Members of the HSBC (Midland Bank) Scheme, reportedly backed by Unite, have called on MPs to “lobby the government over the legal but “shameful” practice known as clawback.”
Pension “clawback”, or “integration”, is a practice whereby employers with defined benefit occupational pension schemes offset all or part of the basic state pension received by members against the pension in payment from the scheme. The practice comes in a variety of forms and is sometimes known as a “bridging pension” or “step-up pension”. Broadly, the offset can happen either at the earnings level by disregarding a certain amount of a person’s earnings before the pension payment is calculated, or at the pension level by deducting an amount from the pension in payment by reference to the state pension. This is expressly permitted by statute but must be built in to the rules of the scheme[1].
Pension integration can be traced back to the introduction of the universal state pension in 1948, when it was recognised that contributing to both occupational pensions and the state pension (via national insurance) could be a heavy burden for employers and members. This was particularly the case where occupational schemes were designed pre-1948 without the state pension in mind.
Fewer schemes now use integration: public sector schemes adopt it only in relation to service pre-1 April 1980, and the NAPF National Survey 2005 found that 70% of open DB/hybrid schemes did not use it at all. The HSBC challenge follows a line of campaigns such as those by the financial services union UNIFI and TUC in 1998, the Guardian in 1999, and a group of Labour MPs in 2011 (among others).
The challenges have largely focussed on the disproportionate effect that integration can have on lower earners, in that a deduction equivalent to the state pension will represent a larger proportion of a lower earner’s occupational pension compared to that of a higher earner. Bridging pensions have also been challenged unsuccessfully in the European Court of Justice[2] and the High Court[3] on the grounds of sex discrimination.
In Parliamentary Questions on 16 November 2017, Pensions Minister Guy Opperman made it clear that the Government does not intend to amend legislation in this area. He said that pension scheme rules on the calculation of benefits “must remain a matter for employers and scheme trustees to decide”, particularly where the details of such arrangements “would have been available to members when they joined the scheme”. Opperman pointed out that the cost-saving benefits of pension integration would have been passed to members by avoiding the need for additional contributions. Overall, “[pension integration] arrangements are not a requirement for Department for Work and Pensions legislation. It would not be right to compel schemes to withdraw this integration arrangement.”
Integration remains an important design element of some defined benefit pension schemes, and can contribute significantly towards affordability and viability of the scheme. As with most things Pensions, and a common refrain from Pensions Compass, communication is key! Communication to members in relation to calculation of their benefits and the reasoning behind any deductions is vital in maintaining member support. Allowing members to opt-in to integration in exchange for e.g. lower contributions, or a higher pension income before state retirement age, can be an effective way to maintain a balance in the interests of employers and members.
[1]Reg 13 Occupational Pension Schemes (Equal Treatment) Regulations 1995 (SI 1995/3183); Finance Act 2004 Sch 28(2)
[2] Birds Eye Walls Limited v Roberts, ECJ 9 November 1993
[3] Trustees of Uppingham School Retirement Benefits Scheme for Non-Teaching Staff v Shillcock [2002] EWHC 641 (Ch)