The High Court judgment in Foster Wheeler Ltd v Hanley, handed down on 28 November 2008, could have serious implications for many schemes.
The main question in this case was whether a member with part of his pension accrued by reference to a Normal Retirement Age (NRA) of 60, and part of the pension accrued by reference to an NRA of 65, both before and after equalisation following the Barber ruling, could take all of his pension from age 60. The judge held that, under the early retirement provisions of the Foster Wheeler Pension Plan (the Plan), a “split pension” regime should not be imposed and the member was entitled to take the whole of his pension from age 60. This was despite the fact that the Plan’s early retirement rule required employer consent.
The second question was whether that part of the pension accrued by reference to an NRA of 65 after equalisation could be reduced for early payment. The judge decided that the Plan’s early retirement provisions did not allow reduction for early receipt in relation to the period between the retiring member’s 60th and 65th birthdays.
The additional liabilities for the Plan are estimated to be in the region of £18 - 30 million and, recognising the significance of this decision for Foster Wheeler and the funding implications for other schemes, the judge granted permission for the employer to appeal.
Prior to 17 May 1990 (the date of the Barber judgment) most schemes had an NRA of 60 for women and 65 for men. In Barber, this was challenged in the European Court of Justice (ECJ) and it was decided that different NRAs for men and women were unlawful under the equal treatment requirements of European law (what is now Article 141 of the Equal Treatment Directive) and that European law had direct effect.
Subsequently, in Coloroll, it was decided that the effect of the Barber decision was not retrospective beyond 17 May 1990. Schemes were permitted to “level down” benefits in respect of future service and this was usually achieved by amending the scheme rules to apply an NRA of 65 for men and women. However, for the period between 17 May 1990 and the date the scheme rules were amended (often known as “the Barber window”), benefits had to be “levelled up” and this was usually effected by decreasing the male members’ NRA to 60.
The issues in Foster Wheeler
Following the Barber and Coloroll decisions, employers and trustees amended scheme provisions to close the Barber window. Unfortunately, this was not always done with the formality required under the scheme’s trust deed and rules (for example, some schemes sought to effect a change by an announcement, rather than a deed of amendment), with the result that equalisation was not achieved as early as intended.
In Foster Wheeler, all parties came to an agreement during the court case that the actual date equalisation had been implemented was 16 August 1993. The employer had originally claimed that equalisation was implemented on 1 June 1992, when an announcement detailing the new, higher NRA for male members was sent out. The employer claimed that members were “estopped” (prevented) from disputing that the raised retirement age took effect on 1 June 1992 as a result of the announcement and other communications to members.
However, the judge thought the information had been provided to members in a “random” fashion, there was no certainty that all members had received it and therefore equalisation had not, in fact, been achieved until 1993 when the deed amending the trust deed and rules was executed. As a result, members were not estopped from claiming benefits based on an NRA of 60 in respect of service between 17 May 1990 and 16 August 1993, and the employer’s estoppel claim failed.
The second claim by the employer in Foster Wheeler was that members should be entitled to take benefits calculated with reference to NRA 60 at that age and those calculated with reference to NRA 65 at age 65 - what is known as a “split pension”, and that this was the correct application of Article 141 in the Equal Treatment Directive.
This part of the employer’s argument was also rejected. The court held that, if split pensions were the only proper way to implement the equal pay principle under European law, it would effectively tie the hands of trustees and employers in relation to measures taken at the end of the Barber window to amend a scheme’s provisions to level benefits down. This, the judge said, would be contrary to the ECJ judgment in Coloroll and wrong in principle. The judge distinguished the Court of Appeal’s decision in Cripps, which allowed “split pensions” in the context of applying the priority order for winding up.
Implications for schemes
In the light of this judgment, there may be a serious issue for schemes with rules which allow early retirement with employer consent and without reduction, as this decision effectively allows Barber rights to override consent requirements (i.e. enabling the member to take the whole benefit at age 60). Trustees and employers may wish to take advice on their scheme’s specific early retirement provisions.
For schemes with early retirement rules similar to that in Foster Wheeler, this may have implications for the funding position of the scheme and should be taken into account in the scheme’s valuation process. Trustees may be minded to make further demands for extra scheme funding, both during negotiations on valuation assumptions and for mitigation when clearance applications are being considered. Both these issues could have serious financial implications for employers in the current economic climate.
Although we understand that the Foster Wheeler decision is likely to be appealed, any appeal judgment is unlikely to be available for some time. Employers and trustees may therefore wish to consider as soon as possible amendments in respect of future accrual to scheme rules which provide unreduced early retirement pensions before age 65.