The opdu Report - Issue 21, November 2006

Advisory Services Forum
Warning UXB
Giles Orton & Jason Shaw

Sex Equalisation is still a minefield

The pre-occupying discrimination issue of 2006 has been age discrimination - a very challenging concept for pension schemes which are, by their very essence, inherently ageist. Attention has naturally been focussed on age as the Government grapples with the challenge of producing a coherent set of regulations. However two recent cases, (and there are more in the pipeline) illustrate that there are still many unexploded bombs in the field of sex discrimination. Over 30 years on from the first sex discrimination legislation (Sex Discrimination Act 1975)and 16 from the landmark European Court of Justice (ECJ) decision Barber v GRE [1991] 1 QB 344, this minefield is still not fully charted. There remain some dangerous pitfalls even for the wary, let alone the not so wary.

European Law

Before 1990 UK pension schemes commonly reflected state retirement ages and provided for differential male/female normal retirement age (NRA) of 65/60 respectively. In Barber the ECJ held that this was unlawful sex discrimination in breach of Article 117 of the Treaty of Rome. However the impact of this on existing practice was recognised, and so the judgment only applied to benefits accruing in respect of service after the date it was delivered, namely 17 May 1990.

In the subsequent cases Coloroll and Smith v Avdel (reported together at [1994] PLR 211) the ECJ ruled that schemes could achieve equality by “levelling down” for the future by amending their rules to provide for a NRA for male and female members on the less generous basis - normally 65. However the ECJ held that until such time as a scheme validly amended its rules to provide equal NRA, benefits should be treated as “levelled up” - male and female members would be entitled to benefits on the more generous basis - normally a NRA of 60.

Thus, following Barber and Coloroll, the position as regards pensions accruing in the various periods was as follows:

Pre 17 May 1990: schemes could have different NRAs (commonly 65/60)

17 May 1990 to date of scheme amendment: NRA for male and female members is on the more generous basis (usually age 60).  This period is commonly referred to as “the Barber window”.

Date of scheme amendment onward: normal retirement age will be as set out in the amended rules (commonly age 65)

Harland and Wolff

The Facts
This decision of Mr Justice Warren was delivered on 14 July 2006 and is reported at [2000] EWHC 1778 (Ch). A preliminary point was taken in action for professional negligence against the Scheme’s former consultants (who are by no means the only ones who are or have been faced with claims in relation to this sort of issue). The Scheme had been established with slightly unusual retirement ages of 63 for males and 60 for females. After some debate as to how to respond to the Barber decision, on 25 March 1993 the trustee resolved to equalise by increasing female NRD to age 63 - the increase applying only to service on and after 17 May 1990. This resolution was put into effect by a deed executed on 7 September 1993. It was agreed between the parties to the case that this retrospective increase in the NRD of female members was lawful and valid under the trust deed and rules and domestic English law. (As an aside it should be noted that such retrospective amendments would not be permissible under the rules of many pension schemes nor, without members’ consent, after 5 April 1997 when section 67 of the Pension Act 1995 came into force). The question that was taken to the Judge was whether this retrospective equalisation was effective under European law.

The Ruling
Mr Justice Warren found himself compelled by the authority of the European court, in particular Smith v Avdel, to hold that the retrospective reduction of the female NRA could not operate to take away the levelling up of the male NRA to 60 in the Barber window period from 17 May 1990 to 7 September 1993. During this period, as a result of the direct effect of Article 119, men were entitled to accrue benefit on the same basis as women were then accruing. This is a free standing right under European law. The decision in Smith v Avdel was clear authority that it is not permissible to achieve equality in respect of service during a Barber window by reducing the benefits of the advantaged sex: rather the benefits of the disadvantaged sex must be increased during this period.

This is a slightly unusual case in that there was an attempt to equalise retrospectively and by adjustment only of the female benefits. However, the Judge also rejected the argument that the Trustees could have sought to achieve the same results by firstly levelling up benefits for the male members, then using the retrospective amendment power under the Scheme to reduce benefits for all members. It was put to him that the female members’ right to retire at age 60 was always subject to the trustee’s retrospective power of amendment. If the males’ right to levelling up could not be taken away, they were effectively being put into not an equal but a better position than the females. However, this argument did not find favour.

The judge did not seem entirely happy with this conclusion, describing the argument as a “ratchet effect”. He made clear he was compelled to this conclusion by the authority of the ECJ, even though the issue of retrospective amendment powers had not been argued out in that case. “Whether Smith v Avdel is right or wrong, it is binding on me.”

Trustee Solutions Limited v Dubery

The Facts
The Colour Processing Pension Scheme (“the Scheme”) was established by a deed of trust dated 3 October 1960. The sponsoring employer went into liquidation on 1 November 2001 and Scheme itself commenced winding up on 15 February 2002 with a deficit.

The Scheme had originally provided for 65/60 male/female NRA. In 1992, the Scheme sought to amend its rules in order to equalise NRA at 65. The Scheme relied on two different documents to establish a valid amendment: a memorandum, written on the company’s headed paper, but expressed to be from the trustees, was sent to all members of the scheme; and an announcement made in July 1992 to female members of the scheme informing them that their retirement age had been increased to 65. A summary of these changes was distributed to members in an updated member booklet.

The trustee of the Scheme sought directions from the Court on three questions.
The Rulings
1 Had there been a valid amendment to the rules of the Scheme?
The Scheme’s amendment power provided that:
... the Trustees may from time and at any time with the consent of the Principal Company by way of formal variation of these Rules adopted by any deed or deeds executed by the Trustees and the Principal Company or by any writing effected under hand by the Trustees and the Principal Company alter or modify all or any provisions of the Scheme Provided that no such alteration or modification as aforesaid shall be made which would have the effect of varying or affecting any benefits... applicable to Pensionable Service completed before the alteration or modification... without the consent of any Member affected thereby and Provided further that no such alteration or modification as aforesaid shall be permissible if it would result in any payment refund or transfer to the Employers or any of them.

Notice in writing of any such alteration or modification as aforesaid shall before the same takes effect be given to every Member who will be affected thereby.

An amendment would therefore be valid if it had been made by ‘any writing effected under hand by the trustees and the principal company’. The Court therefore had to consider whether the memorandum and announcement constituted ‘writing effected under hand’.
Mr. Justice Lewison held that the documents did not constitute a valid amendment to the rules of the Scheme. It was a substantive requirement that a document amending the rules be signed by the trustees and by or on behalf of the company, and as this requirement was not complied with, there had been no valid amendment of the Scheme. Mr Justice Lewison confirmed that the Court has no power to authorise a departure from the rules, or to waive one of their requirements. Consequently as the rules were never validly amended female members were entitled to a retirement age of 60 in respect of all their service and male members in respect of post 17 May 1990 service.

2 Had an estoppel arisen to preclude a male member of the scheme (the first defendant) who had attained the age of 60 from retiring at age 60?

It was put forward by Counsel for the second defendant that, even if the rules had not been validly amended, the Barber window had been closed by estoppel. The species of estoppel relied on was estoppel by convention or ‘group estoppel’; that it binds all beneficiaries under the trust, as well as the trustees and the company. Thus the effect of the estoppel would be more extensive than that which could have been achieved by valid exercise of the power of amendment. The Court had to consider the principal formulated by Lord Denning in Amalgamated Investment & Property Co Ltd v. Texas-Commerce International Bank Ltd [1982] 1 QB 84:

If parties to a contract, by their course of dealing, put a particular interpretation on the terms of it - on the faith of which each of them - to the knowledge of the other - acts and conducts their mutual affairs - they are bound by that interpretation just as much as if they had written it down as being a variation of the contract. There is no need to inquire whether their particular interpretation is correct or not - or whether they were mistaken or not - or whether they had in mind the original terms or not. Suffice it that they have, by their course of dealing, put their own interpretation on their contract, and cannot be allowed to go back on it.
Mr. Justice Lewison considered that there are a number of difficulties in applying this principal to pension schemes so as to create estoppels binding on members of the scheme, the trustees and the sponsoring company alike, and these were outlined by Morritt V-C in Redrow plc v. Pedley [2002] PensLR 339.
The Court therefore held that for an estoppel to have arisen all members of the scheme would have to held the same mistaken belief regarding the rules of the scheme; the evidence given was inadequate to show this and the first defendant was, therefore, not estopped from retiring at age 60.

3 What was the priority of Barber window benefits under section 73 of the Pensions Act 1995?

The question was whether a male member, who had accrued pensionable service within a Barber window, and who had attained the age of 60 before the Scheme commenced winding up, had an “entitlement to payment of pension” for the purposes of s. 73(3) of the Pensions Act 1995. If such an entitlement had arisen, he would rank higher in the order of priority on the winding up of the scheme than a deferred member who had not yet reached retirement age (the second defendant).

It was held that an entitlement arose where a member was entitled to demand immediate payment of his or her pension. As there had been no valid amendment female NRA remained at 60 in respect of all service and entitlement arose at age 60. For males the position is more complex as there are two tranches of benefit to consider. In respect of his post 17 May 1990 service a male member has an NRA of 60 and so, in parallel with the females, entitlement arises at age 60. For pre Barber service NRA is 65. However as Revenue rules require all pension to be taken at once, if the male wished to retire and draw his post Barber pension at age 60, the trustees and the company would have no option but to agree to his taking his pre Barber pension at the same time, albeit with actuarial reduction. Accordingly entitlement to payment arises at 60 in respect of the whole pension, not just the Barber window element. The judge ruled that this would apply even to members who were still in employment at the wind up date, but given his reliance on Revenue rules to reach his main conclusion, the fact that Revenue rules (at the time) precluded drawing pension while still in employment this element of the decision seems inconsistent.
On the facts of TSL v Dubery, where the Barber window never closed and most of the benefits will have accrued to a NRA of 60, the decision on prioritisation is not obviously surprising. But in cases where the Barber window was short, one can conceive members with 38 years of service to NRA 65 having this prioritised on the basis of a mere 2 years service with NRA of 60. This does not seem entirely fair. We do see merit in an argument that members with Barber window benefits have in effect an option to retire at 60 or at 65 (or at any point in between). On this basis “entitlement to payment” does not arise until the member exercises the option and tells the trustees he wants his pension. In this sense the pension is akin to a debt payable on demand. Whatever merit there may be in that argument, the finances of the Colour Processing scheme mean that TSL v Dubery is unlikely to be appealed. It accordingly stands as an authority. The decision was very short on this point, which was not the major issue in the case. It is however much the most significant in terms of wider implications. It is perhaps unfortunate that such an important issue was not settled by a more fully argued and hence more convincing analysis. We undertstand further cases are following on closely related points and it will be interesting to see whether TSL v Dubery is followed. This being a point of statutory interpretation other judges may be inclined to follow it, though given the brevity of the reasoning, they might also beg to differ. The law retains a degree of uncertainty.

Implications

1. Check validity of Barber amendments
Many trustees will believe that their schemes put the sex equalisation issue to bed some time in the early to mid 1990s. In the light of these cases, it could be advisable to check that the amendments were effective. TSL v Dubery illustrates that the courts do tend to take a strict view as to the formal requirements of any amending documentation. Harland and Wolff casts doubt upon the common practice of the early 1990s of issuing an announcement regarding the changes to be made to effect equalisation, but only following this up later with the formal amending deed that is then stated to operate with retrospective effect. It may well be that there are many Barber windows out there that were, as a matter of law, open rather longer than scheme documentation would now appear to indicate.

2. Wind Ups
Trustees have long recognised that there are few legal certainties in the difficult inter-relations between the section 73 priority order and sex equalisation, particularly when one gets into the more obscure areas such as guaranteed minimum pension (GMPs). The typical view has been that it is necessary to take a broad brush pragmatic approach to achieve equal value of benefits on the basis that in the overall scheme of things there is a relatively small percentage difference in value between benefits accruing to age 60 or benefits accruing to age 65, and if one levels up no one else loses out appreciably.

TSL v Dubery does however make the equalisation issues far more sensitive, as they come to affect standing in the priority order. We are aware of one case where benefits were always accruing to NRA of 65 for both sexes. However, the scheme being contracted out, females had a right to the GMP element of their pension from age 60. TSL v Dubery would appear to indicate that they are therefore entitled to be prioritised in respect of all their benefits if they had reached age 60 at wind up - in which case males over age 60 can presumably claim the same treatment.  For the scheme concerned, if this is right, the effect is to move more one third of the liabilities up the priority order. The under 60 deferred members will be left with no asset coverage whatsoever and even the over 65 pensioners, who up until now have expected to receive full benefits, will find their coverage diluted to 70%. Faced with such a dramatic outcome the trustee is not going got be able sweep the GMP equalisation issue under the carpet and may have to seek court directions.

It is likely that the courts are going to be delivering numerous further decisions in this area, which will make it much more risky that those who have adopted “pragmatic” solutions may have members complaining if those decisions are proved wrong in other cases where trustees opted to go to court for the safety of a direction.

3. Comparators
In both Harland and Wolff and TSL v Dubery, the courts make sweeping statements about males being levelled up. This appears however to be judicial shorthand for males who can point to females doing the same work or work of equal value - the female “comparator” required by Article 119. In English legislation this translates (via Section 63 of The Pensions Act 1995 and Section 1 of the Equal Pay Act 1970) into “like work, work “of equal value” or “work related as equivalent”. These are notoriously difficult tests to apply even when employment is ongoing. For trustees of schemes in wind up who often do not have access to employment records from the 1990s, this test is nigh on impossible to apply in many cases. Though in others it is relatively easy. For example where the few female members of the scheme were say cleaners or typists, it is reasonably apparent that the exclusively male boardroom cannot argue for levelling up.  In our experience, in many  equalisation exercises trustees have tended to level up all males on the basis that it is impossible to test for comparators - and it makes relatively little difference when equalisation can be achieved by means of a small percentage adjustment to benefits.  If however equalisation is going to involve members leap-frogging up the order of priorities to the  significant disadvantage of other younger members, then the issue of comparators is going to have to be considered much more carefully. 
4. Financial Assistance Scheme (FAS)
TSL v Dubery is bad news for younger deferred members of insolvent schemes that went into wind up before the Pension Protection Fund came into being. They stand to receive even less. It is of course good news for the older deferred members (60+ at date of wind up). However they were already the ones who stood to pass the test for support from FAS (by being within 3 years of NRA at May 2004). Which makes the case good news for FAS and the government which may be relieved of the need to support the older deferred members if they are going to be prioritised as pensioners.

Conclusion - What now?

These cases illustrate that sex equalisation issues have not been resolved.  This is still a minefield.  All trustees with a Barber window, which they believed to have been shut, would be well advised to check that closure was effected on the due date, if at all.

Trustees of schemes in wind up are going to have to be particularly careful as there are likely to be further court rulings in these areas and the impact of potential changes in the priority order are so significant that it may be more difficult to resolve matters by adopting  a “pragmatic” approach. 

The final lesson to be drawn is that age is potentially even more problematic for pension schemes than sex discrimination.  As all schemes now look to enter the age discrimination minefield, the lesson of sex discrimination is that the law can develop in  ways that  take the industry by surprise and one should tread exceeding careful.

Giles Orton
Partner
0845 497 1094
gilesorton@eversheds.com

Jason Shaw
Solicitor
0845 497 0732
jasonshaw@eversheds.com

Eversheds LLP
www.eversheds.com