Equalisation: a light at the end of the tunnel?

The Court of Appeal has handed down its judgment in the case of Safeway Ltd v Newton and another.  In a judgment that will be of interest to any trustee or employer who is wrestling with equalisation issues, the Court of Appeal confirmed that, where a scheme power of amendment requires amendments to be made by deed, there must be a deed.  An announcement to members is not enough.   However, if there is a deed, and if this says that the change to normal retirement ages takes retrospective effect from the date given in an earlier announcement, this may be enough.

Background

It used to be fairly normal for pension schemes to have one retirement age for men (for example, age 65) and another for women (for example, age 60).   This changed when the Court of Justice of the EU (CJEU) ruled, in  Barber v Guardian Royal Exchange Assurance Group, that having unequal (different) retirement ages for men and women was contrary to the equal treatment requirements of EU law.  Following the Barber judgment, employers and trustees took steps to amend their scheme rules to equalise the retirement ages of men and women.

The main ways of equalising retirement ages were to ‘level down’ (in our example, move the female retirement age up from 60 to 65), or to ‘level up’  (in our example, move the male retirement age down from 65 to 60).  It was generally cheaper to level down.  However, schemes had to think about two periods.  The first was the time between May 1990 (the date of the Barber judgment) and the date the rules were amended to equalise retirement ages.  The second was the time after the rules were amended.  Following a series of cases, including Smith v Advel Systems Limited, it has been generally accepted that schemes must ‘level up’ in the first period.  (In our example, this would mean giving males and females a retirement age of 60 between May 1990 and the date the rules are amended.)  However, they can  ‘level down’ in the second period.  In our example, this would mean giving females and males a retirement age of 65 for service after the date the rules are amended.  The Court of Appeal’s decision in the Safeway case has the potential to change this.

The Safeway case

The Safeway scheme had a retirement age of 60 for women and 65 for men.  In September 1991, an announcement was sent to members telling them that their retirement ages would be equalised at 65 for service after 1 December 1991.  From the beginning of December 1991, the scheme was administered on the basis that male and female members had a retirement age of 60 for service between May 1990 and the end of November 1991, and a retirement age of 65 for service from 1 December 1991.  However,  the scheme’s definition of ‘retirement age’ was not amended by a deed until May 1996.

In the High Court, the judge ruled that the 1991 announcement was not, on its own, enough to amend the scheme rules.  The power of amendment required a deed and, because the definition of ‘retirement age’ was not amended by a deed until May 1996, retirement ages were not equalised at age 65 until May 1996.  In practice this meant that, instead of having a retirement age of 60 for pension earned between May 1990 and 30 November 1991 and a retirement age of 65 for pension earned from 1 December 1991,  male and female members were entitled to a retirement age of 60 on pension earned from May 1990 all the way up to May 1996.  For the principal employer, providing a retirement age of 60 for an additional 4.5 years would add an estimated £100 million+ to scheme liabilities and so, not surprisingly, it appealed.

What were the issues for the Court to decide?

The Court of Appeal considered two key questions.

Did the 1991 announcement to members amend the scheme rules to equalise retirement ages at 65 with effect from 1 December 1991? 

The answer to this question was ‘no’.  The Court of Appeal agreed with the High Court judge that the scheme’s power of amendment could only be exercised by deed, and the scheme’s retirement age was not amended by deed until May 1996.

The May 1996 deed amended the retirement age for males and females to a common age of 65 and said this amendment had retrospective effect from 1 December 1991.  Could it do this, or were males and females entitled to a retirement age of 60 until the date of the May 1996 deed?

In the High Court, the judge ruled that the Smith v Advel line of authority meant that the answer to this question was ‘no’. However, the Court of Appeal decided that the answer is ‘perhaps’.

The Safeway scheme’s power of amendment allowed amendments to be made with retrospective effect to the date of an earlier announcement to members:  “and may exercise [the power to amend] so as to take effect from a date specified in the [deed of amendment] which may be the date of such Deed or the date of any prior written announcement to Members…”.   In view of this the Court of Appeal accepted that there is an argument that, at any time between 1 December 1991 (the date of change given in the announcement to members) and May 1996 (the date an amending deed was adopted), the Principal Employer and the Trustee had the power under UK law to amend the Safeway scheme rules to apply a common retirement age of 65 with effect from 1 December 1991.  The CJEU’s judgment in Smith v Advel Systems Limited looks to have proceeded on the basis that “some EU law justification” would be needed  to allow schemes to ‘level down’ (in this case, apply a common retirement age of 65) with retrospective effect in this way and that there is no such justification.

However, whilst  it is easy to see that an employer and trustee would need to look to EU law if they had no power under UK law to level down with retrospective effect, it is not so clear why they need to look to EU law if they have got that power under UK law.  In light of this, the Court of Appeal has referred a question to the CJEU.  In broad terms, the question asks the CJEU to confirm whether a scheme amendment power (like the one in the Safeway scheme) that allowed an employer and trustee to level down (apply a common retirement age of 65) with retrospective effect can be exercised, or whether it is ‘overruled’ by the equal treatment requirements of EU law.

Osborne Clarke comment

If the CJEU decides that the equal treatment requirements of EU law are not overriding, this could be a light at the end of the tunnel for the Safeway scheme and for other schemes which did not manage to ‘tick all of the boxes’ when they amended their rules to equalise retirement ages.  In the Safeway case, it would mean that, as intended, the scheme could apply a common retirement age of 65 from 1 December 1991 (the date of the announcement to members) instead of May 1996 (the date of the amending deed).  In other cases, it could have a similar effect.   The position would depend on the power of amendment and the facts of the case and, as ever, there are a number of factors in play.  These include the Court’s final decision in relation to section 62 of the Pensions Act 1995 (implied equal treatment rule) and the relationship of this to Safeway’s position.

It is also, of course, possible that the CJEU will not provide its ruling until after the UK has left the EU.  However, whatever is agreed regarding a transition period, we would expect the CJEU’s ruling to be determinative in the UK. This is because the UK and EU have both proposed that references to the CJEU made before the date of Brexit will still be heard after Brexit, and the UK’s draft EU (Withdrawal) Bill provides that CJEU case law up to the date of Brexit will have the status of a UK Supreme Court decision, and decisions given after Brexit can still be taken into account.

We will report any further developments in this case.