Equalisation – Foster Wheeler Ltd v Hanley and others (Court of Appeal decision)

As you may recall from our December 2008 Bulletin, the Foster Wheeler decision in the High Court last year once again focussed attention on the controversial issue of equalisation. By way of reminder, the High Court in Foster Wheeler held that mixed Normal Retirement Date ("NRD") members were entitled to take all their pension benefits (both those accrued on the basis of an NRD of 60 and those accrued on an NRD of 65) at age 60 without any reduction for early payment of the benefits accrued with an NRD of 65.

In the first instalment of this case, the company relied heavily (and ultimately unsuccessfully) on the argument that instead of early payment of benefits without reduction, split pensions should be permitted so that benefits accrued by reference to an NRD of 65 would only be paid in full at the later date. The argument in favour of split pensions was rejected by the High Court on grounds that split pensions would only be justified if they were the only way to make a scheme Barber compliant. [Note: Barber was the crucial European case on pensions equalisation back in May 1990.]

The Court of Appeal has, however, recently heard the company's appeal against the decision and, in a dramatic twist, the Court of Appeal decided to accept the company's argument that NRD 65 benefits should not be paid early on an unreduced basis. Importantly, the company changed its strategy for the appeal to lessen the weight given to the split pensions argument. Instead, at the appeal stage, the company sought the determination of the Court as to whether a member of the scheme with mixed NRDs who wished to take any pension between 60 and 65 years would be entitled to:

  • Option 1: a single pension calculated on the basis that all the benefits had fallen due for payment on the date of retirement; or
  • Option 2: a single pension payable in full, but the pension payable by reference to benefits accrued with an NRD of 65 must be discounted for early payment; or
  • Option 3: split pensions - separate pensions payable from each NRD respectively.

The Court of Appeal favoured option 2 (so that the benefits would be paid in one tranche, but with that part of the pension relating to an NRD of 65 being reduced). The Appeal Court held that the effect of the original High Court ruling was that a member with an NRD of 65 would, on early retirement, receive more than he/she was entitled to receive under the rules - i.e. the member would effectively receive a windfall. This windfall was described, by the Appeal Court, as a "fatal flaw" in the High Court's decision.

Commentary – whilst this is a decision in the Court of Appeal in England, it is highly likely to be just as influential in terms of schemes governed by Scots Law. The key underlying principle to emerge from the decision is that where possible, the court should give effect to equalisation rights in accordance with scheme rules. Further, it held that if a departure from the provisions of a scheme is required, it should represent the minimum interference necessary and should not go further than required by European law on equalisation.

Trivial Pensions/Authorised Payments

New Regulations, in force since the start of last month, ease the current restrictions relating to trivial commutation. These changes apply to payments made on or after 1 December 2009, although the rules are slightly different depending on the size of the scheme - the Regulations differentiate between schemes with less than 50 members and those with more than 50 members.

For the purposes of this note, we have focussed on the new rules for schemes with more than 50 members. Such schemes will be able to commute pensions of less than £2,000 in the following circumstances:-

  • The member is between 60 and 75 years of age;
  • The member is not a controlling director (or connected with a controlling director);
  • The payment extinguishes the member's entitlement under the scheme;
  • There was no individual transfer into the scheme in respect of the member in the preceding 5 years (block transfers are permitted);
  • There was no transfer out of the scheme in the 3 years prior to the payment; and
  • The scheme must fall into one of the following three categories: i) the scheme was in existence on 1 July 2008; ii) there are at least 20 members of the scheme with assets worth in excess of £2,000; or iii) the scheme must be predominantly a defined benefit scheme (more than half the sums and assets held for the scheme must be DB).

In addition, there are a small number of other situations when a one-off lump sum can be payable. These include when extra money comes into a scheme for a member after his/her pension benefit has already been transferred out/secured with an insurance policy or if a previously untraceable member over 75 reappears, having been out of contact for at least 5 years. There are strict conditions attached to the payments for previously untraceable members over age 75 and there is a catch up period until 1 June 2010 to allow schemes to pay out to members who had not previously received a payment because it would have been deemed an unauthorised payment.

The law relating to authorised payments has been amended by the same Regulations to extend the list of authorised payments to include certain pension benefits paid in error – this applies retrospectively to cover payments made in error on or after 6 April 2006. This extension means that these payments will be treated for tax purposes as normal pension or lump sum payments. For the sake of brevity, we have not included details of all of the new categories of authorised payments, but please let us know if you require tailored advice.