UK: Low And Behold: It's Not All Bad News For Pension Schemes North Of The Border!

Last Updated: 7 June 2010

In an era of hard pressed and underfunded defined benefit pension schemes, equalisation has been an issue that has significantly increased the burdens of many.

For schemes that are subject to Scots Law a recent Opinion by Lord Drummond Young in the case of Low & Bonar plc & Low & Bonar Pension Trustees Limited v Mercer Limited (Low & Bonar) may help to lighten the equalisation burden for some pension schemes north of the border.

What is equalisation all about?

On 17 May 1990 the European Court of Justice's decision in the Barber case made it clear that men and women had to have the same normal retirement date ("NRD") under their pension scheme.

Prior to Barber it was very common in the UK for women to be able to retire and receive their pension at a NRD of age 60. Men often had to wait until they reached age 65 before they could do the same.

Following Barber it was permissible for pension schemes to change their rules to give both men and women an NRD of age 65.

Until a scheme changes to an NRD of age 65 for both sexes, men and women have an NRD of age 60.

That all happened years ago. Why does it matter now?

To implement a NRD of age 65 for both sexes most schemes had to change their rules. Pension schemes contain an amendment power which (subject to certain restrictions) allows them to do that.

Amendment powers differ from scheme to scheme. They need to be complied with fully when making scheme changes. Courts take a strict approach to the exercise of the scheme amendment power. If it has not been fully complied with, the scheme change is invalid.

Cases have come to light where pension schemes and their members thought they had changed to an NRD of age 65 for both sexes many years ago only to discover that they have not. Commonly this is because the method they use to bring about the change did not fully comply with the method required by the relevant scheme amendment power.

Consequently, many schemes have been administered and funded on the basis of an NRD of age 65 for both sexes, when in fact for certain periods of service an NRD of age 60 applied to both sexes. These schemes now have to provide benefits on the basis of an age 60 NRD for significant additional periods of service and this is costly. This has left affected schemes even more underfunded while their members have been the recipients of "windfall benefits".

How does Low & Bonar affect all of this?

In its real fundamentals Low & Bonar is not different to the approach taken by the courts to date. Scheme changes still need to comply with the scheme's amendment power.

What this Opinion indicates is that it may well be easier for pension schemes that are subject to Scots Law to conform to a scheme amendment power that requires changes to be made by deed than is the case in England. This is because the term "deed" does not have a prescriptive technical meaning in Scots Law.

How had equalisation been undertaken by the Low & Bonar Group Retirement Scheme ("Scheme")?

The Scheme amendment power was exercisable by the Principal Employer with the consent of the Trustee. It required amendments to be done by deed. The term "deed" was not defined in the Scheme documentation.

The Principal Employer and the Trustee genuinely believed that they had achieved an NRD of age 65 for both sexes in 1991. This had been communicated to Scheme members at that time. The problem was that they had not entered into a formal deed to achieve this. What they could show they had done was:

  1. Produced a signed minute of the board of directors of the Principal Employer which showed that they had resolved to change NRD to age 65 for both sexes with effect from 1 July 1991; and
  2. Produced a signed minute of the board of directors of the Trustee Company which showed that the Trustee agreed with the Company's proposal to change NRD to age 65 for both sexes with effect from 1 July 1991.

If NRD had not changed for both sexes in 1991 the next occasion when that could have occurred was in 2002, some eleven years later.

Lord Drummond Young's approach

Lord Drummond Young considered an occupational pension scheme to be commercial in nature. This meant that the Scheme's provisions should be construed contractually (and therefore objectively) without taking an over-legalistic approach to the words and having regard to the practical effect of what is done.

He identified the two basic characteristics of a "deed" for the purposes of Scots Law as:

  1. An arrangement that has a degree of formality; and
  2. Demonstrates an intention to create a legal relation.

He concluded that the Principal Employer board minute satisfied both of the above characteristics. He was satisfied that the Trustee Company minutes were sufficient to show consent by the Trustee to effect an NRD of age 65 for both sexes. Members had been told about the changes. The amendment power had in his view been complied with in 1991.

The effect of the Opinion

The overall effect of the Opinion is that Lord Drummond Young considered the Scheme had effectively been equalised in 1991.

Brodies' comments

This Opinion is a real triumph of rational thought in a common law jurisdiction. The law provided the legal flexibility and Lord Drummond Young duly applied it to arrive at a sensible outcome.

We are sure that many of our English pension law colleagues would welcome such an outcome south of the border. However, because this Opinion turns on the legal meaning of the term "deed" it is not necessarily directly applicable in the English context.

There have been plenty of cases that demonstrate only too vividly that attention to the detailed requirements of the scheme amendment power is absolutely crucial to bring about a valid scheme change. They also demonstrate the cost of non compliance. This Opinion does not alter that fundamental principle.

That said there are some really interesting aspects to this Opinion and the rationale behind it. We are sure that it will be revisited in contexts other than equalisation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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