct contrast to the situation pertaining under the Safeway scheme. The Court of Appeal was therefore able to conclude that the case law which had constrained the High Court was in fact ambiguous as to the critical question, namely whether EU law turned defeasible
IS RETROSPECTIVE 'LEVELLING-DOWN' OF BENEFITS A SAFE WAY TO EQUALISE? rights into indefeasible ones (and so made both classes of beneficiary better off than they had been before) when, ostensibly, requiring nothing more than the equalisation of benefits as between those two classes. Back to top
In spite of its ground-breaking potential, it must be open to question precisely what impact a finding in favour of Safeway by the CJEU that retrospective "levelling down" is permissible where mere defeasible rights are concerned would have in practice. Many schemes did not permit retrospective amendments of the kind at issue in Safeway, and even those that did may well two decades on have hard-coded the "levelling up" of Barber Window benefits into their rules, most likely during a subsequent re-write or consolidation of their trust deed. The relevance of the issue is probably most pronounced for schemes that attempted to equalise retrospectively but saw their approach rendered invalid for 'past service' benefits, and which have since relied on overriding principles of EU law (rather than any kind of express provision in their rules) to justify the requirement that "levelled-up" Barber Window benefits be based on an NRA of age 60. Such schemes may now be able to reopen the basis on which Barber Window benefits have historically been provided. This, however, would undoubtedly be met with considerable resistance from members, particularly if (as is likely) the vast majority of such schemes have not (unlike the Safeway scheme) been administered on the basis that benefits were "levelled down" for the Barber Window. Such opposition would we think be likely even if it were only future payments that schemes in this position sought to reduce, with 'a blind eye being turned' to past overpayments. In this respect cogent estoppel-related arguments could well be raised by members in order to try and preserve the status quo, to say nothing of the potential impact of sections 62 to 66 of the Pensions Act 1995. These provisions operate to "level up" all benefits from any scheme that had not, by 31 December 1995, incorporated an 'equal treatment rule' into its governing provisions but are something which the Court of Appeal expressly declined to consider at this stage, feeling it would be preemptive to do so before the CJEU had opined on the primary (Barber Window-related) question. Things certainly do therefore have the potential to become very interesting from a legal perspective once the CJEU has reached a decision, but whether the practical impact is equally wide-ranging must remain to be seen... Back to top
LIGHTENING THE LOAD...
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