UK: Human Capital (Pensions): Equalisation – The Chequered Flag Is Looming

Last Updated: 4 September 2007
Article by Helen Needham and Denise Van Gellecum

17 years ago, the ‘hot topic’ for everyone involved in pension schemes was the equalisation of pension ages as between men and women and the implications of the Barber case. Well, as they say, some things never change… There have been numerous recent cases on the problems encountered by schemes in trying to amend scheme rules to comply with the sex equality laws, and the PPF is encouraging schemes to double-check whether they equalised pension ages correctly. In this article we look at why this is still such an important issue and what scheme trustees should be doing if they think they have an equalisation-related claim

It is well known that the introduction of the Pension Protection Fund (PPF) brought with it a raft of issues for occupational pension scheme trustees, particularly if their scheme enters a PPF assessment period. But the PPF’s recent call for trustees to reconsider equalisation has reared an issue which many thought had been laid to rest in the early 1990s – and which may yet cause a headache for trustees.

The PPF regularly requires trustees to undertake a review of recent rule changes in order to assess whether any such changes are inadmissible. But in a recent development it has come to light that the PPF is requiring trustees to undertake a more extensive ‘MOT’ of their scheme by considering whether the normal retirement ages (NRAs) of male and female members have been equalised correctly.

This is an important question for the PPF because in order to calculate the level of PPF compensation payable to members, it needs to know at what age each member is entitled to take their benefits.

As an increasingly important point on the PPF’s agenda, trustees should act now to check that NRAs in their own scheme were equalised correctly.

Back To The Starting Line

The issue of equalisation arose out of the 1990 case of Barber v Guardian Royal Exchange (Barber), in which the European Court of Justice (ECJ) ruled that Article 141 of the Treaty of Rome (which enshrines the principle of equal pay for equal work between men and women) applied to occupational pension schemes. The consequence of this was that men (as the disadvantaged sex) began to accrue benefits by reference to the lower NRA of women, who had historically been the advantaged sex (because their lower NRA entitled them to retire at a younger age). The equal, lower NRA remained in place until such time as the scheme rules were amended to provide a different, and usually higher, NRA for all members. Subsequent ECJ decisions in 1994, in particular in the cases of Coloroll Pension Trustees Limited (Coloroll) and Russell and Smith v Avdel Systems gave clarity as to the retrospective effect of Barber.

The timeline below shows, for a typical scheme (with NRAs of age 65 for men and age 60 for women), the extent of the ‘Barber window’, during which time men accrued benefits by reference to the same NRA as women:

Period

Men

Women

Pensionable service pre 17 May 1990 (date of Barber judgment)

NRA was age 65 under the scheme rules

NRA was age 60 under the scheme rules

Pensionable service from 17 May 1990 to date when NRA was validly amended

Benefits accrued by reference to an NRA of age 60 (the most advantageous NRA under the scheme rules)

NRA remained age 60

Pensionable service following valid amendment

NRA was equalised at any age (usually age 65)

NRA was equalised at any age (usually age 65)

The Pit Stop

During the 1990s, most parties involved in the administration of occupational pension schemes considered the effect of Barber. The majority of sponsoring employers took the decision to increase the NRA for both men and women to age 65 and amendments were made to scheme rules to implement this.

Unfortunately for the employers, and now the PPF as the substitute scheme sponsor for insolvent employers, it has become apparent that many schemes were not amended correctly in accordance with the scheme’s amendment power. Consequently, men and women in such schemes have continued to accrue benefits by reference to age 60 since 1990.

A number of cases last year highlighted obstacles which trustees and employers have faced when trying to make changes to their scheme rules. Two of those cases raised the following points of interest:-

  • Trustee Solutions v Dubery – where the scheme rules require an amendment to be "in writing under hand", an amendment is not valid unless the relevant parties signed the amending document (note that this case went to appeal recently – see below – but not in relation to this particular point).
  • Betafence v Veys and others (currently under appeal) – a failure to notify members of an amendment after it had been implemented, as required by the scheme’s amendment power, may not necessarily invalidate the amendment, although it could give members an opportunity to claim breach of trust.

The outcome of these decisions, combined with the PPF’s interest in this issue, is a further warning that trustees should look to undertake a review of the equalisation procedure followed in the 1990s.

What Engine Work Is Needed And Why?

Firstly, the requirements of the amendment power that was in place at the time of equalisation should be ascertained. The next step is to identify and review all scheme documentation relating to equalisation including deeds of amendment, definitive deeds, written resolutions, member booklets, announcements and meeting minutes.

If there is no evidence that an increase to NRA was made in accordance with the relevant amendment power, then the Barber window will run from May 1990 until the present day. This will increase a scheme’s liabilities because it means that members have accrued benefits by reference to a lower NRA for a longer period than anticipated.

There is a possibility of reducing this funding deficiency if a successful claim can be brought and damages recovered from a culpable third party who advised the employer/trustees on the question of equalisation in the first place.

Refuelling Opportunity

If during an equalisation audit evidence is uncovered which suggests that former professional advisers to the scheme acted negligently or in breach of trust, this evidence may form the basis of a civil claim. But trustees will need to act quickly as there is a risk that any claim will become statute-barred in the near future.

Time Limits

Most attempts to equalise NRAs were carried out in 1994 or 1995, once the impact of the Barber decision had been clarified by Coloroll. Trustees are now unlikely to be able to bring a claim for breach of contract (ie breach of an adviser’s terms of engagement) as the law requires such claims to be brought within six years of the date of the breach.

But, it might still be possible to bring a claim in negligence because the Limitation Act 1980 allows a three-year claim window which runs from the date upon which the trustees or employer knew (for example, by having obtained legal advice), or reasonably ought to have known, about the former adviser’s breach of duty. However, this three-year window is subject to a fifteen-year longstop, which runs from the original date of negligence. This means that trustees who discover in 2007 that equalisation had not been implemented properly in 1994 have until 2009 within which to bring a claim, as this marks the end of the fifteen-year longstop.

Most trustees therefore only have a very limited period of time within which to commence proceedings, before claims become statute-barred in 2009/2010.

Fine-Tuning

Generally, a cost-benefit analysis should be undertaken before entering into litigation but where the limitation deadline is fast approaching, it would be prudent to issue a ‘protective’ claim form before the deadline, in order to preserve the claimants’ ability to bring a claim and allow further time for investigation. The claim form need only contain a brief summary of the basis of the claim. If sufficient supporting evidence is collated, the claim can be pursued by filing particulars of claim. A claim form must be served within four months of being issued. If it is not served within this timeframe the claim will fall away.

Consideration should be given to a number of issues before proceeding with a claim, including:

  • The identity of the claimants. Ordinarily, any loss to a scheme’s funds is borne by the employer but this is not the case where a scheme is in a PPF assessment period and the employer has entered insolvency. Any claim would therefore be brought in the trustees’ names and the trustees’ rights and cause of action would transfer to the PPF in the event that the PPF assumed responsibility for the scheme.
  • The identity of the defendant(s). In most cases professional advisers were involved in the equalisation process. Trustees should scrutinise their terms of engagement and ascertain the current identity of the firm(s) in question and the extent of their involvement.
  • The loss to the scheme, the likely cost of pursuing a claim and the impact of a successful claim on members’ benefits. Bear in mind that damages would not raise members’ benefits above the level of PPF compensation payable. Actuarial advice should be sought.
  • The strength of the claim. This will involve interviewing witnesses, reviewing scheme documentation and obtaining and reviewing the files held by the defendants. Legal advice should be sought.
  • The risk of a finding of contributory negligence. If there is no persuasive evidence that the trustees queried the failure to comply with the amendment power, a court might hold the trustees partly responsible for the failure to equalise. Any award would be reduced accordingly.

Recommended Action Plan

The PPF’s interest in equalisation, the spate of recent cases considering the valid use of scheme amendment powers and the imminent expiry of limitation periods are all good reasons why trustee boards should review their position.

Trustee boards should act now by undertaking an equalisation audit, identifying any limitation periods and, if necessary, seeking legal and actuarial advice. As a further warning, trustee boards may need to consider lodging a protective civil claim, before the opportunity to do so is lost.

Postscript: The Trustee Solutions v Dubery case went to appeal and the judgment of the Court of Appeal was handed down on 26 July 2007. In brief, the focus of the appeal case was how section 73 of the Pensions Act 1995 (the statutory priority order) applied to the benefits accrued by members of the scheme during a ‘Barber window’ period, and the Court of Appeal overturned the decision of the lower court on this point. We will be producing a separate Alert on the Dubery appeal case in due course, but in the meantime if you would like to discuss the implications of the case for your scheme, please do not hesitate to speak to your usual contact at Hammonds.

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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