“Pulp Pensions”

Brian Spence

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The recent popularity of time travelling dramas like Life on Mars, Doctor Who, Torchwood and Primeval have been bringing back nostalgic memories but for some of us we’ve recently had a more unwelcome time-travelling experience.

Pensions equalisation was something that most scheme administrators thought had been put to bed by the time of the Coloroll judgement in 1994. Most schemes felt comfortable about how they had addressed the issue and that the amount of benefits they were paying out for their members complied with the legal requirements.

So what would your average pensions administrator have been doing in 1994? Celebrating with Nelson Mandela on his election as president of the new South Africa? (though to be honest I think Nelson really only came to world notice when he partied with the Spice Girls a few years later). Smooching on the dance floor to Celine Dion’s “the Power of Love”? Or possibly watching movies which have since become classics – the Shawshank Redemption, Pulp Fiction, Leon – how on earth did Forest Gump win best movie at the Oscars that year?

Well, our average pensions administrator may have been doing all those things, but what he wasn’t doing, it now appears, was reading his trust deed and rules. Which, as we shall see shortly, is a bit of a shame.  But first a re-cap on where we thought we were.

Pensions equalisation as an issue dates back to 1990 to the landmark case Barber vs GRE.  Mr Barber was a member of the Guardian Royal Exchange occupational pension scheme, which had different retirement ages for males and females. This was found by the European Court of Justice to be contrary to the Sex Discrimination legislation as they decided that occupational pensions were not some sort of social security benefit but were in fact deferred pay. This meant occupational pensions were subject to the full weight of the equal pay legislation.

This finding, made on 17 May 1990, had a significant impact as most schemes at this time did not provide equal benefits for men and women. Unfortunately whilst the eminent judges who made the decision were entirely clear that pensions were deferred pay, they clearly had no idea as to what that actually meant in practical terms for funded pension schemes. And neither it appears had anyone else!!

There then followed a period of great uncertainty, but schemes had to adopt a consistent approach for males and females in providing benefits. It was pretty clear that schemes could no longer maintain the separate retirement ages for females and males, which had been adopted to reflect the state pension ages of 60 and 65 respectively. But there was huge debate about the possible approaches to actually achieving what was required. A number of crucial issues, such as whether or not it was okay to level down pensions, whether this could be done retrospectively, and whether or not the Barber judgement itself had retrospective effect, were subject to a great deal of uncertainty. The worst case scenario had the potential to bankrupt UK Plc.

The subsequent Coloroll judgement in 1994 clarified a significant number of these points further by declaring that pre 17 May 1990 benefits need not be equalised. Further, for any service between 17 May 1990 and the date of any valid rule amendment, male members would be treated as having the more favourable basis, that is, the same normal retirement age (NRA) as females. This time period became known as the ‘Barber window’.  For service after this rule amendment, both male and female NRA could be equalised at any age.

The Coloroll judgement also had the effect, no doubt entirely coincidental, of removing the possibility of the issue bankrupting UK plc, at least in the short term.

Most schemes opted for a NRA equalised at 65 as for most schemes it would have been too expensive to equalise upwards (i.e. to age 60, the better benefit). That has been the position that has prevailed on equalisation since the mid 1990s, with most schemes having equalised at some point between 1993 and 1996.  For most advisers they key approach was to minimise any increase in their clients’ (by which they meant the sponsoring employer, but that’s a whole different article) liabilities, so once the clarification was available they moved quickly to tell members that their benefits had been levelled down. A typical Barber Window might have remained open between 17th May 1990 and May 94 and pension schemes would have been administered and liabilities valued and paid out on that basis ever since.

There remained a degree of flexibility as to how schemes attempted to implement these principles in practice. I guess buried deep inside the industry’s conciousness there was an expectation of a future day of reckoning when the approaches adopted would be tested legally by a disgruntled member. However, as the years rolled by we began to believe that maybe sometimes you get the breaks and that most people had accepted the approaches adopted without too much questioning.

However, a number of recent legal cases have looked at the question afresh. And do you know what? The approaches adopted by most schemes for achieving equal treatment seem to be largely okay. That’s the good news. Unfortunately the implementation has often been exceedingly flawed and this flawed implementation has given rise to a host of potential complications for schemes, trustees, members and employers.

Last summer’s Dubery ruling is probably the key case, when Mr Dubery challenged the Color Processing Pension Scheme, of which he was a member. As a result companies and administrators will have to review how they have treated pension equalisation.

Mr Dubery had challenged the way that the trustees had amended the scheme documentation to equalise retirement ages. Although the trustees had claimed to equalise retirement ages by an announcement in 1992, the rules of that particular scheme stated that any amendment had to be made by deed. Consequently, the court ruled that the equalisation of retirement ages was invalid as it was done in a manner inconsistent with the rules of the scheme. This meant that the Barber window was never effectively closed, so that the intended short period of benefit, within which a notional normal retirement age of 60 applied, was now significantly longer.

The fact that if you want to amend a Scheme validly, you have to do what the scheme rules tell you appears to have come as startling news to a surprisingly large section of the industry. Presumably the same section who back in 1994 where on the dance floor emulating John and Uma when they should have been reading their trust deed and rules.

As a consequence of the Dubery ruling, all pension scheme trustees should consider revisiting the manner in which they have equalised pension ages in order to ensure that their approach is consistent with the appropriate amendment documentation as, if it is not, the scheme could be carrying significantly higher liabilities as a consequence of the Barber window remaining open.

Another issue to emerge from the Dubery ruling was that if members had the Barber window where the notional retirement age was 60, they should then be able to draw those benefits from age 60, even if the scheme had a retirement age of 65. This was significant because, prior to April 06, scheme rules would typically not allow benefits to be paid in two tranches. The fact that this ruling stated that benefits could be drawn from 60 meant that all the other benefits had to be made available from age 60 as well, although the post equalisation benefit would be actuarially reduced to reflect an early retirement.

The administration implications of this ruling are important because there are many members aged over 60 whom trustees are not expecting to retire for a number of years but who could theoretically now demand their retirement benefits.

Furthermore, the fact that the Dubery ruling concerned a scheme in wind up raised another issue as winding up priority order ranked members whose pension entitlement had already come into payment more highly. The court ruled that any member over 60 had a right to demand their pension and this implies that they should be treated as the higher priority class, whether or not they had actually taken the benefit.

Furthermore the Dubery ruling impacts pension schemes that are contracted out. For members who have contracted out of a State Earnings Related Pensions Scheme, the scheme has had to provide a Guaranteed Minimum Pension (GMP). GMPs had mostly been ignored in any equalisation treatment because they were deemed to be a state benefit. However, even though state pension ages for males and females have been equalised, a legislative hangover has meant that GMPs remain technically payable at age 60 for females and 65 for males.

This means that, in theory, female members could, under the contracting out legislation, request payment of their GMP at 60, though this has never been actively promoted by most schemes. Even where Schemes paid the GMP for females at 60, the Inland Revenue would normally allow the GMP only to be paid at age 60 with the remainder of benefits being payable from 65, where such an arrangement was required purely for the purpose of satisfying the contracting out requirements. However, the Dubery ruling has potentially created a situation where, because female members have an entitlement to some of their benefit at 60, they would be entitled to the rest of it.

As GMPs continued to accrue until 1997, even if trustees had equalised retirement ages in the early 90s, giving a small Barber window, they could now find themselves in a situation where females who had accrued GMPs up until 1997 could have a right to this GMP from age 60. It’s not clear what the corresponding position of a male member would be as male GMP is only payable from 65. Given that it integrates with state benefits you might reasonably expect that the Government would have addressed the point, but it has ducked the issue.

This has the potential to be a material issue as it has never been accepted that males have a right to GMPs from age 60, these benefits always having been valued at 65.  If males now start to claim that they should be entitled to start drawing these benefits at 60, because females can, then the logical implication will be that administrators will have to start re-calculating male GMPs on a female basis.

Whilst lawyers will no doubt reap the rewards to be had from the various complications arising from the Dubery ruling, and administrators are likely to be kept busy ensuring that equalisation amendment documentation is in order, companies with pension schemes could potentially find themselves on the receiving end of a significant hike in liability costs.

The matter of pensions equalisation, it seems, remains far from being settled satisfactorily, a situation that only the ability to travel back in time could resolve.


Brian Spence

Post by Brian Spence

Fellow of the Institute and Faculty of Actuaries and Society of Actuaries in Ireland, scheme actuary, professional pension trustee