New developments on equalisation

This morning, the High Court handed down its verdict in the case of Foster Wheeler Ltd v Hanley and others, in which CMS Cameron McKenna LLP acted on behalf of one of the successful representative beneficiaries. The judgment has serious implications for many UK defined benefit pension schemes.

The case concerned the treatment of benefits accrued during the “Barber window” i.e. the period between the date of the European Court’s judgment in Barber (17 May 1990), and the date the Scheme equalised male and female normal retirement ages at 65. Foster Wheeler, in common with many sponsoring employers, attempted to equalise benefits for future service by amending the Scheme’s early retirement provisions so that, with company consent, members could retire on or after age 60 with no reduction to their benefits for early receipt (except in relation to service after an amending deed was executed in 2003 introducing a power to reduce benefits paid before 65). This applied equally to benefits accrued with a normal retirement date (“NRD”) of 60, and those accrued with an NRD of 65.

By retaining the requirement for company consent, Foster Wheeler believed that it was able to control early retirements. However, two High Court judgments in 2006 (Trustee Solutions Ltd v Dubery and Hodgson v Toray Textiles Europe Ltd) held that where a member has any pension accrued by reference to an NRD of 60, the member is entitled to take the whole of their pension at 60, and whether any reduction applies depends on the terms of the scheme’s early retirement rule. In effect, this removed the requirement for consent to retirement before age 65.

For schemes with early retirement rules which permit a reduction for payment before 65, these cases had, in theory at least, no adverse impact on the scheme’s liabilities. However, for schemes such as Foster Wheeler, this meant that members with service during the Barber window e.g. a male member with 3 years of Barber window service and 30 years of NRD 65 service had the right to take their full pension at age 60 without company consent and with no reduction applied (except in relation to service after 2003). This was estimated to add approximately £30 million to the liabilities of the Scheme. The company sought directions from the Court.

The company relied on the comments of the Court of Appeal in Cripps v Trustee Solutions and Dubery last year in arguing that the correct treatment of Barber window pension rights involved splitting pension into two tranches (which, since 6 April 2006, no longer contravenes Revenue requirements), so that members would be entitled to take their NRD 60 pension at 60, stay in service, and receive their NRD 65 pension at 65. The Foster Wheeler case is the first time this issue has been directly addressed by the courts.

Mr Justice Patten held that the correct approach was to make only the minimum modification necessary in order to give effect to pre-equalisation and Barber window rights, which means that all that is required is the removal of company consent to retirement from 60. The consequence of this decision is that for schemes which adopted the same approach to equalisation, all members with Barber window service are now deemed to have the right to retire at 60, and to take their entire pension at 60 unreduced for early payment (unless at the time of equalisation a power to reduce NRD 65 benefits taken before 65 had been introduced). Clearly this has the potential to add significantly to the liabilities of schemes at a time when most schemes are in substantial deficit.

The company has been granted leave to appeal.

If your scheme is in a similar position to Foster Wheeler, you may wish to seek legal advice as to the implications of this judgment. However, we would advise against taking any immediate action to implement changes in the light of the Foster Wheeler decision until the case has been heard before the Court of Appeal.