ECJ rules that pension entitlement may be backdated

In what is being hailed as a landmark judgment, the European Court of Justice ruled on 16 May 2000 that UK rules limiting the right of part-time workers to retroactive membership of an occupational pension scheme are contrary to Community law. While some commentators maintain that this might lead to vast expense as employers are obliged to settle backdated claims, the full impact of this judgment will not become clear until the UK House of Lords has clarified a number of issues which the ECJ has left to national courts to decide.

On 16 May 2000, the European Court of Justice (ECJ) issued an important ruling in case related to occupational pension rights, referred from the UK- case C-78/98 (Shirley Preston and others v Wolverhampton Healthcare NHS Trust and others and Dorothy Fletcher and others v Midland Bank plc).

Background

This case follows the rulings of the ECJ in Case C-57/93 (Vroege v NCIV Instituut voor Volkshuisvesting and Stichting Pensioenfonds) and Case C-128/93 (Fisscher v Voorhuis Hengelo and Stichting Bedrijfspensioenfonds voor de Detailhandel), in which the ECJ held that the right to joint an occupational pension scheme fell within the scope of Article 119 (now Article 141) of the Treaty establishing the Economic Community (TEC). In these judgments, it held further that the exclusion of part-timers from access to such schemes constituted indirect discrimination contrary to Article 119 if it affected a greater proportion of women than men, and that Article 119 had direct effect, which meant that any claims in this area might be backdated to 8 April 1976 (the date of the judgment in Case 43/75 Defrenne v SABENA, in which it was held for the first time that Article 119 has direct effect).

Although between 1986 and 1995 many pension schemes in the UK were amended to allow part-time workers to join, it remained unclear how far back retroactive claims from those who had been denied access to the schemes could be made.

Therefore, following these two judgments, some 60,000 public and private-sector part-time workers in the UK took cases to industrial tribunals, claiming that, under Article 119 they had been unlawfully excluded from membership of occupational pension schemes, and seeking retroactive membership of these schemes.

Of these claims, a total of 22 were selected as test cases. In the first series of cases, the pension scheme concerned had been amended to allow part-timers to join more than two years prior to them bringing a claim to an industrial tribunal. Therefore, under UK law (the Occupational Pension Regulations), the claimants were not entitled to retroactive claims, as they had been members of the scheme for more than two years prior to them bringing the case.

In the second series of cases, the claimants had ceased employment more than six months prior to bringing the claim and therefore, under UK law (the Equal Pay Act – EPA), were not entitled to recognition for earlier part-time service.

In the third series of cases, the claimants had worked regularly, but periodically or intermittently for the same employer under successive contracts. Under UK law, if such contracts are not covered by an umbrella framework contract, claims must be made in the six months following the end of each contract.

The claimants all maintained that UK law in these three areas was incompatible with Community law as its requirements: make it virtually impossible to exercise rights conferred on the employees under Article 119 of the TEC; and are less favourable than those which apply to similar actions, and in particular those based on UK sex discrimination and race discrimination legislation (the Sex Discrimination Act 1975 and the Race Relations Act 1976).

However, on 4 December 1995, the industrial tribunal inBirmingham ruled against the claimants and this decision was later confirmed by the Employment Appeal Tribunal on 24 June 1996 and upheld by the Court of Appeal on 13 February 1997.

Questions to the ECJ

However, the case then went in the final instance to the UKHouse of Lords, which referred the following questions to the ECJ:

• Are the following national procedural rules compatible with Community law: the requirement for claims for membership of an occupational pension scheme to be brought within six months of the cessation of employment, or: the requirement that service no earlier than two years prior to the date of the claim may be taken into account?

• Does the implementation of Article 119 through the UK Equal Pay Act constitute compliance with the principle of EC law that national rules concerning a breach of Community law must be no less favourable than national rules relating to similar domestic claims? If not, what are the criteria for determining whether a right of action in domestic law is a domestic action similar to the right under Article 119; and if a national court does identify a similar claim, what are the Community law criteria for determining whether the procedural rules governing this are more favourable than those governing the enforcement of rights under Article 119?

• In the case of successive fixed-term contracts, is a national procedural rule which requires claims for membership of an occupational pension scheme to be brought within six months of the end of the contract compatible with (1) the rights to equal pay for equal worker under Article 119 and (2) the principle of EC law that national rules concerning breaches of Community law must not make it excessively difficult or in practice impossible for claimants to exercise their rights under Article 119?

The first question

The ECJ held that the provision of the UK Equal Pay Act (EPA) 1970, which came into effect in 1975, limiting the bringing of claims to up to six months following the cessation of employment "does not render impossible or excessively difficult" the exercise of rights conferred by Article 119 and that therefore Community law does not preclude such a national procedural rule.

However, the ECJ, citing previous case law (Case C-246/96 Magorrian and Cunningham v Eastern Health and Social Service Board), held that the UK legislative provision limiting claims to service no earlier than two years before the institution of proceedings "was such as to render any action by individuals relying on Community law impossible in practice" and therefore ruled that Community law precludes a national rule which provides that a claimant's pensionable service must be calculated only be reference to service dating from no earlier than two years prior to the date of the claim.

The second question

By asking this question, the UK House of Lords was trying to ascertain the criteria for determining whether the relevant parts of the UK EPA and Occupational Pension Regulations, which applied to the proceedings instituted by the claimants on the basis of Article 119, are less favourable than other procedural rules applicable to similar proceedings of a domestic nature. The ECJ held that an action alleging infringement of a statute such as the UK EPA does not constitute a domestic action similar to an action alleging infringement of Article 119. It also held that it is for a national court to consider whether rights of action under domestic law are similar to proceedings giving effect to rights conferred by Article 119. Similarly, it held that national courts must also decide whether procedural rules relating to national actions are more favourable than those governing the enforcement of rights under Article 119.

The third question

The ECJ held that the UK domestic law requirement that a claim concerning membership of an occupational pension scheme be submitted within six months of the expiry of each contract of employment to which the claim relates "cannot be justified on grounds of legal certainty". Therefore, it held that Community law precludes a national rule which has the effect of requiring a claim for membership of an occupational pension scheme to be brought within six months of the end of each contract, in the case where there has been a stable employment relationship based on a succession of short-term contracts.

The ruling

The ECJ's final ruling was made in six parts. The Court ruled that:

1. Community law does not preclude a national procedural rule requiring a claim for membership of an occupational pension scheme to be brought within six months of the end of employment, provided that this limitation is not less favourable than limitations for actions based on domestic law;

2. Community law does preclude a national procedural rule which limits a claimant's pensionable service to no earlier than two years prior to the date of the claim;

3. an action alleging infringement of a law such as the EPA does not constitute a domestic action similar to an action alleging infringement of Article 119;

4. national courts must determine whether a right of action available under domestic law is a domestic action similar to proceedings to give effect to rights conferred by Article 119;

5. national courts must verify objectively whether procedural rules are equivalent, taking into account the role played by those rules in an overall procedure, the operation of that procedure and any special features of those rules; and

6. Community law precludes a procedural rule which requires a claim for membership of an occupational pension scheme to be brought within six months of the end of each contract of employment in the case of a stable employment relationship based on a succession of short-term contracts.

Commentary

This case has great significance in the UK, although there is some disagreement among commentators regarding its impact. The ruling against the two-year limit regarding service effectively means that pension benefits for part-timers who have been excluded from occupational pension schemes could in theory relate to service backdated to 1976 (the date of the Defrenne case which first established direct effect of Article 119). According to some estimates, the total cost of awarding backdated pension benefits could run to as much as GBP 17 billion, with the majority of the part-time workers affected employed in banking, the National Health Service and local education authorities..

However, this overall cost is likely to be significantly less than this, firstly due to the fact that if schemes were contributory, the employee must also pay the relevant back-payments in order to receive the full benefits from the employer. Secondly, as the ECJ effectively referred back to the UK House of Lords the question of determining whether this provision could be brought into line with similar UK legislation, the backdating could theoretically be limited to six years, in line with contract law in the UK. Certainly, in the case of private sector employers, the impact is likely to be limited as it is estimated that the vast majority of affected workers were employed in the public sector.

However, the National Association of Pension Funds and the UK employers' organisation, the Confederation of British Industry, are both in agreement that this ruling will significantly increase administration costs for employers, as past records will need to be checked carefully.

Regarding the six-month limit on bringing a claim, as the ECJ ruled that this limit is not contrary to Community law provided that it is not less favourable than other domestic rules, the UK House of Lords will also now decide whether this six-month limit could be extended, allowing people to bring claims over a longer period following cessation of their employment.

Therefore, it is fair to say that more detailed analysis of the true impact of this case will only become clear after the UK House of Lords has looked once more at the issues referred back by the ECJ. (Andrea Broughton, IRS)