30 years have passed since the landmark Barber judgment, but equalisation issues are still giving rise to pensions disputes, with a potentially large price tag attached. Following the Lloyds decisions, equalisation for the effect of guaranteed minimum pensions (GMP equalisation) is also a hot topic.
What is equalisation?
Pension schemes used to provide for different normal retirement ages for men and women, reflecting the different ages at which state pension benefits became payable. The difference is still reflected in aspects of scheme design, such as past periods of contracted-out service (guaranteed minimum pension (GMP) ages are 65 and 60, respectively, for men and women).
30 years ago, the European Court of Justice (ECJ) decided in Barber that the right to equal pay for men and women (at the time, contained in Article 119 of the EEC Treaty) applied to occupational pension schemes, and that it was in breach of this principle to provide for different age conditions for men and women. Mr Barber’s complaint related to the fact that on redundancy, he was only entitled to a deferred pension, whereas a woman of the same age would have been entitled to an immediate retirement pension.
The ECJ imposed a time restriction on the effect of the judgment, so that Article 119 could not be relied upon to claim entitlement to a pension calculated on an equalised basis for service prior to the decision (17 May 1990), with the exception of claims and legal actions that were pre-existing.
So, for any period of pensionable service prior to 17 May 1990, equalisation of pension ages was not required. For the period between 17 May 1990 and the date that the scheme rules were equalised (known as the ‘Barber window’), pension rights were ‘levelled up’, that is, the disadvantaged members were entitled to the more favourable treatment, which generally meant that male members were entitled to a lower retirement age.
Following the case (and subsequent cases which clarified the effect of Barber), schemes took steps to ‘equalise’ retirement ages between men and women by amending the scheme rules and issuing announcements to members. However, in many cases, the steps taken were insufficient to achieve equalisation – with significant consequences for scheme funding if the mistake was only discovered many years later.
Barber equalisation: if schemes took these steps many years ago, how and why are disputes still arising?
Barber equalisation issues can be identified in various ways – for example, as part of a due diligence exercise for a merger or acquisition, during a rules review, or following a change of scheme adviser. A contractual dispute could also arise between the trustees and an insurer in relation to a liability management exercise (such as a buy-in), or between corporate entities following a merger or acquisition. On occasion, individual members have also complained to the Pensions Ombudsman.
A failure to properly equalise benefits under a scheme’s rules will result in a significant increase in the scheme’s liabilities and will often result in a professional negligence claim against the advisers who failed to advise on the correct way to equalise or identify that the rules had not been validly amended. As time passes, bringing a professional negligence claim in relation to equalisation issues is likely to become increasingly complex because a claim may be out of time, or because of the difficulty of gathering sufficient evidence. To read more about professional negligence claims, visit www.allenovery.com/profneg.
Court claims in relation to equalisation arise mainly in four ways:
- the parties cannot agree on whether equalisation has been achieved and either seek clarification from the court or ask the court to agree a settlement of the disagreement;
- the parties agree on the position but seek the court’s confirmation as to the correct position;
- the parties seek to rectify the document that failed to give effect to equalisation; or
- the failure to equalise is not in doubt but the trustee/employer brings a professional negligence claim against the scheme’s advisers.
To read more about High Court claims, visit www.allenovery.com/highcourt.
Going to court on an equalisation dispute is not necessarily a bad thing, although the risks and benefits need to be assessed in each particular case. Where there is uncertainty or disagreement, a court decision that equalisation was properly effected on a particular date would have the effect of reducing the liabilities that an employer would otherwise face, but an unfavourable decision by the court would have the opposite effect (and the parties would also incur the additional cost of litigating the dispute). The key point, however, is that trustees need to pay the correct benefits and therefore need to know how to calculate those benefits so that they are compliant with the equal pay requirement.
Some recent cases involving Barber equalisation issues include:
What is GMP equalisation?
Schemes that were ‘contracted-out’ are required to provide GMPs (specific statutory requirements apply). Inequalities in total pension may arise for reasons including the different ages at which the GMP comes into payment for men and women, and rates of revaluation and indexation:
After many years of uncertainty, the High Court ruled in October 2018 that benefits should be equalised for the effect of unequal GMPs – the judge considered several proposed methods for equalisation (see our briefing for details). One potential method involves using the statutory framework for GMP conversion – the government has published guidance on using this method, but there are a number of unresolved issues - read more. HMRC has also issued guidance on various tax issues arising from corrective payments.
A further ruling, in 2020, considers issues around correcting past transfers out . We act for the trustee in this case. This is a complex area and both trustees and sponsors should seek legal and other professional advice on the implications for their scheme.
A further issue that should be considered at an early stage is the payment of arrears, as the judge considered that a scheme’s forfeiture rule could operate to limit this. Trustees should take advice on their rules and decide an appropriate approach for their scheme.