In this issue we highlight the implications of the latest ruling on equalisation in the courts, which is proving controversial and may have repercussions for other schemes with similar rules. We also include a short note for trustees regarding current market conditions.

Equalisation -  latest case (Foster Wheeler Ltd v Hanley and others)

The recent Foster Wheeler decision in the English High Court has once again focussed attention on the issue of equalisation. As you will be aware, equalisation refers to the process of amendment of pension schemes that followed the decision in the Barber case on 17 May 1990,  whereby the European Court of Justice held that it was unlawful to discriminate between the sexes by providing their pension benefits at different ages.

The Foster Wheeler case focussed on the Barber "window" (the period between 17 May 1990 and the date when benefits were equalised by amendment of the scheme). Under the rules of the scheme, normal retirement date (NRD) was originally 65 for men and 60 for women with a provision for early retirement. During the Barber "window" male members of the Foster Wheeler scheme, therefore, accrued pension entitlement on the basis of the earlier normal retirement age of 60, rather than 65.

The Barber "window" was closed off in the Foster Wheeler scheme by a deed in August 1993, which equalised NRDs at 65. The deed also changed the scheme's early retirement rules so that members could retire (with company consent) on or after reaching the age of 60 on an unreduced basis, both for benefits accrued with an NRD of 60 and for benefits with an NRD of 65. Despite the new NRD of 65 that had been applied to the scheme, during the 1990s, the company permitted members to take unreduced early retirement from age 60. Funding constraints, however, led to a change of policy following a scheme valuation in 2000. A deed of amendment in 2003 provided for a reduction of benefits paid before age 65 (for benefits accrued after the entering into of the 2003 deed) and the company became less willing to consent to early retirements. In 2005, the company ceased consenting to early retirement unless the applicant was a woman who had joined the scheme before 1 April 1990 and from 2006 the company refused all applications for early retirement.

Following the Dubery and also the Toray Textiles equalisation cases in 2006, the company received advice that members of the Foster Wheeler scheme would be able to take their full pension at age 60 without company consent on an unreduced basis in respect of benefits accrued prior to April 2003 and that the payment of split pensions would not be permitted. Realising the potential financial implications of such a situation, the company raised the court action to seek clarification on how to apply the early retirement rule. The company thought that split pensions should be permitted (given they no longer infringe HMRC requirements) so that benefits accrued by reference to an NRD of 60 would be paid in full at 60 and benefits accrued by reference to an NRD of 65 would only be paid in full at that later date.

The Court in Foster Wheeler held that mixed NRD members were entitled to take all their pension benefits (both those accrued on the basis of an NRD of 60 and those accrued on an NRD of 65) at age 60 without any reduction for early payment of the benefits accrued with an NRD of 65 (except for benefits accrued after the 2003 amending deed, which would be reduced for early payment). The Court rejected the company's argument for split pensions (which were not provided for in the rules) as the Barber window had been closed by the 1993 amendment and an amendment of the scheme to impose a split pension would only be justified if it was the only way to make the scheme Barber compliant.

This case has potential implications for those schemes which retained a company consent requirement in their early retirement rule as a method of "controlling" the cost of Barber equalisation for members otherwise taking an unreduced pension at 60. Although this case has been appealed and the decision may therefore change, schemes with similar rules to those in Foster Wheeler should in the meantime seek legal advice on the implications of this case.

Financial market conditions

The Pensions Regulator has issued a statement to trustees of all work-based pension schemes setting out its general position in relation to current market conditions. Though recent developments in the financial markets will be of great concern to pension scheme trustees, sponsoring employers and scheme members, the Regulator does not believe there is systemic exposure to "toxic" asset classes. The main issues faced by defined benefit pension schemes in the current economic climate will be the general fall in asset values, emerging pressure on employer covenants and, ultimately, the solvency of employers. The Regulator's view is that its current codes and guidance cover the relevant issues and allow sufficient flexibility for trustees.

Trustees should remain vigilant and continue to monitor the scheme sponsor's covenant and their scheme's investment portfolio on a regular basis. Trustees might also wish to check the terms of their investment management agreements regarding the manager's investment objectives, benchmark and obligations to rebalance the portfolio and report to the trustees. Trustees of schemes which do have an exposure to "toxic" assets and/or derivative counterparties with impaired credit ratings should be discussing with their investment manager(s) the steps the manager will take to protect their position.

19 December 2008

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