Home > News > 2009 > July 2009 > Foster Wheeler Ltd – Appeal Court Ruling has implications for ‘Barber’ Equalisation
Foster Wheeler Ltd – Appeal Court Ruling has implications for ‘Barber’ Equalisation
The Court of Appeal delivered its verdict this week in the case of Foster Wheeler Limited v Hanley and Others.
The original High Court judgment on 28 November 2008 had been appealed by Foster Wheeler Limited (FWL) and relates to the implication of benefit changes introduced into the Foster Wheeler Pension Scheme (FWPS) in 1993. These changes were made to comply with requirements to equalise the pension ages of men and women (emanating from the European Court’s ‘Barber’ ruling on 17 May 1990 – see the box below). The High Court directions made in the case imposed a significant financial burden on FWPS.
The Court of Appeal’s decision overturns the previous High Court ruling. The judgment sets out a number of guiding principles for dealing with similar issues connected with equalisation that should give hope of the Court’s willingness to find sensible solutions. Unfortunately the Foster Wheeler judgment managed to find a ‘quick fix’ to implement these principles and is not explicit in dealing with similar issues in different circumstances.
The Foster Wheeler High Court Judgment
Pension ages under the FWPS had originally been 65 for men and 60 for women. FWL had attempted to equalise these in 1993 by setting a common Normal Retirement Age (NRA) of 65.
Some members who joined the Scheme before the change of NRA therefore had some pension accrued by reference to age 60 and some to age 65. In order to allow members to draw their ‘age 60 benefits’ as before, the Scheme’s early retirement provisions were amended so that a member could retire from active service at age 60 and draw benefits without actuarial reduction. If exercised, this provision would provide preferential terms to ‘age 65 benefits’ and so, in order to control costs the employer’s consent would be required for this.
These changes had not caused problems until recently when the cost of exercising the preferential early retirement terms became more apparent in the light of a deficit in the Scheme.
Previous court rulings (in particular the cases of Trustee Solutions and Others v Dubery and also Hodgson v Toray Textiles Europe Ltd in 2006) had indicated that, where a member was entitled to benefits accrued by reference to an NRA of 60 (for example), the member must be allowed to draw those benefits at that time. It was not good enough merely to provide the member with benefits of equivalent value at a later date.
A consequence of this was that if a member had some ‘NRA60 benefits’ they would need to be allowed to draw all their benefits at age 60. This was because the previous fiscal rules did not allow benefits to be split. Under the FWPS the route to receive ‘NRA65 benefits’ at age 60 was via the preferential early retirement rule and hence the High Court held that the employer’s consent required for early retirement between 60 and 65 could not be withheld if a member had accrued any part of their benefits by reference to an NRA of 60.
Significantly, the FWPS rule regarding early retirement from active service does not provide for a reduction for early payment. If the employer consent required to control the cost of this is deemed as given a significant financial impact would result. A pension payable from age 60 is typically around 30% more valuable than the same pension payable from age 65.
FWL proposed a solution based on paying a ‘split pension’ – ‘NRA60 benefits’ could be brought into payment from age 60 and ‘NRA65 benefits’ from age 65. The flexibility to pay split pensions was introduced in 2006 and FWL sought directions from the High Court that they could lawfully be introduced into the rules of FWPS.
This argument had previously been successful following an Appeal ruling in the Dubery case, although the context was slightly different. That scheme was winding-up and the arguments related to the way in which different tranches of benefits should be prioritised when applying the schemes assets to secure benefits.
The Court ruled that, in the FWL case, splitting pensions in this way would be unlawful and that the right way to proceed was in accordance with the equalisation approach adopted by the Scheme in 1993, rather than imposing a new one (i.e. a case of ‘too late to go back to the drawing board’). The minimum modification necessary to give effect to the right to receive some benefits early was to remove the consent requirement, meaning that any member with ‘NRA60 benefits’ could retire with unreduced pension at age 60 (including their ‘NRA65 benefits’).
The Court of Appeal Judgment
The Court of Appeal recognised that the above ruling could, in the circumstances, lead to members receiving higher benefits than intended by European law. It was noted that these ‘windfalls’ were unfair to the Company and also potentially unfair to other members of the Scheme.
It ruled that rights to draw some benefits early should be given effect by adhering to scheme rules where possible but that if some departure from the rules is needed there should be ‘minimum interference’ with a scheme’s provisions. The extent of changes needed to the wording of scheme rules as well as the substantive effect of any amendment on members’ rights must be considered.
A case-specific solution was found to FWL’s problem. The FWPS rules allow members with ‘NRA60 benefits’ to receive these from age 60 by leaving service, in which case the trustees can apply a reduction to ‘NRA65 benefits’ on retirement at that age by making use of the early retirement rule applicable in those circumstances, which does allow for a reduction to be applied. This avoids the potential “windfalls” mentioned earlier and also accords more closely with the current rules than the alternative suggestion of splitting pensions into tranches.
Action for Trustees / Employers
Whilst the possibility of allowing split pensions as a solution was discussed in this case, no clear ruling was given. It was noted that this would involve a more substantial interference with the Scheme’s rules and would involve additional administration requirements and complications as a result of ‘non-uniform accrual’ of benefits. As the problem could be solved by requiring a member to leave service to give effect to their ‘NRA60 benefits’, alternative solutions were not discussed further.
While the FWL judgment provides a pragmatic, common sense approach to the issue of equalisation, it is reliant on the specific provisions of the FWPS and cannot automatically be used as an appropriate practice for all schemes. It still leaves uncertainty for schemes where this route will not prevent unintended ‘windfalls’.
There does, however, appear to be hope that the Court will apply a common sense approach and, in other cases more creative solutions may be allowed. Bringing a Court action for directions is, however, costly and it would be hoped that this would not be needed.
Trustees and Employers may wish to seek legal advice regarding action taken some time ago to equalise pension ages and discuss the potential impact on the scheme’s funding with their actuarial advisers if there is any doubt of its effectiveness. Employers and trustees should pay careful attention to their responsibilities when exercising discretion in relation to members’ retirements in the light of the principles drawn out in this case. Background – sex equalisation
Article 141 of the Treaty of Maastricht (formerly Article 119 of the Treaty of Rome) enshrines the principle of equal pay for men and women. Initially it was unclear whether this applied to pension benefits as well as salary and working conditions. However, in the case of Barber v Guardian Royal Exchange in May 1990, the European Court of Justice (ECJ) decided that Article 141 applied to occupational pension schemes. The ‘Barber’ decision had a significant effect as many pension schemes did not provide equal benefits – in particular normal retirement ages (NRAs) were often 65 for men and 60 for women (in line with state pension arrangements).
The Barber decision meant that many schemes had to ‘equalise’ NRAs for men and women. How they should do this was not clear until further judgements were made including that of ‘Coloroll’ (Coloroll Pension Trustees Ltd v Russell and Others in 1994) when it was confirmed that schemes could have different retirement ages for male and female members, but only for pensionable service up to 17 May 1990. Pension schemes could equalise benefits either by reducing NRA for men or by increasing it for women.
However, for service between 17 May 1990 and the date that a scheme’s rules were amended (the “Barber window”), the ECJ ruling meant that male members’ benefits had to be leveled up so that they were treated the same as female members.