UK - Foster Wheeler has been allowed an appeal by the UK Court of Appeal against an earlier High Court judgment, which allowed members of its pension scheme with mixed Normal Retirement Dates (NRDs) to take all pension benefits at the earlier age without an actuarial reduction.
However, while the judges disagreed with the High Court ruling that also “disapplied” the requirement for employer consent for members to take early retirement, they dismissed the use of a split pension approach.
The case Foster Wheeler Ltd Vs Hanley and Others centres around the changes to the defined benefit (DB) scheme following the introduction in 1990 of European law on pension equalisation, as at this point female members had a NRD age of 60 but men had to retire at age 65.
In 1993, the company amended the rules of its pension scheme to make the pension age for both men and women 65 for future service. However, between 17 May 1990 and 16 August 1993, male employees accrued pension benefits with a retirement age of 60 known as ‘Barber rights’ - following the 1991 European court case.
The High Court case was brought to determine “how the Foster Wheeler pension scheme should pay benefits to members in circumstances where, because of developments in European law on pensions equalisation, (1) those members have accrued benefits with two different NRDs, (2) they choose to retire between those dates, and (3) there is no specific provision in the pension scheme to address this situation.
This was triggered by the fact that in 2003 Foster Wheeler altered the early retirement rules of the scheme to actuarially reduce the benefits with an NRD of 65 and to require members to gain company consent for retirement - because the scheme fell into deficit in 1999 - where previously it had allowed members to take their full pension without reductions.
The High Court was offered three possible solutions to the problem of deciding the entitlement of a member with a mixed NRD wanting to take a pension between 60 and 65:
a single pension calculated on the basis that all the benefits had fallen due for payment on the date of retirement; a single pension payable in full, save that the pension payable by reference to benefits accrued with a NRD of 65 must be discounted for early payment, or split pensions, meaning for this purpose, separate pensions payable from each NRD respectively.
In November 2008, the High Court ruled in favour of option one, however Foster Wheeler was given leave to appeal and in today’s judgement the three Appeal Court judges unanimously agreed to grant the application and instead ruled in favour of option two.
Lady Justice Arden noted in the judgement that the High Court’s decision had “major implications for the administration of pension schemes” as the effect of the ruling is that in relation to pension with an NRD of 65, “a member will on early retirement receive more than that to which he is entitled under the rules, and in that sense he receives a windfall”.
Following a summary of the background to the case, she noted the ruling was “unfair to the company and potentially unfair to other members of the scheme” and claimed the windfall element of the ruling “constituted a fatal flaw”.
Instead, she favoured the second option of allowing members to take all their benefits as a single pension rather than splitting it, which would be a “substantial interference with the provisions of the scheme”, but allows for an actuarial reduction on the latter part of the pension to avoid the windfall element, using rule 17 of the scheme’s existing regulations.
She added: “To all intents and purposes, through the operation of rule 17, the member would obtain a single pension, comprising the benefits accrued with an NRD of 60 and with reduced benefits accrued with an NRD of 65”.
Mr Justice David Richards and Lord Justice Lloyd supported Arden’s arguments, with Lloyd noting a single pension with an actuarial reduction would be less complicated than splitting the pensions which “involves venturing into uncharted waters, undertaking a task which, so far as is known, no-one has attempted before in relation to a UK occupational pension scheme”.
As a result the appeal was granted and the ruling made in favour of using rule 17 to actuarially reduce at the discretion of the trustees - although the Judges agreed that trustees may wish to modify the rule to make the reduction dependent on the advice of an actuary or if the company requires it to be made rather than at the trustees discretion.
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