Your IndustryMar 3 2016

All change for love and pensions except in some quarters

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All change for love and pensions except in some quarters

There have been so many changes to pensions legislation and pensions taxation in recent years, with more anticipated in the forthcoming March 2016 Budget.

However, as fast as one supposedly ‘broken’ aspect of pensions is fixed - such as the removal of the compulsion to buy an annuity - another problem emerges; such as the ongoing furore over women born in the 1950s who will be detrimentally affected by changes to the state retirement age.

The state pension in itself is a fraught area for civil partnerships.

As early as 2003, the government realised it could take “many years” for changes in pension systems to reach maturity.

In a June 2003 consultation document from the Women and Equality Unit (WEU), it said: “It would not be possible before 2010 to introduce state pension rights for registered partners, which treat all-male and all-female couples equally.

“Introducing changes before this time would create new inequalities in the state pension system.”

Thankfully, this situation no longer applies, as the government is moving away from widows/widowers pensions from April this year, treating all people as single and earning pensions within their own right, which overcomes the issue raised by the WEU.

According to Robin Ellison, consultant for Pinsent Masons, “The state pension has moved away from using ‘dependency’ (i.e. a spouse) as a reason for giving a benefit, towards each partner earning in their own rights.”

However, this is only part of the solution to ensuring that nobody is left in financial hardship in retirement, simply because of their marital status or sexual orientation.

Mr Ellison, explains that before the 2004 Civil Partnership Act, it was not possible in the UK for same-sex couples to marry or enter into a legal relationship or status equivalent to marriage.

He says: “As a consequence, there were material issues in practice for pension schemes and scheme members, including the fact many benefits payable under pension schemes were limited to a married, opposite-sex partner.

“This applied to state benefits and to requirements for contracted-out benefits in occupational schemes. Benefits payable to same-sex partners were only paid at the discretion of the trustees (as with non-married heterosexual partners).

“As only married spouses pre-2004 were able to divorce, pension sharing was only available on termination of a marriage, not on the termination of any form of relationship.

“Also, HM Revenue & Customs required the recipient of pension benefits payable, following the death of a member, to be limited to a spouse or a dependant.”

Under the principle of no retroactivity, conduct which was lawful when it occurred cannot retroactively become lawful Pension Benefits Law Reports

Therefore, before the 2004 Civil Partnership Act, same-sex partners were in the same position as unmarried heterosexual partners living together.

When the law finally afforded same-sex partners equal rights to financial and legal protection, from 5 December 2005 onwards (couples could register from 21 December 2005), this did not mean that all companies had to change their pension schemes.

Many pension schemes in 2005 still stated pension benefits could only accrue to married partners; even until recently, experts FTAdviser spoke to point out many occupational pension schemes imposed a prerequisite of marriage on the payment of a benefit, which effectively deprived a same-sex couple from the benefit altogether.

While the 2013 Marriage (Same-Sex couples) Act removed this obstacle, not all schemes have removed what could be seen as unfair practices.

As Alistair McQueen, savings and retirement manager for Aviva, says: “Where an occupational scheme provides survivors’ benefits to married couples, it must also provide them to surviving civil partners - but only in respect of service from 5 December 2005.”

This means any payment of pension to an employee’s same-sex partner can only be calculated based on 10 years of pensionable service, regardless of whether the employee has accrued 20 or even 30 years’ worth of pensionable services.

Mr Ellison adds: “The rules now are pretty simple: marriage, civil partnership and same-sex marriage are treated in pensions law as examples of marriage and the benefits are automatic under the rules to the scheme.

“The only difference is when the legislation came into force for civil partnerships and same-sex marriages; the scheme does not have to pay benefits earned in relation to the member’s service before the legislation took effect.”

The case of Walker versus Innospec raised this issue publicly, with a Court of Appeal hearing on 6 October 2015 against an unsuccessful employment appeal tribunal.

At the Court of Appeal (Civil Division) John Walker, who had been a member of the Innospec pension scheme, and retired in 2003, claimed Innospec had discriminated against him, since while the scheme provided a spouse’s pension to a member’s civil partner it only did so in relation to service after 5 December 2005 - when the Civil Partnership 2004 Act legislation came into force.

Mr Walker claimed his husband (who has been with him since 1993) would be in financial detriment as a result, but the law still allows for this exemption - namely a scheme’s trustees cannot confer on a member a benefit to which he is not entitled.

The judgement states: “Where a member accrues benefits under a scheme when he was in service, and any discriminatory treatment of which he complained was then lawful, under the principle of no retroactivity, conduct which was lawful when it occurred cannot retroactively become unlawful.”

His appeal was dismissed.

Clare Moffat, technical manager for Prudential, says: “Mr Walker wanted the pension fund to pay a surviving spouse’s pension to his husband if the husband outlived him.

“For this to happen, the law would have to apply retroactively. An interesting comment made by the court was ‘changes in social attitudes, and the legislation that embodies those changes, cannot fully undo the effects of the past’.”

She suggests same-sex married couples, and those in civil partnerships, should realise if there is a final salary scheme, and benefits were accrued before the 2004 Civil Partnership Act, then the same reasoning will apply to them.

While this is not illegal - what would be illegal is if a scheme treated homosexual couples differently to heterosexual couples - this seems to be a matter of whether schemes implement the spirit, not just the letter, of the law.