Equalisation and winding-up: all change (again)

United Kingdom

This morning, the Court of Appeal handed down its verdict in the case of Cripps v Trustee Solutions and Dubery. The decision is of vital importance to underfunded schemes currently in wind-up and their treatment of benefits accrued during the "Barber window" (i.e. the period between the date of the European Court's  judgment in Barber (17 May 1990), and the date the scheme equalised male and female normal retirement ages).

A quick reminder - the background

The original High Court judgment in this case was handed down in June 2006. The key question was whether a male member (who was aged over 60 but under 65 at the date winding-up began and who had accrued benefits in the scheme’s Barber window), was to be regarded as "entitled" to the payment of benefits under the scheme even though he had not yet retired. The issue was crucial because if the answer to this question was "yes", this would have the effect of allowing him to leapfrog deferred members in the statutory priority order on winding-up then applicable under the Pensions Act 1995.

The judge at first instance placed his emphasis on the pre-A Day Inland Revenue requirements, reflected in most scheme rules, that the whole of a pension had to be taken at once. In his view, this meant that the member had an “entitlement” to the immediate payment of his whole pension (not just the proportion relating to Barber window service). One potential impact of this for schemes more generally was that even for male members with only a short period of Barber window service, many years’ worth of non-Barber window benefits would also be prioritised on wind-up, to the detriment of younger deferreds.

The Court of Appeal’s decision

However, the Court of Appeal unanimously overturned the judge's decision. It held that the wording in the Pensions Act referring to an "entitlement" to pension or other benefits arising on wind-up should be construed as meaning benefits either in payment, or which a member had the right to demand under European law (i.e. benefits related to service during the Barber window). It did not extend to benefits accrued outside that window where the member had not reached normal retirement age under the scheme rules.

In other words, the case decided that the way to deal with pension benefits for these purposes is by "tranching": splitting benefit entitlements by reference to the different normal retirement ages applicable to different periods of service. The judgment also prevents the prioritising of non-Barber window service, a result that the judges referred to as "potentially distorting" and "extraordinary".

Action required

Many wind-ups have been delayed while schemes awaited the outcome of this case. It may now be necessary to take further legal advice to ensure that the effects of the Court of Appeal's decision are adequately communicated, and that the required changes to existing winding-up processes are properly implemented.