I started last week to look at the major developments concluding the case of Preston v Wolverhampton, which potentially opens the floodgates for many hundreds of thousands of part-time workers to claim a backdating of their pension rights to the date they joined service or back to 1976, whichever is the later date.
Noting that the House of Lords' judgment renders any defence against a legitimate claim ineffective, yet noting that we now know many or most schemes are not planning to introduce this retrospectivity proactively, in this article we need to look at the essential aspects of making a valid – and therefore an ultimately successful – claim.
The first key aspect to remember is that although it is unanimously accepted that Mrs Preston won her claim outright and established a binding precedent for future part-time claims generally, the main players behind the raft of claims which accompanied the Preston case to Europe – the trade unions – lost on one major point.
The European Court of Justice suggested, and the Lords has agreed, that claims made by part-timers more than six months after they have left service must be ruled “out of time” (in common terms, they are too late).
This was a blow for many potential claimants who left service more than six months ago. It was also a blow to many dependants of former part-timers who died more than six months ago, these people otherwise seeking to claim the lump-sum death-in-service benefit to which the deceased's beneficiaries would or should have been entitled as members of the employer's pension scheme. So now we cannot hope to secure backdated benefits for anyone other than those still in the employer's service or those who have only very recently left service.
One particularly interesting point here (interesting, that is, for those IFAs with as sad a life as my own) is that claims should definitely be made for longer serving part-timers who are already members of their employer's pension scheme as they will in all probability only have been admitted into the scheme within the last couple of years or so and will almost certainly not have been granted a backdating of their membership to 1976 (the Defrenne judgment).
Having determined the individual has not left service more than six months ago (and note this is six months prior to the date of the individual's claim, not six months prior to the date of the Preston judgment), it is then necessary for the claimant to establish that his or her exclusion from benefits has amounted to sex discrimination. This means that in the part-time workforce there must have been a significant imbalance between the numbers of males and females (it does not matter which way) and it must be possible to demonstrate that part-timers were discriminated against only because they were part-timers and not because they were doing a different job than full-time emp-loyees of the company.
The first of these requirements – imbalance between males and females – is quite straightforward. It is highly unlikely that the employee will know the relevant numbers of each sex within the employer's part-time workforce and so the claim should be made on the assumption that there was some significant imbalance. It is then down to the employer to demonstrate the absence of such imbalance, if he feels such a defence is justified, by stating the relevant proportions.
Note that there are no accepted guidelines as to what does or does not constitute a significant imbalance but any proportions closer to an equal division than, say, 60/40 are unlikely to help the chance of success of the claim.
The second requirement is that the part-time claimant must be able to show there were full-time employee members of the pension scheme doing broadly the same jobs as the part-time claimant(s) excluded from the pension scheme. It remains perfectly permissible for an employer to select categories of employee to be invited in to membership of the pension scheme, discriminating, for example, between management, supervisory staff, shopfloor workers, secretarial, etc.
It is not, however, possible to make such selections on the grounds of race or sex and herein lies the issue for part-time claimants. It is still possible for part-timers to be indirectly discriminated against by exclusion from pension scheme membership if the part-timers excluded perform a different role or roles within the firm to their full-time colleagues.
Thus, the part-time claimant must be able to demonstrate equivalence of jobs with full-timers. For example, a Preston claim from a part-time hotel receptionist is likely to be successful only if he or she can cite full-time receptionists who were members of the pension scheme. This is a very simple example, of course, and advisers becoming involved in this field should be prepared for more contentious circumstances.
Another important point relates to claims and an issue which neither the Magorrian nor the Preston judgment resolved. Where the pension scheme in question requires employee contributions, it is the generally but not unanimously held view that backdated membership granted to the part-time employee requires backdated contributions from that employee to the scheme.
Schemes have expressed differences and uncertainty as to how, if at all, they intend to levy this backdating charge.
For example, schemes have to consider whether to include some form of interest charge on the unpaid premiums. Advisers will have to deal with these requests from schemes according to the nature of the demand but should be aware that there is a school of thought that suggests the scheme, having acted illegally in denying access to part-timers, cannot now demand the contributions to which the scheme would have been entitled if it had not acted illegally.
After writing last week's article, I was chatting to one of the country's leading pension lawyers and the subject of these potential “Preston claims” came up in the conversation. Actually, it was as a spin-off to a Shillcock case discussion which I will come on to later in this article.
He questioned whether such claims were worth the effort for the claimant (he saw the potential value to the IFA, as I outlined last week) as he thought the level of the benefits they stood to secure would make the effort and the £250 fee unattractive. He was referring, of course, to the fact that the generally low wages of part-timers, especially when coupled with shortish-term service, would mean very low levels of pension benefit at stake.
I put forward the rough and ready calculation illustrated (above) but the speed of the withdrawal of his doubts took me by surprise.
Even short-service/low-earnings claims can run into thousands of pounds of value and the Inland Revenue triviality rules, allowing full commutation of benefits for such small value pensions, help to focus even the client's minds on this potential gain.
So, there is plenty of room for advisers to provide a highly remunerative – remunerative to the client and to the adviser, that is – service to a huge number of potential claimants. Over the next couple of weeks, we will look at the progress (or rather lack of it) in the Shillcock case, which could potentially prove even more important than Preston.
We will also look at a major update on the aftermath of the White v White pension and divorce case and a first look at the possible implications of a case which I am convinced will be the prelude to the age 75 limit on annuity purchase being completely removed and not just lifted to age 80 or 85, as some commentators are still suggesting.
Part-time worker with earnings of £4,200 a year
Has 10 years' service with an employer operating a 1/60th pension scheme
Scheme includes escalation and surviving spouse's pension
Preston claim entitlement: pension of 10/60ths of £4,200 = £700 a year
Capitalised value of the claim = £10,000-plus