The Supreme Court has unanimously held that on the death of a member, a pension scheme will no longer be able to limit a pension payable to that member’s surviving civil partner or same sex spouse to benefits accrued after 5 December 2005. The financial implications of this decision are wide ranging as far as pension schemes are concerned. We discuss some of the issues that trustees ought to be aware of when reviewing the implications for their own schemes.
John Walker joined the contributory pension scheme of Innospec Ltd (Innospec) on 2 January 1980 when he started his employment there. He remained a member until he accepted early retirement on 31 March 2003.
Mr Walker and his partner have lived together since 1993. They applied for a civil partnership on 5 December 2005, the date on which civil partnerships were introduced to the UK. They registered as civil partners on 23 January 2006 and have since married.
Shortly after entering into his civil partnership, Mr Walker asked Innospec to confirm that in the event of his death, they would pay the spouse’s pension to his civil partner. A spouse’s pension was provided for under the rules of the scheme. Innospec refused on the grounds that his service (and therefore benefits) predated 5 December 2005.
Innospec based this decision on the Employment Equality (Sexual Orientation) Regulations 2003, as amended, the relevant provisions of which have been incorporated into paragraph 18 of Schedule 9 to the Equality Act 2010. These provisions broadly provide that pension schemes can restrict access to a benefit (a) where the right to that benefit accrued before 5 December 2005 (6 April 1988 for contracted-out survivors’ benefits), or (b) which is payable in respect of periods of service before 5 December 2005 (6 April 1988 for contracted-out survivors’ benefits). As Mr Walker’s service ended in 2003, his case fell within that proviso and Innospec were entitled to refuse his request.
Mr Walker brought a claim alleging discrimination on the grounds of sexual orientation: he argued that had he married a woman, she would have been entitled to the entirety of the spouse benefits amounting to approximately £45,700 per annum.
The Supreme Court held that paragraph 18 of Schedule 9 to the Equality Act 2010 is incompatible with EU law which prohibited unequal treatment in employment and occupation (namely, the EU Directive 2000/78/EC (the Framework Directive)) and must be dis-applied. It was also held that that Mr Walker’s husband is entitled on his death to the full spouse’s pension, provided they remain married.
Whilst the courts do not have the power to strike down legislation enacted by parliament, the court does have the power and duty to dis-apply provisions in legislation which are in conflict with EU instruments from which they are derived, in this case the Framework Directive.
In delivering the explanation of the Court’s judgment, Judge Kerr noted that Innospec were entitled to come to their original decision under the law as it then stood because all of Mr Walker’s pensionable service in the scheme pre-dated 5 December 2005. However, the Supreme Court unanimously decided to allow Mr Walker’s appeal on the grounds that it was irrelevant that Mr Walker’s right to a pension for his spouse was earned during a time that discrimination on the grounds of sexual orientation was not against national law. What mattered was that at the time the pension became payable it would be against national law to discriminate against him on the grounds of his sexual orientation. The Court gave the example that had Mr Walker married a woman long after his retirement, under the scheme rules she would be entitled to a spouse’s pension, notwithstanding the fact that they were not married during the time that he was paying contributions to his pension fund.
As to the question of the impact of this decision, the Court was satisfied that EU case law was clear that unless there is evidence that there would be ‘unacceptable economic or social consequences of giving effect to Mr Walker’s entitlement there is no reason that he should be subjected to unequal treatment as to the payment of that pension.’ The Supreme Court noted that in the financial planning of the scheme, possible changes in Mr Walker’s marital status should have been considered therefore the Court did not deem there to be unacceptable economic or social consequences.
The implications for pension schemes
The potential financial implications for pension schemes are significant.
Some occupational pension schemes may already apply spouse’s pensions equally to civil partners and same sex spouses on a discretionary basis. However, the schemes which have chosen to rely on the exclusion under paragraph 18 of Schedule 9 to the Equality Act 2010 will be most strongly affected by this ruling as they will no longer be able to limit the pension payable to a surviving member of a civil partnership or same-sex marriage to pensionable benefits built up after 1 December 2005. Mr Walker’s case illustrates the significant sums that are at stake for pension schemes as a result of this decision: in the event of Mr Walker’s death, his partner would have been entitled to around £1,000 per annum (which reflects the contracted-out benefit entitlement); however, his partner would now be entitled to a pension of approximately £45,700 per annum. When this is applied across multiple members of a pension scheme it is easy to see how the ruling will have significant consequences for scheme funding assumptions and future valuations.
Schemes which have bought-out benefits will also need to consider whether they have fully discharged their responsibilities towards same sex spouses and civil partners. Where the scheme has only bought-out benefits for the period post December 2005, this could be important as there could be a risk that members may seek a higher pension entitlement under this ruling. Equally if a scheme has bought-in benefits it will be necessary to check that all benefits (as opposed to post-5 December 2015 benefits) have been secured or otherwise make enquiries with the insurer to secure the balance.
The full impact of the Walker ruling is not yet known. Nor we do know what the Government intends to do with paragraph 18 of Schedule 9 to the Equality Act 2010. Moving forward it is likely that all occupational pension schemes will need to review the implications of this ruling on their scheme and, in some cases, get ready to pay out far greater pensions for the surviving civil partner or same sex spouse than was previously anticipated. However if any cases arise in the immediate aftermath of this decision, they should be dealt with on a case-by-case basis and advice sought where appropriate.