Key points
At a glance
- More Barber equalisation issues are coming to light as employers look to wind up schemes
- Liabilities may be higher than expected, which increases the bulk annuity price
- Schemes looking to do a bulk annuity in the next few years should take action now
Equalisation problems from the 1990s are increasingly coming out of the woodwork as more schemes go down the bulk annuity route. The consequences can be enormous but there are ways to tackle it, writes Stephanie Baxter
It is 25 years since the Barber judgment ruled that benefits had to be equalised between men and women, creating a major task for the industry. However, equalisation was not properly executed in most cases, and past issues are coming back to haunt schemes as they look to wind up through a partial or full buyout.
The problem lies in a general consensus in the early 1990s that an announcement to members was sufficient to achieve equalisation. However years later the courts ruled this was not successful and instead an amendment was required to the scheme rules through a deed.
Some of the common issues that arise are that a deed for equalisation is missing, doesn't exist or wasn't done properly because the adviser at the time said an announcement to members would suffice. This may mean liabilities may be higher than expected, thereby pushing up the bulk annuity price.
Equalisation headache
RAC Staff Pension Scheme trustee John Nestor says: "People may think they've equalised as what was required in the mid-1990s with Barber, but it's only when you think about the next destination for the pension fund such as going to buyout that things start to come out of the woodwork. The insurance company asks for a trust deed for equalisation, but in many cases it doesn't exist.
"Briggs versus Gleeds 2013, which said you need a deed for equalisation, is what's making insurance companies nervous. Someone could come along and say 'you've been paying me the wrong pension for X years'. They're nervous about taking on a liability that for all intents and purposes everyone thinks is correct but because of the lack of a trust deed it becomes an issue."
Insurers are understandably careful as they are potentially exposed to massive risks if it turned out members were due a bigger benefit than thought.
In the majority of cases a deed wasn't issued straightaway when a decision was made to equalise retirement ages post-Barber. It would have been tidied up years later, according to ARC Pensions Law senior partner Anna Rogers.
Where many years have passed between the invalid announcement and the subsequent valid deed, equalisation would have been dealt with much later than intended.
Rogers explains: "A lot of deeds were done in 1996 because across the industry most schemes updated their trust deeds and rules before the 1995 Pensions Act came into force in 1997. However, I've seen cases where there was no deed until 2000 or after. If you thought your Barber window was closed in 1991 but it actually wasn't done until 2000, that's a lot more pension accrual that people are entitled to have from 60 without actuarial reductions."
Unsurprisingly, there is little incentive to go looking for problems that may result in extra liabilities, particularly where a scheme is in deficit and the employer already has difficulty making contributions. But avoiding the problem can cause major headaches where they suddenly arise in the preparatory process for a bulk annuity and can delay the transaction.
Bulk annuity process
Pension Insurance Corporation business origination actuary Uzma Nazir says when the insurer writes business it relies on the trustees to say who the members are and what benefits should be insured.
"To do that, schemes will put together a benefits specification (summary of rules and documentation), and that's where issues like equalisation come to the forefront," she says.
During the sign-off, lawyers will check the specification against the trust deed and rules.
"Usually schemes tell us the benefits and have 12 months to clean the data and issue policies, and get sign off from their lawyers that they are insuring the correct benefits. Any issues that come out of that process, the trustees will have to amend the benefits and pay a different premium."
She continues: "If the scheme tells us 'these are the correct benefits but we just can't find the deed that exists to back these up' and if the scheme lawyer is comfortable the trustees are insuring the correct benefits, then there's maybe a workable solution. But if they're saying 'we actually can't find the deeds and don't know what the correct benefits are', and trustee lawyers won't give sign-off to the correct benefits being insured, then that's where an issue arises."
So although discovering a problem is not good news, it's not necessarily the end of the world.
Nazir gives one example where a scheme was confident a deed existed even though it couldn't be found despite searches: "But they wanted to do the transaction. We said ok, we'll insure on a basis which gives members the better outcome as agreed with their trustee lawyers because the deed couldn't be proven to exist. We agreed that they should keep trying to find it and if found within an agreed period we would readjust the benefits."
Where a deed is missing and there's evidence it existed, it may be possible to persuade a court to grant an order declaring equalisation took place.
Burges Salmon disputes and litigation partner Justin Briggs recommends adopting a 'no stone unturned' approach: "Often in these cases where an employer has an equalisation black hole, I'm told 'we don't have any documents, we've looked and there isn't anything'. Look again, dig out all your files and think about where the document might be."
Documentation issues are of most risk to an insurer where the transaction is carried out on an 'all risks basis', where it takes all risk for any benefits or data being incorrect and charge an extra premium. While these are relatively uncommon in the broader bulk annuity market, they are common for big buyouts.
All material buyouts that Mercer has advised on in the last 10 years have been on an all risk basis, says its UK leader for bulk pensions insurance advisory David Ellis. He adds: "With those, the insurer is absolutely incentivised to find all these problems as otherwise it will have to take them on."
Be pro-active
Given the issues that can come out during the process, schemes looking to do a bulk annuity in the next few years could consider doing a benefit specification with a lawyer to get their house in order now.
"You wouldn't want to instruct your advisers and start paying them, engage with insurance firms, take everyone down the route to a transaction, and then discover a problem with the documentation and find that you're out of pocket," says Ellis.
Doing due diligence up front could even improve the pricing as insurers will put more competitive prices in for deals which are likely to transact.
"The price may be more because the liabilities are bigger, but at least it will be matching the real liabilities. The latent liability becomes settled and that is de-risking," says Rogers.
She adds: "If a buy-in really is in prospect, you can let that extra cost come in at the eleventh hour when you're under pressure and you have little negotiating position to do the deal, or you can find out about the extra cost when you have plenty of time to think about it and do something. But in general people aren't taking that view and there's a strong inclination to let sleeping dogs lie."
Although it is understandable why there is little desire to unearth these issues, as more schemes look to buyout it may be worth discovering problems now rather than later.
Litigation
Some pensions litigation work has been generated by schemes discovering an equalisation problem while looking to buy out.
Burges Salmon's Justin Briggs says where equalisation was dealt with at a much later date than intended, and the announcement is definitely invalid, little can be done other than try and sue whoever is still on the scene.
The claim against the adviser in the mid-1990s has been time-barred since 2010, but it could be seen if any claim can be made on the subsequent deed which did equalise the scheme.
"If that deed was drafted on the basis that it rubber stamped the invalid announcement, then arguably you have a claim. But even some of those claims are becoming time-barred, and those would be against people doing documentation services which typically are a smallish number of big consultancies, but mainly lawyers that may have created the problem but whitewashed over it later."
He litigated on behalf of an employer that was ready to buyout but couldn't because an issue was found in the documentation, and so had to sue the adviser. By the time it came back the bulk annuity pricing had considerably worsened.
He says in claims against negligent advisers there can be a new category of damage resulting from the worsening of the buyout market while the transaction couldn't proceed due to documentation problems.
"These claims can be big enough as it is. A firm of solicitors or pension consultants may find itself on the hook for £5m-£10m of liabilities valued on the then buyout basis, but with an additional head of claim that figure will go up as the client been taken out of the buyout market."
