Court of Appeal overturns "windfall" pensions decision

In a ruling that applies to most final salary occupational pension schemes, the Court of Appeal has rejected a High Court decision on the equalisation of retirement ages on the grounds that it would give some workers a "windfall" while being unfair to others.

Delivering judgment in Foster Wheeler v Hanley and others [2009] EWCA Civ 651, Lady Justice Arden said the case arose from a series of ECJ decisions including Barber which held that pension benefits were equivalent to pay for the purposes of the equal treatment directive.

The requirement on schemes to equalise male and female retirement ages was applied from 17 May 1990, the date of the barber ruling. The period after that date and before schemes were amended to take into account the rights created by the ECJ, in Foster Wheeler's case three years, became known as the 'Barber window'.

To close the window, Foster Wheeler set the retirement age for both men and women at 65, while continuing to permit early retirement at 60 without any reduction in benefits.

Six years later the scheme fell into deficit and changed the rules so that the consent of the company was required for early retirement and the pension was actuarially reduced, to apply from 2003.

Arden LJ said the change in rules left some employees with retirement ages of both 60 and 65, but the rules made no specific provision for them.

She said the court had to choose whether to allow them a single pension with full benefits (option 1), a single pension with a discount for early retirement (option 2) or split pensions payable from each retirement age (option 3). In the High Court Mr Justice Patten backed option 1.

Lady Justice Arden said the effect of the judge's ruling could mean that '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.

'It is said that the European jurisprudence does not require the enhancement of a member's benefits accrued outside the Barber window.

'Moreover, such benefits have to be borne by the pension fund or paid for by the company, and thus could prejudice the position of members of the scheme who do not have Barber rights.'

Arden LJ said Patten J's decision was 'unfair to the company and potentially unfair to other members of the scheme'.

She went on: 'In my judgment, the windfall element constituted a fatal flaw.'

She said that option 3 would involve a 'more substantial' interference with the rules of the scheme than option 2, which she decided was the best option.

Lord Justice Lloyd agreed that the appeal should be allowed.

'The guiding approach should be that of making the least substantive alteration to the provisions of the scheme that is compatible with the required equalisation,' he said.

Mr Justice Richards agreed.

Stephen Lister, head of commercial litigation at Bond Pearce in Bristol, acted for Richard Williams, a beneficiary of the scheme whose case was similar to others.

Lister said the outcome was not as good for his client as the High Court decision, but better than split pensions (option 3).

'This judgment has an impact on the vast majority of final salary occupational schemes,' he said.

Robin Simmons, partner at pensions specialist Sackers, said the appeal demonstrated the judiciary's willingness to find ways to reach the 'right' solution. 'The High Court's decision resulted in a windfall for certain members and the Court of Appeal was at pains to find a workaround within the confines of the scheme's rules,' he said.

'It has succeeded in doing so on a construction of the particular scheme's rules. Other possibilities - such as splitting periods of benefits - might work in other cases.'

Kate Richards, pensions partner at Nabarro, said that a lot of schemes would be reviewing their rules following the Foster Wheeler judgment to ensure they made clear which benefits accrued where employees had mixed retirement dates.

'Some schemes did not properly close the window at the right time and liabilities have built up which were only discovered quite a few years later,' she said. 'This could come as a nasty shock.'

She added that Foster Wheeler came after a series of similar cases, and although the Court of Appeal had attempted to pull the strands together, more cases may follow.