Home > News > 2001 > March 2001 > Part-timers' pension rights - the Preston Case
Part-timers' pension rights - the Preston Case
Nigel Hacking gives a summary of the situation for UK occupational pension scheme trustees in the light of the recent Lords ruling.
On 8 February 2001, the House of Lords delivered its ruling that part-timers may claim pension rights as far back as 8 April 1976. There have been reports of the cost to UK employers ranging from £4 billion to £17 billion. Even the lower end of this range appears to be an over-estimate.
Some Background
Since 1 July 2000, employers have been required [1] to offer part-time employees pension benefits equivalent to the benefits offered to a comparable full-timer (unless the employer has objective grounds for treating the part-timers differently).
However for service before 1 July 2000, part-timers can only claim access to the employer's pension scheme if they can prove that exclusion was indirect sex discrimination.
UK regulations [2] effective from 31 May 1995 restrict the period of backdating membership to 2 years before the date of making the claim. However, in the Preston and Fletcher cases [3], the House of Lords ruled that scheme membership may be claimed in respect of service from 8 April 1976[4].
Making a Claim
Now that the time limits are clear, there is likely to be a deluge of claims brought to the Employment Tribunals (and the Pensions Ombudsman) - indeed there are 60,000 cases that have been pended awaiting clarification of the backdating period.
The part-timer must make the claim of indirect sex discrimination while still working or by no later than 6 months after leaving employment. (If there have been a succession of short-term contracts resulting in a "stable employment relationship", the claim needs to be made within 6 months of the end of that relationship and will cover all service under the various separate fixed-term contracts within it.)
Hence, there are likely to be many cases that are "out of time" and so will not proceed. For those cases that satisfy this time limit, there are still hurdles to overcome:
- It needs to be proven that the exclusion of the part-timer did indeed amount to indirect sex discrimination (ie it needs to be shown that exclusion affects one sex more than the other, but by how much more?).
- The employer may be able to justify exclusion on objective grounds unrelated to gender.
- The position on these points will not become clear until there have been rulings on actual cases.
- Employers with only a few cases may simply accept the claims and provide backdated membership rather than incur the costs of contesting the claims on the above grounds.
Issues for the Employer
If an employer does backdate membership for part-timers, there are further issues to be resolved, including:
- Whether to backdate for those part-timers in current employment, or include those who left less than 6 months before the employer's decision to backdate, or include any others.
- For contributory schemes, whether to allow the back contributions to be spread or insist on immediate payment.
- For contracted-out schemes, whether to backdate contracting-out also.
Employers will presumably wish to provide the normal scheme benefits for the backdated service and at the same cost to the member so as to avoid the risk of any further discrimination claims (except that it is not permitted2 to require the part-timer to pay member contributions in respect of any period from 31 May 1995). On this basis, employers should backdate contracting-out and claim a refund of National Insurance contributions, if this is permitted by the Contribution Agency.
The situation will be even more difficult for money purchase schemes, where it would be necessary to obtain monthly/weekly payroll records in order to determine exactly the backdated benefits.
Impact on the Part-timer
Employers may well choose to make the backdating conditional on the part-timer paying the backdated member contributions immediately as a single lump sum and this may deter many part-timers from proceeding. The question of whether interest can be added to the backdated member contributions still needs to be resolved. Unless some special provisions are introduced, the part-timer would not receive income tax relief on any payment in excess of the 15% contribution limit.
The part-timer would be treated as a post-1989 member for determining Inland Revenue benefit limits even if the period of backdating extended back before 1989.
If the part-timer paid contributions into a personal pension during the backdating period, this will count as a retained benefit in determining Inland Revenue limits under the employer's pension scheme. If the part-timer had contracted-out under the personal pension and the employer's scheme backdates contracting-out, there are some complex issues that need to be resolved with regard to the most equitable treatment of the contracted-out rights under the personal pension.
Summary
While the House of Lords ruling has clarified that pension rights may be backdated as far as 8 April 1976, there are many other points to resolve including:
- What parameters will be adopted as the basis for deciding that exclusion does amount to indirect sex discrimination.
- What objective grounds will be accepted as justifying the exclusion of part-timers.
- Whether the Contribution Agency will allow contracting-out to be backdated and if not, whether and how contracted-out pension schemes should allow for the additional state pension accrued by the part-timer.
- Whether, and how, to make allowance if the part-timer has contracted-out under a personal pension during the backdating period.
- Whether any special tax treatment will be allowed where the backdated contributions exceed the 15% limit for tax relief.
Employers with large numbers of part-time employees could face a significant financial cost, particularly if they operate non-contributory pension schemes, but we are doubtful that the total cost will approach anything like the reported £17 billion.
1. Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000
2. The Occupational Pension Schemes (Equal Access to Membership) Amendment Regulations 1995
3. Preston v Wolverhampton Healthcare NHS Trust and Fletcher v Midland Bank plc
4. The date of the ECJ decision in the case Defrenne v Sabena II.
Nigel Hacking, March 2001.