This highly anticipated decision of the Court of Appeal (the latest in a long line of equalisation cases), was handed down on 8 July 2009. The judgment has been hailed as a good result for schemes as it provides a sensible solution within the confines of the Scheme’s rules.
In Barber , the ECJ concluded that pensions provided under an occupational pension scheme constitute “pay” for the purposes of Article 119 (now article 141) of the EC Treaty and, as such, need to conform to the principle of equal treatment. At the time, the majority of schemes had retirement ages of 60 for women and 65 for men, which resulted in unequal benefits in certain respects. For example, if a male member opted to retire at 60, his benefits would be reduced for early payment while a female member’s benefits would not be. Therefore, in the wake of Barber, schemes were required to equalise retirement ages from 17 May 1990 (the date of the judgment). This could be done by increasing Normal Retirement Dates (NRDs) going forwards, but providing benefits on the more favourable basis for the period between the date of the Barber judgment to the date of a valid amendment to equalise benefits. The period is known as the “Barber window”.
The Trustees and Foster Wheeler Limited (the Company) took prompt action to try to equalise the Scheme’s retirement ages following the Barber judgment and equalisation provisions were formally incorporated into the Scheme’s governing documentation on the execution of a new trust deed and rules on 16 August 1993 (the Rules).
From the date of the amendment, all members had an NRD of 65 and so members with Barber window benefits had mixed NRDs of 60 and 65. The Scheme Rules did not expressly deal with how benefits should be paid to such members, but permitted early retirement with the Company’s consent, subject to a reduction for early payment of benefits between the date of retirement and the member’s 60th birthday. In line with advice it had received on the implications of the Barber judgment, the Company continued its post-Barber practice of freely giving consent to early retirement and applying no actuarial reduction between the ages of 60-65. Initially this was not an issue for the Scheme (as it was in surplus), but when faced with a deficit of £57 million in 2002, the Company sought to revise the early retirement rule. Therefore in 2003, it introduced a power to reduce benefits paid early between the ages of 60-65. This change permitted periods of service before and after 30 April 2003 to be considered separately, with scope to reduce benefits in respect of service after that date if they were taken before age 65.
The court had to consider a number of issues, with particular focus on the treatment of benefits for members who, following Barber, had mixed NRDs and retire between the ages of 60 and 65. The court was presented with three possible options:
(1) payment in full of all benefits on retirement;
(2) payment of all benefits on retirement but with a discount for benefits paid early by reference to NRD 65; or
(3) “split pensions”, i.e. separate pensions payable at each NRD.
The judge opted for (1), concluding that members with mixed NRDs could take all of their benefits unreduced from age 60, without the need for consent. The split pension option (option (3)), was rejected, as effect could be given to Barber by paying a single pension under the Scheme’s early retirement rule.
The Company argued against option (1), on the basis that it conferred a windfall on members with mixed NRDs by allowing them to receive more than they were entitled to under the Scheme rules in relation to their NRD 65 benefits. Instead, it argued in favour of option (2), but (in an argument not raised before the High Court), suggested that the discount for early payment of NRD 65 benefits could be achieved by reference to the Scheme’s deferred pension rule, which allows for a reduction for early payment.
The Court of Appeal allowed the appeal, ruling in favour of the revised option (2). The decision brings members with mixed NRD benefits within the deferred early retirement provision in the Rules, meaning that an actuarial reduction can be applied to the non-Barber window benefits
Option (1) was overturned on the basis that “the windfall element constituted a fatal flaw”. Lady Justice Arden considered that “the court should, where possible, give effect to Barber rights by adhering to the provisions of the relevant scheme where it is possible to do so in preference to some other approach. If some departure is required, it should in general, so far as practicable, represent the minimum interference with the scheme provisions.” She indicated that “minimum interference” should be determined by taking account of the form and the substance of any notional amendment and acknowledged that a “minimum interference” solution might need to be achieved by using a scheme’s rules “in a manner not previously contemplated”.
The split pensions approach (previously advocated by the Court of Appeal in Cripps4) was not found to be appropriate here. Being more complex than single pensions, they would require “a more substantial interference with the provisions of the scheme” (both quantitatively and qualitatively) than option (2) using the deferred pension rule. However, it was acknowledged that giving effect to Barber by splitting periods of service may work in other cases.
This decision will send a positive message to other schemes with difficult equalisation issues. Not only has the Court of Appeal demonstrated judicial willingness to reach the right equalisation solution for the Scheme, and to find a workaround that fits within the Scheme’s rules, but it has also sent a message of encouragement to employers and trustees, that they should work together to find solutions for their particular scheme without having to resort to judicial proceedings. It stated that “it must be much more satisfactory, from every point of view, if the task of ensuring compliance with Community law can be accomplished in the case of most schemes without recourse to the court.”