August 12 2009
On July 8 2009 the Court of Appeal issued its judgment in Foster Wheeler v Hanley. In allowing the company's appeal against the original High Court decision, the Court of Appeal held that: (i) the implementation of the principles established in Barber v Guardian Royal Exchange Insurance Group fell to be considered on a scheme-specific basis; and (ii) where a complete solution to equalization issues cannot be found in scheme documentation, the equalization mechanism adopted should involve the "minimum interference" with the substance of the scheme's provisions.
For the Foster Wheeler scheme, this broadly means that members with pensionable service attributable to different normal retirement ages - and who wish to retire between the ages of 60 and 65 - are entitled to receive a single pension. However, the element of pension which is based on a normal retirement age of 65 can be treated as a deferred benefit and reduced for early payment.
The European Court of Justice cases of Barber and Coloroll Pension Trustees Ltd v Russell established that: (i) it was unlawful sex discrimination to have unequal normal retirement ages for men and women; and (ii) in respect of the period between the Barber judgment (on May 17 1990) and the date on which normal retirement ages were actually equalized in any particular scheme, that scheme had to be administered as if the more favourable (ie, lower) normal retirement age applied to both sexes. This period became known as the 'Barber window'.
Before Barber the typical normal retirement age structure was a normal retirement age of 60 for women and 65 for men. However, following Barber many schemes chose to level down normal retirement ages so that both sexes had a normal retirement age of age 65. Barber and Coloroll had the following implications for such schemes.
On retirement, pensions for men had to be based on:
On retirement, pensions for women had to be based on:
Before Barber the Foster Wheeler scheme had unequal normal retirement ages: 65 for men and 60 for women. However, following Barber the scheme sought to equalize normal retirement ages by levelling down to a normal retirement age of 65 for both sexes. The scheme closed the Barber window in 1993.
Until 2003 the scheme's rules provided for an unreduced pension on early retirement at 60 with the employer's consent.
The employer and trustees chose to implement their Barber policy by the employer consenting to early retirement at 60. However, changing financial circumstances prompted the employer to rethink its approach to granting early retirement which, in turn, raised the question of how a scheme should equalize benefits when the scheme rules did not provide specifically for pensions based on split service.
In addition, the earlier cases of Trustee Solutions v Dubery and Hodgson v Toray Textiles seemed to establish that both men and women had an unrestricted right to retire at 60 in respect of benefits accrued during the Barber window. In light of this, the trustees of the Foster Wheeler scheme decided to apply to the High Court for directions.
The court considered the options of:
The court concluded that members with mixed normal retirement ages could take the whole of their pension, unreduced, at 60 - that is, following the first option - without employer consent, notwithstanding the requirement for the employer to consent to early retirements in the scheme's rules.
Essentially, the court held that a requirement for employer consent to early retirement in the scheme's rules was overridden by the Barber principle in respect of all pensionable service on the grounds that, in the court's view, this involved the least formal change to the rules.
Court of Appeal Decision
The Court of Appeal overturned the High Court decision that the scheme had to allow members with mixed normal retirement ages to take early retirement with an unreduced pension in respect of all service. In reaching its conclusions, the Court of Appeal considered a number of key principles.
Equalization to be imposed with minimum interference
The court followed and elaborated on the principle set out in Bestrustees v Stuart, to the effect that pension benefits in these circumstances should be delivered in a way that involved "the least interference with the modifications to the scheme for which the company and trustees had opted when the Barber window closed".
The concept of 'minimum interference' requires consideration of the substantive effect of an amendment imposed to give effect to equalization principles. The court noted that under the High Court judgment, affected members were given rights far in excess of their basic entitlement under European law. Moreover, the effect on the company - that is, the removal of its right to consent to early retirement - was significant. The Court of Appeal considered that by conferring a windfall on members with mixed normal retirement ages, the High Court's solution contained a fatal flaw.
The Court of Appeal stated that it had to compare options and consider in relation to a particular option whether equalization could be given effect in some other way that involved less interference with the rights of any party. Hence, the preferred option in this case was to use the early leaver rule, instead of the early retirement rule.
The court emphasized that equalization solutions to schemes in a comparable situation to that of Foster Wheeler will nonetheless vary depending on the circumstances of the scheme at issue. In Foster Wheeler the deferred pension solution was to be preferred, but this may not necessarily be true of other schemes. The court noted that "the guiding approach should be that of making the least substantive alteration to the provisions of the scheme that is compatible with the required equalization".
The court stopped short of endorsing split pensions as an automatic or universal solution to equalization issues such as those raised in Foster Wheeler. The split pension solution is one option which may be appropriate, but this depends on the circumstances of the particular scheme at issue. However, the court recommended analyzing an affected member's rights as if he or she had two separate pension entitlements, whether or not they are to be given effect by way of a split pension.
The decision will be welcomed by employers and trustees who attempted to give effect to equalization principles through the operation of their scheme's early retirement rule, but have since become concerned about the cost of that method. It is clear from this judgment that where the scheme's rules require employer consent to early retirement, Barber principles will not necessarily override that consent requirement.
It is implicit in the judgment that in considering whether a scheme has implemented Barber through its early retirement rule, that rule should not be considered in isolation, as other rules may be significant.
The court endorsed a scheme-specific (and therefore relatively flexible) approach to implementing equalization in circumstances where there is ambiguity in scheme documents or where the employer's and trustees' policy is unclear for other reasons. It also leaves open the option of inferring split pensions where appropriate.
In particular, the court's endorsement of the concept of 'minimum interference' - and its forceful obiter dictum (ie, passing remark) that this is a matter of substance, rather than form - will be a helpful guiding principle for trustees and employers when grappling with this issue.
For further information on this topic please contact Andrew Brown or Susanne Wilkins at Herbert Smith LLP by telephone (+44 20 7374 8000), fax (+44 20 7374 0888) or email (firstname.lastname@example.org or email@example.com).
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