The Shillcock judgment - Lower Earnings Limits offsets are not illegal

United Kingdom

The long awaited judgment in the Shillcock case was delivered on 19 April.

The case was an appeal against a determination by the Pensions Ombudsman which concerned the operation of an offset equal to the national insurance lower earnings limit ("LEL"). A part-time employee was excluded from the scheme on the basis that she earned less than the LEL and the scheme only provided pension benefits on earnings in excess of the LEL. The employee claimed that her exclusion amounted to indirect sex discrimination as it affected significantly more women than men.

Ombudsman decision
The Ombudsman upheld the complaint on the basis that a significantly higher proportion of women employees were excluded than men and the policy could not be objectively justified. He directed that Mrs Shillcock should be retrospectively admitted to the scheme and be provided with pension accrual that did not discriminate against her because of her low earnings. The duty to make such arrangements was conditional upon Mrs Shillcock, at the Trustees’ request, paying to the scheme contributions at a level consistent with her having been a member of the scheme for the relevant period. The determination raised the question of whether pension schemes should, for example, be pro-rating LEL off sets. The Trustees and employer appealed.

High Court appeal
The appeal was allowed. The judge said that, as he saw it, the purpose of deducting the LEL was to achieve a broad integration between benefits under the scheme and the provision of the state pension. It was not artificial, and it applied equally to all employees. Neither statute nor Article 141 (the EC Treaty provision establishing the right of equal pay for equal work by men and women) mandated any particular method by which pay should be calculated, and as long as the method used was not discriminatory, one sex could not object that they would have done better against the other if a different method had been employed. There was therefore no difference in treatment for the purposes of establishing discrimination.

Although not necessary, the judge went on to consider whether the scheme's practice could be objectively justified. He said that integration with the state scheme could provide objective justification. Where the policy was that it was sufficient that all employees had the opportunity to accrue a state pension on earnings up to the LEL (by paying voluntary national insurance contributions), the fact that this applied irrespective of whether employees actually chose to make relevant national insurance contributions did not render the policy illegitimate.

The judgment will come as a big relief to the large number of occupational pension schemes that operate similar offsets.

For further information please contact Mark Grant on +44(0)20 7367 2325 e-mail [email protected].