Universities Superannuation Scheme Ltd v Simpson & Ors

This claim raises an issue as to the proper operation of the Universities Superannuation Scheme ("USS" or "the Scheme"). USS is a sector wide occupational pension scheme serving the University and Higher Education sector. Most of the participating employers, by number and size of membership, are bodies which had university status prior to the reforms made to the status of universities in 1992. Other participating employers are either new universities, which acquired university status under those reforms, or institutions engaged in higher education or research which are not universities or university colleges but are related to the university sector. The Scheme is very large in its membership and in its invested funds. At the end of March 2002 there were 309 employing institutions participating in the Scheme, with over 180,000 members and funds with a market value of almost £20 billion. Membership is not now limited to those in academic or academically related employment.

The Scheme is an occupational pension scheme which is exempt approved by the Inland Revenue. It provides final salary benefits by reference to final salary and aggregate service for participating institutions, regardless of changes of employment from one institution to another within the Scheme. It is not a sectionalised scheme, unlike some industry-wide schemes. The same contribution rate applies to all participating employers, but members do not have standardised terms of employment. Some groups of employees have terms of employment which, when taken with the terms of the Scheme, give them more favourable benefits than those of others, particularly as regards the date at which they may retire on full pension. The absence of standardised terms of employment, together with the standard terms of the Scheme and the uniform rate of contribution, means that there is likely to be an element of cross-subsidy between one employer and another.

The issue which is to be determined in these proceedings arises from a tension between the potential variety of terms of employment of members on the one hand, and the efficient and economical administration of the Scheme on the other. The Trustee, on advice, has adopted an approach on one point which assumes that one particular factor is, or can be treated as being, the same for all members of the Scheme, or for all male and female members respectively. It is suggested that this is incorrect, and that the Trustee must use a factor which depends on the terms of employment of the relevant member, and that this will, in many instances, result in a more generous provision by way of pension, in one way or another. The impact of this, if the Trustee’s current approach is incorrect, is likely to be substantial, both as regards administration and as regards the cost of the additional benefits.

The Claimant is the sole trustee of the Scheme. The First Defendant represents all members of the Scheme whose interest it is to have the individual approach adopted. The Second Defendant represents all other members of the Scheme, and has accepted responsibility for instructing Counsel to put forward the contrary arguments. The Third Defendant represents all participating employers under the Scheme. The Third Defendant chose not to be represented at the hearing before me, but may need to be represented at later stages.

The Scheme is currently governed by consolidated rules made in 2003. Counsel addressed me by reference to those rules, all agreeing that nothing turns on any differences of wording in any previous version of the rules. Similarly, submissions were addressed by reference to the consolidated legislation in the Pension Schemes Act 1993 (to which I will refer as the Act), on the basis that there was no material difference between that and the previous legislation.

The point at issue is whether a member of the Scheme who leaves pensionable service before retirement, becoming a deferred member, and who, under his or her terms of employment, was entitled to retire on pension at an age below 65 (normally at or from 60), must suffer an actuarial reduction of his or her pension if it is brought into payment at an age between 60 and 65. I will take 60 as a typical example of an age below 65 at which an employee may be entitled to retire on pension, and I will refer to such an age as a contractual retirement age.

It has been the practice of the Trustee to proceed on the basis that the "normal pension age" for this purpose is the same for all male members of the Scheme as the "normal retirement age" under the Scheme, namely 65. For the First Defendant it is submitted that this is wrong, that the Trustee must proceed by reference to the actual terms of service of the given member, and that if the member was entitled to retire at 60, it would be wrong to impose an actuarial reduction of the pension on the basis that, if it comes into payment at 60, this is an acceleration of the benefits.

The relevant provisions of the rules are as follows.

The basic retirement benefit on retirement in the ordinary way is governed by rule 10. Under rule 10.1, every member who retires and has either attained normal retirement age (which is 65) or (having attained the age of 60) is entitled to retire on pension in accordance with the terms of appointment or contract of employment applicable to that member is entitled to pension benefits calculated under rule 10.2. That benefit is a pension for life at 1/80, and a lump sum of 3/80, of pensionable salary for each year of pensionable service. Rule 10.5 deals with "permitted early retirement". It does not cover the case where the employee is entitled as of right under the contract of employment to retire on pension at 60. Under rules 10.1 and 10.2, if a member does have that right, and remains in pensionable service under the Scheme until the age of 60, he or she can then retire on full pension with no actuarial reduction.

Rule 9 deals with benefits on cessation of service. In terms, by rule 9.1 it applies to a former member whose service has ceased before attaining normal retirement age, and to whom an immediate pension does not then become payable under the rules. If the member has qualifying service he or she becomes entitled, by rule 9.3, to indexed preserved benefits, at the same rate as applies under rule 10.2, for each year of pensionable service up to the date of cessation of service.

By rule 9.5, which is headed "Date of payment of preserved benefits", preserved benefits are payable at the same time and upon the happening of the same events as the corresponding long service benefits would be payable, but subject to a number of special provisions. The only one which is relevant is 9.5(d), which is at the heart of the case, and I must quote it, omitting irrelevant passages, which include two provisos.

Preserved benefits are defined (relevantly) as the benefits which will be expressly payable under the rules at normal retirement age to a former member with qualifying service "and all such other benefits as must be payable to or in respect of a former member in order that the scheme shall conform to the preservation requirements of Chapter I of Part IV" of the Act.

Normal retirement age is defined as 65 (apart from special provision made for a class or classes of members who came into the Scheme on special terms, who can be ignored for present purposes). That, however, was affected by the need for equalisation of benefits as between males and females demonstrated by the judgment of the European Court of Justice in Barber v. Guardian Royal Exchange, delivered on 17 May 1990, Case C 262/88 [1990] ECR I-1189, [1991] 1 QB 344. Until then benefits for males were calculated by reference to an NRA of 65, but females were able to retire on full pension at 60, so being treated as having a normal pension age of 60. The effect of Barber was that, for periods of pensionable service after 17 May 1990, the same age had to be applied to all benefits. In 1995 the rules were amended so as to permit retirement on full pension at the age of 63 years 6 months (defined as "normal benefit age") in respect of all pensionable service under the Scheme after 1 April 1995: see rule 10.6. For the intervening period, benefits for all members have to be calculated by reference to the age of 60.

The result of this is that the category of members who are put at a disadvantage by the Trustee’s practice are those who (a) were entitled under their contract of employment to retire on pension at an age below 65, (b) left pensionable service under the Scheme before the age of 60 with qualifying service but without becoming entitled to an immediate pension, and (c) wish to take advantage of the provisions of rule 9.5(d) to call for payment of the preserved benefits at 60. Female former members within this category are only at a disadvantage as regards service since 1 April 1995. Males are at a disadvantage in respect of service before 17 May 1990 and after 1 April 1995.

I must now turn to the relevant legislative provisions, which are in the Act, and are among those concerned with the preservation of benefits for early leavers. This legislation was first introduced in the Social Security Act 1973, with effect from April 1975. The purpose was to prevent those who left pensionable service early from being put at a disadvantage to those who remained in service.

The provisions most relevant are those in Chapter I of Part IV of the Act. The basic principle is set out in section 71. Under this, a scheme must make such provision that where a member’s pensionable service is terminated before normal pension age, he having either at least 2 years’ qualifying service or a relevant transfer payment in, he is entitled to benefit consisting of or comprising benefit of any description which would have been payable under the scheme for long service benefit. The benefit so provided for is called short service benefit. In the relevant cases, short service benefit must be payable as from normal pension age or (if later) from the age of 60: see section 71(3). Correspondingly, long service benefit is defined by section 70(1) by reference to the member continuing in service until normal pension age and retiring at that time.

Section 72 prohibits any rule of a scheme which results or can result in a member being treated less favourably for any purpose relating to short service benefit than he is, or is entitled to be, treated for the corresponding purpose relating to long service benefit. The section does not apply to a rule which merely confers discretion on the trustee, so long as it is not a rule requiring the discretion to be exercised in any discriminatory manner against members in respect of their short service benefit: section 72(3). By section 74, a scheme must, subject to irrelevant exceptions, provide for short service benefit to be computed on the same basis as long service benefit.

A definition of importance for present purposes is that of "normal pension age". This is set out in section 180, and is as follows:

The provisions of Chapter I of Part IV of the Act do not override those of any scheme, but schemes are no doubt to be construed, if possible, so as to be consistent, rather than inconsistent, with these provisions: see sections 131 and 132. The definition of short service benefits quoted in paragraph 12 above is designed to ensure the required consistency.

Mr Topham’s submission, for the First Defendant, is that, in the case of a former member of the Scheme whose terms of employment entitled him or her to retire on pension at 60, normal pension age is 60, by virtue of section 180(1)(b). It is common ground that, if such a member had remained in pensionable service under the Scheme until 60, he or she could then retire with an immediate full pension. He therefore submits that it cannot be right so to construe, or so to operate, the provisions of the Scheme that a former member in that situation suffers an actuarial reduction of the pension if it is brought into payment at 60. That, however, is what the Trustee has done.

The evidence on behalf of the Trustee is that of Mr Colin Busby, who is a senior employee of the Claimant and has worked for the Claimant since January 1975. He says that the Scheme has been administered since its inception on the basis of an assumed normal pension age of 65 (for males) as regards the provisions for bringing preserved benefits into payment prior to the normal retirement age defined by the rules. This practice is said to have been based on the Claimant’s understanding, supported by legal advice, to the effect that to take the age of 65 was consistent with the obligation under section 71(3) of the Act. The basis of that understanding is said to have been that, because (as it was understood) the most common age at which a right to retire on pension subsisted in the university sector, in accordance with members’ terms of employment, was 65, that age could properly be taken as the "normal pension age" for the Scheme for the purposes of section 71(3). The definition in the rules of long service benefit is at odds with the statutory definition, because it refers to normal retirement age, i.e. 65, rather than to normal pension age. However, this was not the basis of the Trustee’s practice.

This practice was first questioned in 1993. That led to some correspondence between the Trustee’s lawyers and the Occupational Pensions Board, to which I will refer later, which culminated in January 1997. The Trustee assumed that the result of that correspondence was that the practice carried on hitherto was satisfactory. It therefore remained in place. The point was, however, again queried by solicitors on behalf of the First Defendant in 2000. That led the Trustee to decide to apply to the court, by these proceedings.

The First Defendant is an active member of the Scheme. Under his contract of employment it seems that he is entitled to retire on pension at 60. It may be that he will do so, but he has raised the point because of a risk that, if he leaves pensionable service before 60, he would then find that, on the pension coming into payment at 60, it would be actuarially reduced. Undoubtedly there are former members of the Scheme who have been affected by the Trustee’s practice, and adversely affected if they were entitled to retire at 60 under their terms of employment. Various classes of persons have been identified as being those adversely affected by the practice:

Issues may also arise as regards a member who has had successive employments with different employers within the Scheme but on different terms in a relevant respect. For present purposes, however, so long as at least one of those employments, and perhaps only if it is the last, had a contractual retirement age less than the Scheme’s defined normal retirement age, the same points will arise.

Mr Topham’s submission, summarised at paragraph 20 above, is straightforward and simple. He accepts that the adoption of a standard normal pension age for all members of the Scheme, or for all male members and all female members respectively, is administratively convenient, because on that basis the Trustee does not need, for these purposes, to keep records of the individual members’ contractual retirement dates if different from the general rule of 65 or, now, 63.5. But he argues that this cannot be reconciled with the words of section 180(1)(b).

It is true that the terms of rule 9.5(d) are apparently general as regards the Trustee’s discretion over the terms of payment. However, this discretion has to be exercised rationally, by reference to the preservation legislation and therefore also to the equivalent benefits that would be payable on retirement under rule 10 if the member in question had remained in service. He therefore submits that the Trustee acted unlawfully in the exercise of its discretion by imposing the actuarial reduction in cases where, if the member had remained in service to normal pension age and had then retired, such a reduction would not have been imposed.

Miss Rich, for the Second Defendant, submitted that the definition of long service benefit in section 70(1) of the Act suggests that "normal pension age" is a definable attribute of the Scheme as a whole, rather than of individual members, and that the reference in section 180(1)(b) to "any employment to which the scheme applies" also shows that the age was to be determined generally for the purposes of the Scheme, rather than individually according to the circumstances of each member.

As regards administrative convenience, Mr Topham said that the Trustee ought to keep the necessary information anyway because it would need to be applied on normal retirements. I imagine, however, that on normal retirement what is relied on, in practice, is information from the employer at that time to the effect that the retirement is one which does not attract actuarial reduction. I can see the point, for the Trustee, of not having to consider the circumstances of individual members, especially those whose relevant contracts of employment have come to an end some time in the past. However, it seems to me that the terms of the legislation and the rules do not permit the "one size fits all" approach which the Trustee has adopted.

In my judgment, the normal pension age which is defined by section 180 and is relevant under section 71 cannot be determined except by reference to the terms of employment of the member in question. The phrase "any employment to which the scheme applies" in section 180 does not mean that the same normal pension age applies to all members of the particular scheme. The words "the member" and "his retirement from such employment" in section 180(1)(b) show that the relevant age is to be ascertained by reference to the particular member’s terms of service. Long service benefits are not subject to actuarial reduction in the comparable circumstances. It follows that short service benefits cannot properly be reduced either, where the pension is to be brought into payment on a date on or after the contractual retirement date. Calculation of short service benefits on a less favourable basis under rule 9.5(d) is illogical and incorrect, and does not result in the payment to the relevant pensioners of such benefits as are required to ensure conformity with the preservation requirements. Cash equivalent transfer values are also to be calculated on the basis that retirement at a contractual retirement age of at least 60 does not require or permit the application of an actuarial reduction.

As I mentioned earlier, when the point was first raised the Trustee’s solicitors approached the OPB on the point. The second question in the case is whether, if, as I have held, the practice is not consistent with the rules and the legislation, the response of the OPB sanctioned it. For this purpose I must refer to other provisions of the Act, and to the relevant letters.

The OPB had two relevant types of power. Under section 133 it could give advice, and under section 134 it could issue a determination. Advice under section 133 (so far as relevant) would be as to whether the rules of a scheme to which the preservation requirements apply do or do not conform with those requirements, and if they do not, what steps should be taken to secure conformity. Under section 134, they could issue a determination on any such question. In addition, under section 134(5) they had a special power. It is as follows:

The correspondence started with a letter from Alsop Wilkinson on behalf of the Trustee dated 19 August 1993, seeking a determination by the Board pursuant to the predecessor of section 134(1) as to whether the rules of the Scheme were in conformity with the preservation requirements as regards the date when short service benefits should be brought into payment. The point was described. As regards contractual retirement dates the position was stated as follows:

The issue was identified as being the treatment of male deferred pensioners whose contractual retirement date is before age 65. The argument was advanced that because there are employments to which USS applies for which the contractual retirement date is at or after 65, it followed that the normal pension age for all male deferred pensioners was 65. The Board was asked to confirm that this was the correct interpretation. Alternatively the Board was asked to exercise its power under the predecessor of section 134(5) so as to enable the currently adopted practice to continue "having regard to the structure and character of the scheme". Attention was drawn to the fact of there being then some 250 participating employers, all legally independent of each other and with no common contractual retirement date, but also to the fact of a common contribution rate established without regard to the differing contractual retirement dates. As a further possibility, if the Board would or could not use its power to sanction that practice, the question of amendment of the rules, with retrospective effect, was mentioned.

The Board’s reply, dated 2 September 1993, declined to make a determination on one particular point. The Board considered that it could only issue a determination as to the rules as a whole. However, the writer went on to express a view as to the substance of the point on short service benefits to the effect that the date at which they should become payable should be the contractual retirement date.

Matters then proceeded more slowly. On 11 April 1994 Alsop Wilkinson wrote again to the Board, asking formally for a determination as to the conformity of the rules generally with the preservation requirements. Issue was taken with the Board’s expressed view on the application of the relevant rules. On 8 November 1995 Alsop Wilkinson, not having had a reply, wrote again to the Board. They sent the latest version of the rules. They argued the point about whether there was one normal pension age for the whole Scheme, rather than different normal pension ages for different members. They requested a formal determination that the rule complied in full with the preservation requirements. If such a determination could not be given, they asked for a determination under section 134(5) that, having regard to the structure and character of USS and to the anomalous or impractical consequences of requiring a separate individually ascertained normal pension age to apply to the relevant deferred pensioners, section 180 be modified in its application to the Scheme in relation to that group of members so that 65 may be taken as the applicable normal pension age. They also raised again the question of retrospective amendment of the rules.

At long last on 22 January 1997 the Board replied. The response was that the Scheme did fully comply with the preservation requirements except in three respects, none of which is relevant for present purposes. No reference was made to the issue of normal pension age, to the possibility of modifying the application of any of the preservation requirements to the Scheme or to a retrospective amendment of the rules. On 31 March 1997 the Board ceased to exist. Although the effect of any determination already made was preserved, the power to make such determinations ceased to exist as well. In those circumstances it is understandable that the Trustee did not pursue with the Board during the last two months of its existence the points which had not been expressly dealt with in its letter.

The Trustee proceeded on the basis that, not having commented critically in the letter of January 1997 on the point about normal pension age, the Board was content with the position. It seems to me, however, that there is nothing in the letter of 22 January 1997 which can be regarded as a determination of the point. Certainly there is no determination that a specified provision shall apply to the Scheme with specified modifications. Equally there is nothing that could fairly be read as a determination that any given provision of the legislation should not apply to the Scheme.

Accordingly, nothing said or done by the OPB affects the question whether the Trustee’s practice is consistent with the rules and the legislation.

I therefore hold that, in relation to a member of the Scheme who requests that his preserved benefits be brought into payment under rule 9.5(d) not earlier than the date that was his contractual retirement date under his terms of employment while within the Scheme, that being not less than 60 but less than the Scheme’s normal retirement age (in effect 65 for males before 17 May 1990, and 63.5 for males and females from 1 April 1995), the Trustee may not apply an actuarial reduction to the pension when brought into payment. The same applies for the calculation of cash equivalent transfer values.

It is clear that this ruling will give rise to administrative and perhaps other difficulties. The Claim Form seeks directions as to those matters. It was agreed that it would be premature to consider those until the main question had been answered by this judgment.