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OPDU Report 26 October 2009 Advisory Service Forum The past 12 months have seen many pension related cases coming before the courts. Important decisions in relation to age discrimination, equalisation, rectification and the responsibility of trustees for scheme records are considered in this article highlighting issues trustees and supervising employers might in consequence want to consider . Age discrimination In March this year, the ECJ decided that the UK default retirement age (DRA) of 65 introduced by the Age Regulations could be compatible with the overarching EC Equal Treatment Directive (the Directive) provided that the DRA could be objectively and reasonably justified. It was for the High Court to determine if the DRA was in fact justifiable. Just as this edition of the Report was going to press the High Court decided (25 September 2009)1 that it is lawful for employers to compulsorily retire employees atage 65. In reaching its decision, the court sought to identify the legitimate aim that justified the DRA. The social policy aims which influenced the decision to introduce a DRA of 65 were set out in the Government’s July 2005 Coming of Age consultation document as: (i) workforce planning; and (ii) the avoidance of an adverse impact on the provision of occupational pensions and ther work related benefits. The judge was satisfied that the Government had proved to the necessary standard that these were legitimate social policy aims. He considered this to be a social policy aim of general public interest that could be distinguished from reasons particular to an individual employer’s situation. On this basis he concluded that the DRA could be objectively and reasonably justified. The judge was clear that his decision would have been different if the Government had not recently brought forward its review of this area to 2010, giving a clear steer that employers should expect changes. He commented that given the changed economic circumstances since the time of implementation, and the burdens that an ageing population places on the social security system, a DRA above age 65 would now seem sensible. Subject to any appeal, this decision brings to an end the Heyday. It also means that the 800 or so claims on the issue of mandatory retirement, currently on hold at employment tribunals, will now fail. For now, employers can continue to retire employees from age 65 upwards, as long as they follow the statutory processes set out in the Age Regulations, but it looks like change is inevitable and trustees of those schemes still open to accrual will then need to think about what pension can legitimately be provided for those working past 65. Equalisation Continuing with the discrimination theme, the Barber decision, even though nearly 20 years old, continues to throw up significant decisions in the courts. In Beck2 a question arose as to whether provisions in the scheme rules allowing members’ benefits generally, or specific aspects of those benefits (such as their normal retirement age), to be as notified to them could be relied on to cure problems that otherwise existed with the approach taken to equalise benefits in the scheme. The judge decided that reliance could not be placed on the notification provisions. He considered that the rule was one which allowed the admission of a member to the scheme on special terms. It was not a rule that later allowed a fundamental feature of the scheme to be altered without going through the processes provided for in the scheme amendment power. Other schemes will have similar rules, and may have used them in relation to new joiners at some point after 17 May 1990. In those situations Beck suggests that such rules will provide an effective means of equalising benefits for those individuals despite the absence of an effective rule amendment. Even in this type of case though care will be needed. In Beck the judge took a strict view of the notification provisions. In consequence, and reflecting the approach of the judge in the BESTrustees3 case, the failure of the relevant companies to have given the notification would have proved fatal to the argument that the announcement had altered members’ normal retirement date. Trustees and employers wanting to use this approach will therefore need to look very carefully at what has in fact been done to ensure both that the power is available and has in fact been correctly exercised. There was better news for employers from the other significant equalisation case recently decided – Foster Wheeler.4 Readers of this edition of the Report may well be familiar with the important decision from which the following key points emerge. In the original judgment the court decided that the effect of the European case law and the amendments made to the scheme were such that members were able to retire from age 60 with no reduction applied to any part of their pension even that accrued by reference to a normal retirement age of 65. This added significantly to the liabilities of the scheme and the company therefore appealed. The company’s appeal was successful. The court decided that on the proper interpretation of the scheme rules, members’ benefits accrued by reference to a normal retirement age of 65 should be reduced if paid before that age even where so paid as part of a single pension. In reaching this conclusion the court acknowledged that the rules did not specifically state the amount of pension a member should receive in retiring between age 60 and 65 with a period of Barber service. Some departure was therefore necessary from the rules to resolve the question and the court decided that where this was necessary it should intervene in such a way as would represent minimum interference with the existing scheme provisions. In deciding what “minimum interference” was required, the court needed to consider not merely the form but also the substantive effect of the modification. The Court of Appeal therefore rejected the trial judge’s solution because it gave a windfall to members imposing an unintended additional cost on the company. The Foster Wheeler case does not help schemes which did not properly equalise benefits but where effective equalisation has occurred, the decision makes it clear that members should not be able to claim unintended benefits. The very pragmatic approach taken by the court to achieve this result has been welcomed. Schemes will need to consider their own rules in order to decide how this result is achieved, the court’s principle of “minimum interference” making a solution through the existing rules the preferred approach. There is encouragement to schemes to identify a pragmatic solution (as the court did in Foster Wheeler) with the introduction of an appropriate rule amendment. Resorting to the courts to justify those actions is discouraged. Not all trustees will necessarily be comfortable with that approach but for those that are, the need for a rule amendment to give effect to equalisation within the scheme ought to be noted and taken into account when those rules are next amended. Rectification Correcting benefits conferred by mistakes in the rule drafting process can be difficult as cases such as Lansing Linde and Smithson – v – Hamilton have shown. Even in cases where the necessary evidence to seek such relief is available, employers can be put off by the significant costs that might be incurred – particularly if a full trial is necessary. The Colorcon5 decision demonstrates, however, that in appropriate circumstances, that concern could be unfounded. In this case the employer sought by summary judgment an order for rectification of the rules of the scheme in relation to deferred pensions. The employer was seeking to rectify an alleged error relating to the provision, in the 1996 rules, of an annual rate of increase for deferred pensions fixed at 5%. It was the company’s case that it was the common intention of the company and the trustees that the annual increase would be the lesser of 5% or the rate of increase in the retail prices index. The representative beneficiaries had consented to the application and in granting rectification the judge was satisfied that the necessary evidence of intent was present. He saw no other compelling reason for the case to go to trial. The decision in this case should help those acting for representative beneficiaries who might be worried that the responsibilities of that role have not been properly discharged if no full trial occurs. That in turn may encourage more employers or trustees, in appropriate cases, to look at this type of solution to drafting errors. Scheme records As the Pensions Regulator noted in its consultation document on record keeping in July 2008, the quality of scheme records has a huge impact on all aspects of a pension scheme’s administration. The MCP case6 decided in July 2009 is a sharp reminder to trustees of the legal obligations they have in this area in addition to the Regulator’s expectations of them. In the MCP case, the claimants sought damages in respect of loss alleged to have been suffered as a result of the defendant administrator’s breach of duty. Some 32 members had transferred to the scheme but the defendant had failed to maintain their records so that no reference to those members was subsequently found. The result was that they were overlooked when the scheme was wound up and subsequently substantial financial provision had to be made for them. The scheme in question was one of the Maxwell schemes and presented many challenges on the administration front. The defendant disputed liability on a number of grounds. One argument was that, as the claimant had undertaken an extensive advertising campaign and issued section 27 notices, with no former members coming forward as a result, the section 27 notices provided a complete answer to any claim by the 32 members. This line of defence was based on the provision in the Trustee Act 1925 which states that, once two months have elapsed after a section 27 notice has been issued, trustees can safely distribute assets by reference only to those beneficiaries of which they have “notice” and no other person has a claim. There were two key questions for decision; firstly whether section 27 applied to pension schemes at all (the judge thought that it did) and, therefore, secondly, what constituted “notice” for the purposes of that act. On the second issue, the judge considered that there was a distinction to be drawn between “notice” and “knowledge”. Section 27, he decided, was concerned with notice and not knowledge. A person had “notice” of a fact even though it might have been forgotten and so not known any more. The trustees accepted that they had previously been aware of the 32 members in question. The judge therefore concluded that section 27 notices were ineffective to protect the trustees from those members’ claims. An appeal is contemplated but, unless it is successful, the decision means that trustees risk being liable for any members they lose track of and will therefore be expecting more from scheme administrators to guard them against this risk. The world being what it is, records may rarely be complete and accurate 100% of the time. Indeed, the larger the number of schemes operated by employers and the more corporate reorganisations affect scheme members, the greater the risk. For schemes that have not yet considered the Regulator’s guidance on record keeping, the MCP case may be a prompt to look at that more closely, more urgently. Although section 27 notices are not a complete answer for trustees who are winding up schemes, they will continue to provide a layer of protection such that trustees are likely still to use them. Given the limitations on the effectiveness of such notices, however, buying missing beneficiary insurance looks to be essential for trustees who want fully to protect themselves on a winding up. Foot notes 1 - Age UK, R (or the application of) v Attorney General (2009)
Peter Shave
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