Update | Pensions: Same-sex partnerships and defined benefit pension schemes?

As the dust begins to settle over the parliamentary debates regarding the possibility of same-sex marriage, an interesting case was taking place in the employment tribunal which is not entirely unconnected to the topic. It concerned the implementation of the civil partnership legislation back in 2005 and the impact on pension benefits.

First, a little history. Prior to December 2005, same-sex couples were not directly entitled to benefit from each other's pension schemes. There had been some cases involving same-sex benefit discrimination such as Grant v South West Trains Limited [1998] All ER (EC) 193 but generally speaking, entitlements were non-existent except perhaps as a result of a financial dependants definition for discretionary death benefits, but this was hardly flexible and often a same-sex partner could not bring themselves within the class of possible beneficiaries. Grant v South West Trains Limited concerned the failure to grant travel benefits to the same-sex partner of an employee which would have been granted to the spouse or 'common law' opposite-sex partner. It was found not to be discriminatory to withhold such benefits under EC law as it then stood but of course, this pre-dated the Equal Treatment Framework Directive (2000/78/EC).

The Equal Treatment Framework Directive (2000/78/EC) was the first requirement to formally address discrimination on the grounds of sexual orientation. It required member states of the EU to introduce anti-discrimination provisions into domestic legislation. The directive required that pension schemes which recognise unmarried heterosexual partners must also recognise same-sex partners. The Employment Equality (Sexual Orientation) Regulations 2003 (SI 2003/1661) came into force on 1 December 2003 and were designed to implement the directive although these in turn were revoked with effect from 1 October 2010 by the Equality Act 2010 which makes similar provision against discrimination on the grounds of sexual orientation.

The EE(SO) Regs were the precursor to the Civil Partnerships Act 2004 (which received Royal Assent on 18 November 2004) and which recognised for the first time the legality of same-sex relationships formally by the state (in the sense of a formal ceremony) and with that came the extension of anti-discrimination laws on the basis of sexual orientation including within pension schemes with effect from 5 December 2005. However, there was a tiny quirk with the legislation, which was this - while schemes would be required to provide survivors benefits to a civil partner in relation to benefits which accrued post 5 December 2005, there was no requirement to provide such benefits in relation to periods of service prior to that date although schemes could elect to do so if they wished.

Well, those readers with long enough memories may recall that by 2005, all was not well with the health of many defined benefit schemes. Deficits were becoming the norm and in order to keep costs to a minimum, most schemes when coming to amend their provisions to implement the CPA, chose to take the cheap option and restrict civil partners to the post 5 December 2005 benefits only. For schemes which were contracted out of the state second tier provision, there was a requirement to provide full GMP benefits but only on the GMP element.

Heads-up from Europe

There had already been a slight warning in the wind based on a couple of German cases called Tadao Maruko v Versorgungsanstalt der deutschen Bhnen C-267/06 [2008] All ER (EC) 977) which went to the ECJ in 2008, and Jurgen Romer v Freie und Hansestadt Hamburg (10 May 2011). The ECJ ruled that the surviving registered life partner (the German equivalent of a UK civil partner) of a member of an occupational pension scheme was unlawfully discriminated against on grounds of sexual orientation where the national legislation had required equal benefits since 1 January 2005, but the scheme rules did not provide for survivor benefits for same-sex partners. In this case the ECJ declined to limit in time the benefits to be provided and required the full benefit which a heterosexual partner would have received to be paid.

The ECJ went on to decide that where, under national law, same-sex couples are in a "comparable situation" to married couples, it is direct discrimination to treat same-sex couples less favourably than married couples on the grounds of sexual orientation. The temporal limitation did not apply to married couples and so it should not apply to same-sex couples.

This should have put up a very bright red flag as to how the UK had implemented the framework directive and sure enough, the recent case of Walker v Innospec EAT 2411316/2011 has again raised the prospect of a challenge to the implementation of the directive into UK domestic law.

The facts of this case are fairly straight forward. Mr Walker was a member of the Innospec pension scheme from January 1980 until 2003. In 2006 he entered into a civil partnership. The scheme provided a spouse's pension on the death of a member and in August 2006 the scheme rules were amended only to the extent necessary to comply with the Civil Partnership Act 2004. In other words with the temporal limitation relating to benefits which accrued on or after 5 December 2005.

Mr Walker claimed that the scheme had discriminated against him in relation to his pension benefits by restricting any spouse's pension payable on his death to pensionable service which had accrued since 5 December 2005 (which of course he didn't have as he'd left in 2003) and that this was contrary to the directive. The benefit would have been worth about 41,000 to Mr Walkers' civil partner had Mr Walker predeceased him, based on a total pension payable of over 80,000. As the rules of the scheme stood, Mr Walker's partner would receive nothing where a heterosexual married partner would benefit.

In their defence, the respondents relied on paragraph 18(1) of schedule 9 to the Equality Act 2010, which sets out the temporal limitation and which states that it is not discriminatory to limit benefits to periods of accrual post 5 December 2005.

Unfortunately for them but rather more happily for Mr Walker and his partner, the Employment Tribunal was having none of it.

Employment Judge Russell held that Mr Walker had suffered both direct and indirect discrimination. He said that the respondents could not rely on the paragraph 18(1) exemption since the exemption contravenes the framework directive prohibiting discrimination on grounds of sexual orientation and paragraph 18 should be read compatibly with the directive so as to prevent the respondents from relying on the exemption.

In coming to this decision the judge (and indeed Mr Walker) placed reliance on the German cases already decided by the ECJ. He dismissed arguments put by the respondents that attempted to distinguish this case from the German situation in that in Germany, the schemes involved were a state sponsored pension arrangement, not a private one. To use the legal expression - they were, it was argued, "emanations of the state" thereby outside any exemption that statute might provide and so it was no surprise that the ECJ came to the conclusion that it had. The respondents also tried to argue that in Maruko, there had been a failure to pay any benefit at all, whereas the Innospec rules only sought to apply a partial restriction. These arguments too were rejected by the judge. In addition the respondents attempted to place reliance on the temporal limitations contained in the Barber and Coloroll judgments. Readers may recognise these two cases as the fundamentals of sex discrimination in pension schemes and in which a temporal limitation of 17 May 1990 was upheld by the ECJ in the provision of equal treatment to men and women in relation to pensions. The judge held that this argument had been considered by the ECJ in the Maruko case and in which it decided that there was no need to restrict the effect of the judgment so this ground failed as well.

Nail in the coffin

So what can we conclude from all of this? The obvious conclusion is that for many if not most legacy defined benefit schemes who adopted the temporal limitation approach for civil partnerships, they may yet find themselves with having to provide benefits for which they were neither expecting nor which have been funded for. For schemes already in significant deficit this is yet another unwelcome addition to the bill which will inevitably be passed on to the sponsoring employers. Pension lawyers will have yet another tangle to sort out - we are a robust breed and quite used to sorting out the messes that constant tinkering with pension legislation by successive governments has created, so no doubt we will survive this. The same probably cannot be said for the few remaining defined benefit schemes hanging on by their fingernails as another nail gets firmly beaten in their coffins.

While the Innospec case is only an ET decision, it is very likely going to go to appeal. The chances of a success are frankly not high given the ECJ decisions on similar grounds. The next area for debate of course may be in relation to unmarried heterosexual couples. Again there is case law to suggest that schemes can discriminate against these, but given the way the wind is blowing who would take bets on this one going the same way?