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UK pensions speedbrief - Walker v Innospec: Supreme Court case on pension benefits for same-sex partner

  • United Kingdom
  • Pensions

13-07-2017

On 12 July 2017, the Supreme Court handed down its judgment in Walker v Innospec Ltd and others. This case looks at a defined benefit scheme where the survivor’s pension payable to a surviving civil partner or same sex spouse is restricted so that it reflects only the member's pensionable service since 5 December 2005, the date on which the Civil Partnership Act 2004 came into force. In a result that will have come as a surprise to many in the pensions industry, the Supreme Court overturned the Court of Appeal decision and held that this restriction is unlawful.

This decision means that trustees and employers of defined benefit schemes may no longer be able to rely on the Equality Act 2010 exemption that allows service before 5 December 2005 to be disregarded in these circumstances. They may instead be obliged to provide pensions to civil partners and same sex spouses based on the member’s full period of pensionable service.

Background

The EU Framework Directive (2000/78/EC) established a framework for combating discrimination, including on the basis of sexual orientation. The Civil Partnership Act 2004 came into force on 5 December 2005 and an exemption now contained under schedule 9 to the Equality Act 2010 (the December 2005 exemption) allows pensionable service before that date to be disregarded (save for certain contracted-out rights) when calculating the survivor’s pension payable to a civil partner or same sex spouse.

Mr Walker worked for Innospec from 1980 until his retirement in 2003. He and his partner had been living together since September 1993. They entered into a civil partnership in January 2006 and subsequently married.

Innospec’s scheme, in common with many other defined benefit schemes, only takes into account pensionable service from 5 December 2005 when calculating the survivor’s pension payable to a same sex spouse or civil partner. As Mr Walker left service before 2005, his husband’s pension would only have reflected certain contracted-out rights and would therefore have been materially smaller than that payable if he were married to a woman.

Mr Walker brought a discrimination claim in the Employment Tribunal, which decided in his favour. On appeal, the Employment Appeal Tribunal (EAT) reversed that decision. The Court of Appeal unanimously upheld the decision of the EAT, holding that Mr Walker’s entitlement must be judged by reference to the law in force at the time he accrued his pension (i.e. conduct that was lawful when it occurred cannot retroactively become unlawful). Mr Walker then appealed to the Supreme Court, which heard the case in March 2017.

This appeal was heard jointly with the appeal in O'Brien v Ministry of Justice, which is on a similar time limit or “temporal limitation” theme. It looks at whether the period of service before the coming into effect of the Part-Time Workers Directive (97/81/EC) should be taken into account in calculating the amount of pension to be paid to a part-time judge.

The Supreme Court decision

The Supreme Court unanimously allowed Mr Walker’s appeal. It made a declaration that the December 2005 exemption under UK law is incompatible with the EU Framework Directive and must be disapplied. The court said Mr Walker’s husband is entitled, on Mr Walker’s death, to a spouse’s pension based on his full period of pensionable service.

As a general rule, legislative changes apply prospectively under UK and EU law. This broad principle presents a particular challenge in a pensions setting, where rights accumulate over many decades. It is not always easy to identify the point at which rights become “permanently fixed”.

The previous Court of Appeal decision in Innospec was influenced by a line of cases including Barber and Coloroll, in which the Court of Justice of the European Union (CJEU) applied temporal limitations to judgments relating to equal pay for men and women. The Court of Appeal said that “pension rights attributable to a particular period of service are acquired definitively during that period of service; and that the legal situation created by that period of service is definitively fixed on expiry of that period of service”.

However, the Supreme Court in Innospec considered that these cases were not particularly relevant to the application of legislation, which in this case was the EU Framework Directive. Instead, the Supreme Court relied more extensively on a different line of CJEU cases, including Maruko and Römer, and said that the time limits in the Barber cases were introduced only as an exceptional measure. The Supreme Court said that unless there was evidence of “unacceptable economic or social consequences” of paying Mr Walker’s husband a full pension, it should be done. The court did not discuss the economic consequences of disapplying the December 2005 exemption.

The Supreme Court took a different approach in the O’Brien appeal, which was heard at the same time. It found that it was not clear whether the Part-Time Workers Directive requires periods of service before the deadline for transposing that directive to be taken into account when calculating the pension of a part-time judge. The question was referred to the CJEU.

Comment

This Innospec decision will come as a surprise to many in the pensions industry, particularly trustees and employers of schemes that restrict the survivor pensions payable to civil partners and/or same sex spouses in line with the 5 December 2005 exemption under the Equality Act 2010. After all, in designing and funding benefits in this way, schemes were applying an exemption specifically provided for under UK law.

The Supreme Court said that “the period during which [Mr Walker] acquired that entitlement had nothing whatever to do with its fulfilment” and “the financing of Innospec’s retirement scheme should have been planned taking into account a possible change in Mr Walker’s marital status.” This does not sit particularly comfortably with the fact that funding and actuarial assumptions for defined benefit schemes are necessarily made based on existing law and conditions during the time the benefits are accrued. At the time Mr Walker’s benefits were accrued, neither civil partnership nor same sex marriage was possible in the UK.

The Innospec judgment is not easy to reconcile with the Supreme Court’s views in O’Brien, where it was considered unclear whether periods of service prior to a directive should be taken into account when calculating a pension. The court referred the question to the CJEU in legal circumstances which, on the face of it, appeared broadly similar to those in Innospec.

The precise implications for schemes that apply the December 2005 exemption will need to be considered carefully, and will depend on whether this case is referred to the CJEU (which seems unlikely). There is a real possibility that affected schemes will need to change their benefit structures in respect of surviving civil partners and same sex spouses going forward, as well as facing the prospect of retrospectively re-calculating benefits already paid. This could of course have funding implications, or at least mean that trustees have to re-consider the actuarial assumptions applicable to survivor benefits at the next actuarial valuation.

The first step will be for trustees and employers to check the rules of their schemes to identify whether they have to date applied the restriction on same sex survivor benefits. Those schemes that have done so will need to take advice on their position and may need to take steps to amend their schemes to remove it.

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