Pensions - Equal treatment for all

An exemption which allowed pension schemes to award smaller pensions to civil partners and same-sex spouses found to be incompatible with EU law.

In brief
A recent Supreme Court decision has paved the way for equality of pension provision by confirming that a surviving same-sex spouse is entitled to the same spouse's pension rights as a surviving opposite-sex spouse. 

Comment 

The Supreme Court handed down its judgment in Walker v Innospec Limited and others on 12 July 2017, and in a move which surprised many, confirmed that a surviving same-sex spouse should be entitled to the same spouse's pension rights as a surviving opposite-sex spouse.  

This decision means that trustees and employers of defined benefit schemes will no longer be able to rely on the statutory exemption that permitted certain pensionable service accrued before 5 December 2005 to be disregarded from the calculation of pensions for civil partners and same-sex spouses.  Instead civil partners and same-sex spouses are entitled to receive benefits based on the member’s full period of pensionable service.

In light of this decision trustees and employers should look again at the rules of their schemes to determine how benefits for same-sex couples should be administered.  In particular, legal advice should be sought where buy-ins and buyouts are in place or being contemplated.

Background

Mr Walker was employed by Innospec for 23 years prior to taking early retirement in 2003, contributing to the pension scheme throughout that time.  In 2006 he entered into a civil partnership and subsequently married his civil partner.  Mr Walker brought an action claiming that his (then) civil partner should be entitled to the spouse's pension provided for under the scheme.  The Court of Appeal confirmed that, broadly, there was no requirement to provide benefits for his partner in respect of pensionable service prior to 5 December 2005 (the date on which civil partnerships were introduced).  Mr Walker appealed the decision to the Supreme Court.

Arguments

Much of the Supreme Court's discussion concerned the timing of legislative changes, especially in a pensions context where it is not always easy to see when benefits become permanently fixed.  In the case in question it was argued that the entitlement to a spouse's pension is not fixed at the date of retirement but at the date when that spouse's pension falls due.  Denial of a pension to a same-sex partner at this point would amount to discrimination on the grounds of sexual orientation.  If Mr Walker had married a woman (whether during his pensionable service, after retirement, or at some future date), there was no question that she would have been entitled to a spouse's pension.

Judgment

The Supreme Court confirmed that Mr Walker’s husband, provided he does not predecease him, and that they remain married at the time of Mr Walker’s death, is entitled to a spouse’s pension calculated on the basis of all the years of Mr Walker’s service with Innospec.

For schemes, this means that their funding requirements should take into account the possibility of a change in marital status of an employee, regardless of whether it is a same-sex marriage or opposite-sex marriage.  This could lead to an increase in scheme liabilities.

Summary and Actions

Unless there is an appeal to the Court of Justice of the European Union, which seems unlikely, schemes will need to ensure that same-sex couples are provided with the same benefits for all periods of pensionable service as married couples of the opposite sex.  At this time it is uncertain if and when any specific amendment to the Equality Act 2010 will be made.

For trustees and employers this means:

• Reviewing scheme rules to consider how benefits for same-sex couples should be administered for both those in payment and those yet to come into payment.  Any underpayment of pension should be addressed (potentially with interest for late payment).
• Reviewing the scheme rules to see if any specific rule amendments are required to bring them in compliance with the judgment.
• Where buy-ins and buyouts are in place or being contemplated, reviewing / revising the specifications and contractual terms to provide same-sex spouses with the same benefits as opposite-sex spouses.

If any further advice is needed please contact your usual Wrigleys adviser.