An important case for schemes which have undergone Barber equalisation and which have allowed unreduced early retirement before the new equalised NRD.
Background to the case
The scheme introduced an NRD of age 65 for all members on 16 August 1993 (the Barber equalisation date). Before then, NRD was the usual age 60 for women and age 65 for men. This meant that for women, pension built up before the Barber equalisation date had an NRD of age 60 and other pension had an NRD of age 65. For men, pension built up in the period from 17 May 1990 to the Barber equalisation date (the Barber window) had an NRD of age 60 and other pension had an NRD of age 65.
The scheme allowed early retirement from age 50 with employer consent. The method for calculating early retirement pensions changed several times:
- Until 1993: a 0.5 per cent reduction applied for each month pension was taken before NRD;
- 1993 to April 2002: pensions were reduced by 0.5 per cent for each month pension was taken before age 60 or on such other basis as the scheme trustees decided;
- April 2002 to 30 March 2003: the reduction was set by the trustees at a level they considered reasonable, having regard to, amongst other things, the period between the start of pension and age 60;
- from 1 April 2003: future pensionable service was subject to a reduction for each month pension was taken before age 65.
Company practice (and the position communicated to members) until 1 April 2003 was to allow early retirement with a 0.5 per cent reduction for each month pension was taken before age 60.
What the Court was asked to decide
The Court was asked two main questions.
Firstly, on early retirement, could pensions built up before 1 April 2003 be reduced for each month they were taken before age 65?
Secondly, what benefits were payable to members who have benefits determined partly by reference to an NRD of age 60 and partly by reference to an NRD of age 65? Three alternative options were considered:
- members were entitled to a pension at age 60 with only that part built up after 30 March 2003 reduced where pension was paid before age 65;
- members were entitled to a pension at age 60 with that part calculated by reference to an NRD of age 65 reduced where taken before age 65;
- member’s pensions were payable in two parts – that determined by reference to an NRD of age 60 at age 60 and that determined by reference to an NRD of age 65 at age 65.
The scheme’s principal employer argued for the final alternative.
The Court’s decision
On the question of the early retirement reduction, the Court decided that pensions built up before 1 April 2003 could be reduced only for the period up to age 60. This was for the following reasons:
* because of company practice and the position communicated to members, the references in the scheme rules which applied between 1993 and April 2002 - to the trustees being able to decide an alternative basis for reducing pension - only allowed the trustees to vary the default 0.5% per month reduction applicable to retirement before age 60. The rules did not give a power to make a reduction for early payment after age 60;
- in the rules introduced in April 2002 - providing for the trustees to set the early retirement reduction, having regard to amongst other things, the period between the start of a pension and age 60 –the reference to amongst other things did not give the trustees power to apply any reduction where pension was taken after age 60. Key to this decision were two facts. Firstly, the previous version of the rules allowed reductions only to pensions taken before 60 - the reference to amongst other things was not intended to preserve some preexisting power to apply a reduction to age 65. Secondly, the express provision introduced on 1 April 2003 to take into account the period up to age 65 for pension built up from then evidenced the fact that this power has not existed previously.
On the question of what pension is payable, the Court decided:
- that members with any part of their pension calculated by reference to an NRD of age 60 have a right to take pension at that age;
- that EU law imposes only minimum requirements on schemes about providing equal benefits to men and women. It allows flexibility in how equal pay is provided. The effects of changes to schemes to comply with equalisation requirements need to be considered on a scheme specific basis;
- that the mechanism for payment of the pension was the scheme’s early retirement rule. Under this employer consent would be deemed to be given at age 60. It followed that on the interpretation of the early retirement rule, on retirement at age 60, only that part
of pension built up from 1 April 2003 would be reduced; the employer argued that Barber rights should not be seen as being provided through the early retirement rule and this is likely to form one of the main grounds for the appeal in this case;
- to reject the two part payment approach. This was on the basis the scheme provided for payment only of a single pension and that EU law did not require such an approach.
The impact of the decision
This is the latest in a series of recent cases demonstrating that, almost 20 years after the original ruling in the Barber case - that male and female members have to be provided with equal benefits from 17 May 1990 - there is still much confusion about what benefits schemes have to pay.
In this case, the effect of the decision is to increase the scheme’s deficit by around 30 per cent to £130 million. If the Court of Appeal upholds the decision it is likely to have serious financial implications for many other schemes. Trustees and employers will need to undertake a careful analysis of their schemes’ rules relating to equalisation and early retirement.
The decision also shows the importance of not interpreting scheme rules literally and in isolation from a scheme’s other rules. To understand a rule properly, it is necessary to understand the original intention behind the rule. To do this, it is important to look at the circumstances existing at the time the rule was introduced.