Need to know:
- Employers need to review their pension scheme membership and rewrite scheme rules to ensure any same-sex spousal pension benefits owed have been delivered.
- The ruling in the O’Brien v Ministry of Justice case could have a wide financial impact on pension benefits for part-time employees.
- Divorce and pension rulings also need to be reviewed. Scottish employers, in particular, will need to examine arrangements around the division of pensions to ensure these comply.
Of the many recent court rulings with implications for workplace pensions, the case that stands out as requiring immediate action for employers and trustees is Walker v Innospec, which relates to same-sex spouses’ pensions.
Walker worked for chemical firm Innospec between 1980 and 2003, and sought clarification of the spousal pension his same-sex partner would receive should he die. Innospec argued that it had no obligation to pay a spousal pension to Walker’s husband because the Civil Partnership Act 2004 came into force on 5 December 2005, which pre-dated Walker’s service.
The Supreme Court unanimously allowed Walker’s appeal, and ruled that the spouse’s pension should be calculated on all his years of service, and that the Equality Act 2010, which provides an exception to non-discrimination rules where the right to a benefit is accrued before 5 December 2005, should be disapplied.
Employers and pension scheme trustees should now be looking over their membership base to rectify cases where a same-sex spousal pension should have been paid, and rewrite their scheme rules to ensure they have adequate powers to deliver the required benefits. This should then be notified to employees, beneficiaries and trade unions.
John Wilson, head of technical at JLT Benefit Solutions, says: “Trustees should revisit past cases, to see whether there are arrears to pay, with interest for late payment which would need to be separately identified. There is no need to re-visit benefits payable on member deaths prior to 2 December 2003, the deadline for transposing the Equal Treatment Framework Directive into domestic law. No payments can arise before the directive was implemented. However, for member deaths occurring on or after that date, benefits should be calculated on the member’s full period of pensionable service.
“This is a large exercise for JLT as a third-party administrator, and raises interesting questions such as what should happen if someone has died, or if a lump sum has been paid as a trivial commutation?”
These principles apply whether a pension has been paid direct from the fund or under a trustee buy-in policy. If benefits have been bought out on an all-risks basis, then there will be no trustee liability, but there may be residual liability otherwise. If the scheme has been wound up, the trustee insurance policy may cover any claims.
Financial impact of legal cases
While Walker v Innospec demands immediate action by scheme sponsors, the case of O’Brien v Ministry of Justice, which focuses on the rights of part-timers, could have a wider financial impact.
O’Brien claimed pension benefits for part-time work as a Crown Court judge between 1978 and 2005, and after seven years, the Supreme Court upheld his claim of unfair treatment compared with full-time workers. However, the case has been referred to the Court of Justice of the European Union (CJEU) for clarification on whether the pension should be based on O’Brien’s full 27 years of service or whether EU rules on the non-retroactivity of judgements should limit it to his five years of service after the Equal Treatment Directive became UK law, looking in particular at the comparison with how such a pension would be calculated for a full-time worker.
Whether pension constitutes ‘deferred pay’ for past work is a moot point, because ‘deferred pay’ is assumed to accrue at the time of employment. On that basis, O’Brien would not be allowed a pension based on entitlements before the directive came into force; in contrast to Walker v Innospec, where entitlement to the spousal benefit arises only on Walker’s death.
Ele Lovering, partner in the human resources group at Eversheds Sutherland, says: “While the Walker case on same sex and civil partnerships affects certain members significantly, overall from an industry perspective the numbers are few. However the O’Brien case could have a big impact on scheme funding levels, depending on the European Court’s decision.
“In relation to Walker and Innospec, we have a decision from the highest court in the land, and action should be taken now. Scheme rules should be changed and employers need to consider, where pensions are in payment, whether they have based the benefits on all of the member’s pensionable service. Regarding part-timers, we are advising [organisations] to hold fire until we have seen what the European Court has to say, but that ruling would apply to a much larger population.”
Pension divorce ruling
A Scottish case, McDonald v Newton or McDonald, meanwhile, has implications for what constitutes a ‘period of pension scheme membership’ that should be taken into account in the division of assets, with the ruling that both pensioner as well as active membership should be taken into account. Employers will now need to examine their pension division arrangements to ensure these comply, and that any higher cash equivalent transfer values must be shareable.
This case was unusual because Mr McDonald was a pensioner for most of his 25-year-marriage, contributing to the British Coal scheme between 1978 and 1985, and retiring early at age 32 in ill health. He argued that it was only the value of the pension at the point when contributions stopped that should be considered as ‘matrimonial property’, but the Supreme Court concluded that the period of membership meant simply that and that the words ‘contributing’ or ‘active’ should not have a bearing.
The industry is also awaiting a white paper from the Department of Work and Pensions (DWP) on the sustainability of final salary schemes, which has been promised in the autumn. Much of the anticipation focuses on government interest in Section 67 of the Pensions Act 1995, allowing schemes to scale back accrued rights if that results in a better outcome for employees than the Pension Protection Fund (PPF).
Eleanor Dowling, principal policy, professionalism and research at Mercer, explains: “We expect a largely cosmetic refinement. The government has a low majority, and anything that would be seen to diminish promised pensions would create political fallout. The press would have a field day, and plenty of Conservative MPs represent constituencies where local employers have an issue. If that were the case, one might also expect Ireland to take a separate line.”
There is broad support for a merger of The Pensions Regulator (TPR) and the PPF, which could make it easier and cheaper to implement Regulated Apportionment Arrangements, the statutory mechanism used to split an employer and its defined benefit (DB) pension scheme where there is risk of insolvency.