In light of Foster Wheeler and other recent cases, employers should identify whether their schemes have been effectively equalised and, where they have not, take immediate steps to do so, to limit the extent of future liability.

Foster Wheeler is the latest in a line of recent cases which highlight the failure of some defined benefit pension schemes to have properly equalised their retirement ages as between male and female members following the Barber judgment of 17 May 1990.

Foster Wheeler – Cost Consequences

The decision in Foster Wheeler could have serious cost implications for many employers, in particular where they had sought to mitigate the costs of equalisation by controlling early retirement under their schemes. The employer (Foster Wheeler), faced with an estimated increase in its scheme deficit of £30 million, has been given permission to appeal.

A Reminder of Barber and Equalisation

Prior to 1990 it was a common design feature of a pension scheme that normal retirement ages (NRA) differed based on gender, typically 65 for male and 60 for female members. In Barber the European Court of Justice (ECJ) held that pension benefits were “pay” and that it was unlawful for schemes to discriminate between men and women by paying their respective pension benefits at different ages. The ECJ limited the financial consequences of its decision by determining that schemes would not be required to equalise benefits accrued prior to 17 May 1990. The ECJ, however, gave little detail on how to implement its decision. Many schemes awaited the outcome of further test cases brought before the ECJ before taking action to equalise.

The following principles emerged from the ECJ decisions in the early 1990s:

  • Pensionable service prior to 17 May 1990—no equalisation is required.
  • Pensionable service from 17 May 1990 to date scheme benefits are equalised—benefits are “levelled up”, with the disadvantaged gender (males) accruing benefits on the same basis as the advantaged gender, i.e., with an NRA of 60, the “Barber window”.
  • Pensionable service from the date scheme benefits are equalised—the Barber decision did not stipulate the age at which benefits were payable, merely that they were to be paid on an equal basis. The benefits could remain “levelled up,” but in practice most were “levelled down” so that male and female members accrued benefits from this date on the basis of an NRA of 65.

The Foster Wheeler Decision

Historically the Foster Wheeler pension scheme provided for a male NRA of 65 and a female NRA of 60. Furthermore it provided that, with company consent, members could take early retirement prior to their respective NRAs subject to an actuarial reduction in the amount of their benefits.

Following Barber and pending further clarification from the ECJ, the company and the trustees agreed that, for a temporary period, NRA would be levelled up to age 60 for male members. It was also agreed that an actuarial reduction would only apply on the early retirement of a male member before age 60 and then only in respect of the period between retirement and age 60.

Between 1990 and 1993, the company and the trustees agreed the steps they would take to “equalise” the scheme and notified members by way of announcements and an updated member’s booklet (although there were evidential issues as to whether all relevant members received these documents).

On 16 August 1993, the scheme rules were amended, equalising male and female NRAs at age 65. The erstwhile temporary measure that an early retirement reduction would only be applied on retirement prior to age 60 (but no reduction for early retirement between 60 and 65) was incorporated as a permanent feature of the rules.

Because of the deteriorating funding position of the scheme, the rules were again amended from 30 April 2003 to end early retirements (between age 60 and 65) with no actuarial reduction, in respect of service from that date.

The ECJ was asked how to apply the scheme’s early retirement rule in a manner that was consistent with Barber. The ECJ held that members who had, in respect of any element of their benefits accrued at any time, the right to retire at 60 were entitled to take their entire pension at 60 without company consent (which was required under the rules) unreduced except in relation to post 2003 service.

The ECJ rejected the company’s argument that it was possible (following a change in the law in 2006) to split pensions so that pensions accrued with an NRA of 60 should be taken at 60 whilst pensions accrued with an NRA of 65 should be taken at 65. The ECJ’s reasoning was that women, prior to 1993, had an absolute right to take their pension from age 60. From 1993 this right was effected under the scheme by the implied consent of the company to early retirement. Since the principle of equalisation conferred on male members the same rights as those enjoyed by female members, male members also benefited from the implied consent of the company to early retirement from age 60.

The ECJ also rejected the company’s argument that the announcements and new booklet issued to members were effective to raise the NRA to 65 prior to the August 1993 deed. The ECJ ruled that none of the evidence amounted to more than the passive acceptance by the members of the information which those documents contained, and that there was nothing in them to indicate that the change to NRA would be introduced into the scheme otherwise than in accordance with the amendment power, which, as Section 67 Pension Act 1995 now also provides, prevented detrimental retrospective amendments.

Consequences for Employers

In light of Foster Wheeler and other recent cases, employers should identify whether their schemes have been effectively equalised and, where they have not, take immediate steps to do so, to limit the extent of future liability.

Warning Signs of Non-Equalised Schemes

  • There are different NRAs for male and female members under scheme rules.
  • Where NRAs were different but are now the same for male and female members, the change was not or was inaccurately communicated to members. The historic scheme communications should be checked.
  • Some schemes attempted to equalise benefits merely by way of announcement rather than by formal amendment of the scheme rules; the effectiveness of this as a means of achieving equalisation is increasingly in doubt.
  • Where the scheme rules were formally “amended”, it is possible that the change to NRA did not comply with the scheme’s amendment power and/or, after 6 April 1997, Section 67 Pensions Act 1995.
  • Benefits are not being paid or the scheme is not being administered in accordance with the principles of equalisation, perhaps because the changes were not, or were not fully, notified to the administrators.
  • In relation to transfers, schemes from which benefits have been received should be checked to ensure they were equalised properly. Checks on transferring schemes should also now be made prior to the receipt of future transfers-in.