Are You Owed Money?
Regulator warns of widespread pension calculation errors
This is an interesting article written by Maria Espadinha in FTAdviser and especially important if you know anyone that was born in 1972 or before that is in receipt of a pension that was administered by Prudential, even if the scheme has since been transferred to another scheme.
About 120 schemes administered by Prudential have been informed that their members could be receiving wrong pension payments, after incorrect calculations were identified in connection with a thirty year old legal case. The trustees of these defined benefit pension funds have been advised by The Pensions Regulator (TPR) to speak to their legal and actuarial advisers, after Prudential informed the watchdog of the potential errors.
Members who have been affected by this mistake could be in line for a pension uplift of 25 per cent in some cases, but there is also the chance that the error resulted in over payments.
A spokesperson at Prudential UK said the provider has identified Defined Benefit schemes “where incorrect calculations may have been made to members’ benefits when schemes attempted to equalise benefits after the Barber judgment”.
A spokesperson at TPR said its officials had “written to trustees and managers of the schemes to make them aware that members may have had incorrect pension calculations,” which has been confirmed by Prudential.
In the Barber case almost 30 years ago, the European Court of Justice decided that the right to equal pay for men and women applied to occupational pension schemes, which meant men and women had to be given the same retirement age. Until then, it was normal practice in the UK to have unequal retirement ages between male and female members, typically age 65 for men and 60 for women.
The court ruling dictated that for any period of pensionable service prior to May 17, 1990, equalisation of pension ages was not required.
But schemes had to set a date for equalisation and until that date came into effect, pension rights were gradually leveled up, in what it was called the Barber window.
This meant that disadvantaged members were entitled to more favourable treatment, which generally meant that male members were entitled to a lower retirement age.
Benefits recalculation example
A man takes early retirement at age 60 from a scheme in 2000 having completed 20 years’ pensionable service. His final pensionable salary is £30,000 and the scheme’s accrual rate was 1/60ths.
His scheme operated a normal retirement age of 65 for men and 60 for women until 1992, when following the Barber judgment it moved to a common normal retirement age of 65.
Pensions taken early are reduced by 4 per cent for each year they are taken early. So when he retired in 2000 his pension was calculated as follows:
1. Pre-Barber: 10/60 x £30,000 x 0.80
2. Barber window: 2/60 x £30,000
3. Post equalisation: 8/60 x £30,000 x 0.80
Making a total pension of £8,200 per year
However, in 2019 it was discovered that the Barber window had not been closed until 1995. A recalculation of his pension when he retired in 2000 is as follows:
1. Pre-Barber: 10/60 x £30,000 x 0.80
2. Barber window: 5/60 x £30,000
3. Post equalisation: 5/60 x £30,000 x 0.80
Making a total pension of £8,500 per year
So as the man has been underpaid by £300 per year for 19 years, he is due compensation in respect of missed payments worth £5,700, plus interest, in addition to his pension being recalculated going forwards.
Source: LCP
Solicitor David Everett, explained that in theory, equalising normal retirement ages after Barber should “have been done and dusted by the mid-1990s”. However, there were a series of court cases where the equalisation hadn’t been carried out properly, he noted. He said: “The legal cases that came out refer to the fact that the Barber window wasn’t closed properly, sometimes equalisation was never put through. “There may well be cases where some kind of equalisation was put through, legally it was okay but the actual administration didn’t work.”
Anna Rogers, senior partner at ARC Pensions Law, explained the issues weren’t confined to schemes administered by Prudential. She said: “It is quite common to find that sex equalisation was done in a way that doesn’t quite work, with the benefit of hindsight.
“It took years after 1990 for the meaning of the Barber case to become clear, and the process is still continuing, with the Lloyds case and further uncertainties that arise from that. So it’s interesting to see TPR acting to make sure this issue is on trustees’ agenda.”
Mr Everett explained that more cases of incorrect calculations were surfacing . It’s not uncommon to find issues around Barber equalisation with schemes that didn’t implement it properly in the 1990s. If an error was made, a member could get a benefit uplift of 25 per cent, assuming they are moving from a retirement age of 60 to 65, which was the majority of cases.
He added he has yet to see a case where the member was overpaid and was asked to give back some of the pension previously received, but said it was possible.
Interesting to see that Prudential identified this themselves but at least the TPR are now running with it. The compensation payments could be quite significant, however, anyone with a defined benefit scheme needs to be aware of this and it is worth writing to your scheme trustees, whether you are in receipt of your pension or not to ensure that they have applied the Barber judgement appropriately.