Thales Uk Pension Scheme · CAS-38298-S5D4 — Pensions Ombudsman determination

CAS-38298-S5D4

Ombudsman’s Determination Applicant Mr N

Scheme Thales UK Pension Scheme (the Scheme)

Respondent Thales Pension Trustees Limited (the Trustee)

Outcome

Complaint summary

Background information, including submissions from the parties The sequence of events is not in dispute, so I have only set out the salient points. I acknowledge there were other exchanges of information between all the parties.

1 Mr N says the history of his employment within the group is:-

• The Decca Navigator Company Ltd – 3 December 1979 to 31 August 1984 • The Racal-Decca Advanced Development Ltd (a Decca legacy company) - 1 September 1984 to 31 May 1992. • Racal Research Ltd (a Racal Company) – 1 June 1992 to 29 April 2001. 1 CAS-38298-S5D4

In 2008, the RD Scheme and RG Scheme, together with seven other schemes, merged creating the Scheme. The Scheme is administered by Equinity.

Mr N took early retirement in February 2019.

Mr N complained to Equinity about the calculation of his pension. Dissatisfied with Equinity’s response, Mr N invoked the Scheme’s Internal Dispute Resolution Procedure (IDRP). Mr N said:-

• Records incorrectly showed that he was a member of the RD Scheme from 1 July 2003 to 30 September 2007. He was then a member of the RG Scheme.

• The calculation of his FPS was understated. Bonus, car allowance and medical benefit payments should have been included in the calculation.

• His deferred pension in excess of GMP had been incorrectly revalued by CPI. RPI should apply.

• Wrong ERF had been used. An ERF of 4% per year should have been applied, as the latest statement published to Scheme members said that the factors were not changing.

At Stage One IDRP, the Secretary to the Trustee did not uphold Mr N’s complaint. He said:-

• The records it had inherited showed that he was a member of:

o the RD Scheme from 1 April 1985 to 31 May 1992;

o the RG Scheme from 1 June 1992 to 30 April 2001; and

o the RD Scheme from 1 May 2001 to 30 September 2007.

• Thales Avionics Ltd (A Decca legacy company) – 30 April 2001 to 30 June 2003. • Thales Communications Ltd (a Racal legacy company) – 1 July 2003 to 30 September 2007.

2 CAS-38298-S5D4

• The definition of Pensionable Salary (PS) was the same for the RD Scheme and the RG Scheme. So, the calculation of Mr N’s pension under the separate schemes would have been the same.

2 The Newsletter, under the section heading ‘Statutory increases – government announcement on move from

RPI to CPI said:

“…the way in which deferred pension benefits are revalued to normal retirement age after leaving employment with the Thales group is expected to change automatically due to the Government’s new approach. In this case, revaluation is generally expected to follow CPI (subject to certain caps) going forward. Note: There will be some specific exceptions to these general expectations for certain legacy schemes.” 3 CAS-38298-S5D4

The Trustee is represented by Gowling WLG (UK) LLP (Gowling WLG).

Mr N says:-

• It was common practice for employees to move between pension schemes as they moved between companies within the Thales group.

• Equiniti held incorrect data records for him. He joined the Decca Navigator Company Ltd on 3 December 1979 and the RD Scheme on 1 April 1985. He moved from a Decca legacy company to a Racal legacy company on 1 July 2003 and therefore either moved, or should have moved, from the RD Scheme to the RG Scheme 3 at that time.

• He does not contest the definition of BS. Rather, his issue is with the definitions of PS and FPS. The October 1989 ‘Your Guide to the Racal Group Staff Pension and Life Assurance Scheme’ (the Guide) uses the word ‘bonus’ in the pensionable earnings section. So, how can it be omitted from the calculation of PS? The final pensionable earnings section of the same document states “including any other earnings which are deemed to be pensionable”. A car allowance and medical benefit were due to be based on his grade and were included in his contract of employment as part of his salary. So, they are pensionable 4.

• “The information made available to myself and to other members of the scheme did not specify the authority who had the power to deem what other earnings were

3 Mr N has provided an RG Scheme pension consent form that he signed in March 2004 in relation to a

January 2004 members Announcement. It says: “By signing the form below, I confirm that I have read and understand the information pack, including the Announcement and Q & As.” Option 1 is signed and dated by Mr N.

4 Mr N has provided an extract from the Guide and ringed the sections: “Pensionable Earnings: are

adjusted at 1st April each year and are your annual rate of basic pay at the date including any other earnings which are deemed pensionable, PLUS the average of the previous tax years’ commission/bonus payment” and “Final Pensionable Earnings: are the greater of 1) the yearly average of your last 36 months’ basic earnings including any other earnings which are deemed pensionable OR…”

4 CAS-38298-S5D4 or weren’t pensionable. I had presumed until now that it was defined in law which I believe was the reasonable thing to do. I did not realise that the Principal Employer was the authority here. If a few extra words ‘... by the Principal Employer’ had been included in the information distributed to members of the scheme, this particular issue would have been nipped in the bud. Indeed now I’m wondering under what conditions the Principal Employer would deem any other earnings pensionable and wonder why this statement is there at all. Regardless, and also with reference to the same attachment, there is a clear statement about bonus payments being included in Pensionable Earnings.”

• Gowling WLG has attempted to argue that the applicable index was not specified, so the Trustee had the right to change from RPI to CPI. That is incorrect. The term RPI is hard-wired into the text of the 1991 RG Scheme Member Booklet 5 and the June 2009 Scheme Member Booklet 6.

• He has a whole file of pensions information and illustrations supplied by Thales over more than 25 years. None state different ERF apply to deferred members. Nor does the Scheme website. The last information he received on this was an illustration that used 4% per annum inverse compound. So, these are the ERF that should be used in the calculation of his pension.

• His requests for the supporting calculation sheets for his pension have been ignored.

5 The Booklet states under ‘Leaving Service’: “if you leave service after 1st January 1991 and you are entitled

to a “Preserved” Pension, then the whole of the pension in excess of the Guaranteed Minimum Pension will be increased by 5% a year compound (or the rise in the Retail Prices Index if less) from the date of leaving the Scheme until Normal Retirement Age.”

6 The Booklet states under ‘Revalued Pensionable Salary’: “Your Pensionable Salary revalued each year by

the rise in the Retail Prices Index up to a maximum of 8% compound per annum.”

5 CAS-38298-S5D4

• From 1 April 1985 to 31 May 1992, he was a member of the RD Scheme.

• From 1 June 1992 to 30 April 2001, he was a member of the RG Scheme.

• From 1 May 2001 to 30 September 2007, he was again a member of the RD Scheme.

• Rules 12(a) and (j) of the 1987 RD Scheme Deed permit Mr N to take his deferred pension before his normal retirement age. Part IV of the Schedule to the rules provides that the pension is the relevant fraction of his FPS. FPS, PS and BS are defined in Part I of the Schedule.

• Having regard to these provisions, none of bonus, car allowance or medical benefit payments is pensionable.

• Mr N’s entitlement to the revaluation of his deferred benefit in excess of his Guaranteed Minimum Pension (GMP) is based on legislative provisions in The Pensions Act 1993 (the Act). Following a statement by the Minister of State for Pensions in July 2010, the index used was changed from the RPI to the CPI with the Orders made from 2011 onwards, so the schemes have provided CPI-based revaluation from then.

• Proviso (A) to rule 12(j) provides for the benefit taken early to be reduced by an amount determined by the scheme actuary as reasonable as provided for in rule 10(a). The ERF previously advised by the scheme actuary for deferred members continue to apply, have not been altered and therefore were correctly applied in the calculation of Mr N’s pension.

6 CAS-38298-S5D4 • Rules 12(a) and (j) permit Mr N to take his deferred pension before his normal retirement age. Part IV of the Schedule to the rules provides that the pension is the relevant fraction of his FPS. FPS, current PS and BS are defined in Part I of the Schedule.

• Having regard to these provisions, none of bonuses, car allowance or medical benefit payments is pensionable. They were also not separately prescribed for the earnings figures provided to the Trustee by Mr N’s employer.

Adjudicator’s Opinion

On RPI to CPI

• Under the Act deferred pension rights must be revalued in line with prices, capped at 5% for service to 5 April 2009, and at 2.5% for service thereafter. The minimum annual increases were provided for in an annual order. The applicable index for prices was not specified in the Act.

• Historically the index used was RPI, but in 2012 the Coalition Government switched to CPI as the measure of prices used for setting the statutory minimum increase each year. However, many schemes had RPI written in their rules and could not change this.

• Mr N highlighted that the 1991 RG Scheme Member Booklet and the 2009 Scheme Member Booklet both reference RPI as the applicable index. But the Booklets reflected the position at that time and did not override the scheme rules.

• Under the rules of the RD Scheme and the RG Scheme, a pension in deferment “is revalued to the extent required by the revaluation provisions of the Pension Schemes Act 1993” 7. So, the revaluation provisions in the rules of both schemes relied on the requirements of pensions legislation. As no specific reference was made to RPI, RPI was not entrenched as the only reference index that should be used. Consequently, the change of reference index from RPI to CPI was consistent with both schemes’ rules and Mr N’s deferred pension was correctly revalued.

On the calculation of Mr N’s FPS

7 Part IV of the Schedule to the rules.

7 CAS-38298-S5D4 o from 1 April 1985 to 31 May 1992, he was a member of the RD Scheme;

o from 1 June 1992 to 30 April 2001, he was a member of the RG Scheme; and

o from 1 May 2001 to 30 September 2007, he was again a member of the RD Scheme.

• Mr N disputed his final period of pension employment. He said from 1 July 2003 to 30 September 2007 he was working for a legacy Racal company and so he was a member of the RG Scheme. To support this, Mr N had provided a copy of a pension consent form he signed in early March 2004 to continue membership of the RG Scheme. Mr N said his earnings included bonus, car allowance and medical benefit payments. So, these earnings should have been included in the calculation of his PS and FPS.

• On behalf of the Trustee, Gowling WLG said under the RG Scheme none of these were specified as pensionable, and they were not separately prescribed as pensionable earnings in the figures provided to the Trustee by Mr N’s employer. So, they did not fall to be taken into account in calculating Mr N’s FPS.

• The rules of the RG Scheme specify that PS and FPS includes fluctuating emoluments if prescribed by the Principal Employer as pensionable. So, the default position was that bonus, car allowance and medical benefit payments, which qualify as fluctuating emoluments, were not pensionable unless stated by the Principal Employer to be so.

• The onus was on Mr N to submit evidence that showed, more likely than not, that his bonus, car allowance and medical benefit payments counted as pensionable earnings. Unfortunately, none of the documents that Mr N had provided specifically stated that. The extract from the Guide merely supported the RG Scheme’s definitions of PS and FPS.

• Additionally, Mr N was a Specified Member. The contribution rate for Specified Members of the RG Scheme was defined as a percentage of the year’s current PS. Mr N said he paid member contributions based on his BS only. So, his BS was his current PS. The RG Scheme’s definition of BS excludes bonuses, commission, overtime, and any other fluctuating emoluments.

• The definitions of PS and FPS under the RD Scheme mirrored those under the RG Scheme but excluded fluctuating emoluments. So, as Mr N’s bonus, car allowance and medical benefit payments did not count as pensionable earnings, it made no difference whether Mr N’s last pensionable service was under the RD Scheme or the RG Scheme as the calculation of his FPS was the same.

• Consequently, Mr N’s FPS had been correctly calculated.

8 CAS-38298-S5D4 On ERF

• Mr N said he had a whole file of pensions information and illustrations supplied by Thales over more than 25 years. He said none stated different ERF applied to deferred members, nor did the Scheme’s website.

• The Trustee said an ERF of 4% per year formerly applied to members who retired from active service only. A different basis had always applied for deferred members and current factors date from 2006.

• The rules of the RD Scheme and the RG Scheme each stipulate that deferred pension benefits taken early will be “reduced at a rate determined by the Actuary…”

• It was not uncommon for different ERF to apply to active and deferred members of an occupational pension scheme. Indeed, trustees can treat different classes of member differently. There was nothing in the rules of either the RD Scheme or the RG Scheme which said that the ERF for active and deferred members were or must be the same.

• Moreover, the Adjudicator had seen no evidence that the factors provided by the Actuary had been misapplied in the calculation of Mr N’s pension. The documents that Mr N had submitted in support of his position related to immediate early retirement rather than early retirement from deferred status.

Mr N did not accept the Adjudicator’s Opinion and the complaint was passed to me to consider. Mr N has provided his further comments which do not change the outcome. I agree with the Adjudicator’s Opinion and note the additional points raised by Mr N.

Mr N’s further comments

9 CAS-38298-S5D4

• The Adjudicator’s view is that the documents he has submitted in support of his position relate to immediate early retirement rather than early retirement from deferred status. But none explicitly state that.

General comment

Ombudsman’s decision

8 Both letters concern pension increases in the course of payment.

10 CAS-38298-S5D4 The default position under the rules of the RG Scheme, and the rules of the RD Scheme, is that bonus, car allowance and medical benefit payments, which qualify as fluctuating emoluments, are not deemed pensionable unless stated by the Principal Employer to be so.

The documents that Mr N has provided do not state that his bonus, car allowance and medical benefit payments count as pensionable earnings.

Mr N has confirmed that he paid member contributions based on his BS only. So, his PS and FPS is correctly based on his BS.

On RPI TO CPI

The Trustee’s letters to scheme members dated 13 February and 6 June 2017 concern increases to pensions in payment and not the revaluation of preserved benefits in excess of GMP.

The Trustee has confirmed that ERF of 4% per year formerly applied to members who retired from active service only and that a different basis has always applied for deferred members and current factors date from 2006.

11 CAS-38298-S5D4

I can only consider the merits of Mr N’s case; not how other members may have been affected. From the documents submitted, I have found no evidence that Mr N was misinformed. More importantly I have found no evidence that his retirement benefits were miscalculated.

I do not uphold Mr N’s complaint.

Anthony Arter

Pensions Ombudsman 2 March 2022

12 CAS-38298-S5D4 Appendix 1 Racal Decca Staff Pension and Life Assurance Scheme

“(a) With the consent of the Trustees and of an Employer an immediate pension may be granted in lieu of the benefit to which he would otherwise be entitled under Rule 12 to a Member who elects to retire from Service…prior to Normal Pensions Date but at or after his 50th birthday…on grounds other than incapacity…he will be entitled to receive as from the relevant Pension Payment Date a pension at a reduced rate determined by the Actuary as being equivalent on a reasonable basis to that part of the Short Service Benefit consisting of pension payable to him which has accrued up to such Pensions Payment Date or a pension of such higher rate as the Employer with the consent of the Trustees shall decide.”

13 CAS-38298-S5D4

““Specified Member” shall mean a Member who at the date of his admission to the Plan or, if he has been admitted to membership more than once, the date of his last admission, was eligible for membership in accordance with the proviso to sub- rule (a) of Rule 2, and shall include any other Member who has been notified (whether under Rule 4 or otherwise) of the benefits payable to and in respect of him from the Plan and such benefits are described in Parts III or IV of the Schedule to the Rules.

As relevant, Part III of the Schedule to the Rules, provides

14 CAS-38298-S5D4

where:

(a) “N” is the number of complete years of Pensionable Service with a proportionate amount for any odd complete months of Pensionable Service completed by the Member up to the date of leaving Pensionable Service; and

(b) “FPS” is Final Pensionable Salary.

Notes:

…

2. In the case of a Post 88 Member, the pension calculated as above shall be revalued to the extent required by the revaluation provisions of the Pension Schemes Act 1993.

3. In the case of a Pre 88 Equalised Member, the pension calculated in accordance with this paragraph is subject to the following adjustments: 15 CAS-38298-S5D4 (a) to the extent that the pension is attributable to the Member’s period of Pensionable Service before 1 May 1990, it shall be appropriately adjusted (see Note 4) in the same way as it would have been if the Member’s Normal Pension Date were deemed to be the Member’s 65th birthday (if male) or 60th birthday (if female);

(b) to the extent that the pension is attributable to the Member’s period of Pensionable Service between 1 May 1990 and 31 March 1996, it shall be appropriately adjusted (see Note 4) in the same way as it would have been if the Member’s Normal Pension Date were deemed to be his or her 60th birthday; and

(c) to the extent that the pension is attributable to the Member’s period of Pensionable Service on or after 31 March 1996, it shall be revalued to the extent required by the revaluation provisions of the Pensions Act 1993.

4. For the purpose of Note 3, “appropriately adjusted” means adjusted as follows by reference to the deemed Normal Pension Date referred to in the relevant paragraph of Note 3:

(a) Revalued to the extent required by the revaluation provisions of the Pension Schemes Act 1993 in respect of any period between leaving Pensionable Service and the deemed Normal Pension Date;

(b) Increased by a late retirement factor determined by the Actuary as reasonable in respect of any period from the later of the Member’s deemed Normal Pension Date and the date the Member left Pensionable Service to the Member’s Pension Payment Date (where the Pension Payment Date is later than the deemed Normal Pension Date); and

(c) Reduced by an early retirement factor determined by the Actuary as reasonable in respect of any period from the Member’s Pension Payment Date to the Member’s deemed Normal Pension Date (where the Pension Payment Date is earlier than the deemed Normal Pension Date.”

As relevant, Rule 10, ‘Retirement Before Normal Pension Date’, provides:

“(a) With the consent of the Trustees and of an Employer an immediate pension may be granted in lieu of the benefit to which he would otherwise be entitled under 16 CAS-38298-S5D4 Rule 12 to a Member who elects to retire from Service…prior to Normal Pensions Date but at or after his 50th birthday…on grounds other than incapacity…he will be entitled to receive as from the relevant Pension Payment Date a pension at a reduced rate determined by the Actuary as being equivalent on a reasonable basis to that part of the Short Service Benefit consisting of pension payable to him which has accrued up to such Pensions Payment Date or a pension of such higher rate as the Employer with the consent of the Trustees shall decide.”

17 CAS-38298-S5D4

18 CAS-38298-S5D4

where:

(a) “N” is the number of complete years of Pensionable Service during which the member paid contributions…with a proportionate amount for any odd complete months of such Pensionable Service completed by the Member up to the date of leaving Pensionable Service; and

(b) “FPS” is Final Pensionable Salary. …

Notes:

1. In the case of a Post 88 Member, the pension calculated as above shall be revalued to the extent required by the revaluation provisions of the Pension Schemes Act 1993.

2. In the case of a Pre 88 Equalised Member, the pension calculated in accordance with this paragraph is subject to the following adjustments:

(a) to the extent that the pension is attributable to the Member’s period of Pensionable Service before 1 May 1990, it shall be appropriately adjusted (see Note 3) in the same way as it would have been if the Member’s Normal Pension Date were deemed to be the Member’s 65th birthday (if male) or 60th birthday (if female);

(b) to the extent that the pension is attributable to the Member’s period of Pensionable Service between 1 May 1990 and 31 March 1996, it shall be appropriately adjusted (see Note 3) in the same way as it would have been if the Member’s Normal Pension Date were deemed to be his or her 60th birthday; and

19 CAS-38298-S5D4 3. For the purpose of Note 2, “appropriately adjusted” means adjusted as follows by reference to the deemed Normal Pension Date referred to in the relevant paragraph of Note 2:

(a) revalued to the extent required by the revaluation provisions of the Pension Schemes Act 1993 in respect of any period between leaving Pensionable Service and the deemed Normal Pension Date;

(b) increased by a late retirement actor determined by the Actuary as reasonable in respect of any period from the later of the Member’s deemed Normal Pension Date and the date the Member let Pensionable Service to the Member’s Pension Payment Date (where the Pension Payment Date is later than the deemed Normal Pension Date); and

(c) reduced by an early retirement factor determined by the Actuary as reasonable in respect of any period from the Member’s Pension Payment Date to the Member’s deemed Normal Pension Date (where the Pension Payment Date is earlier than the deemed Normal Pension Date.”

20 CAS-38298-S5D4 Appendix 2 Racal ‘Questions and Answers’ document on equalisation

• Decided by the Trustee, subject to advice from the actuary. • Presently calculated on a cost neutral basis. • Different for a salary linked pension compared to a fixed pension (e.g. from a predecessor scheme, insured scheme or transfer-in).

An example explains why. In case a) a member requests immediate early retirement after 20 years’ service and in case b) the early payment of a fixed pension. It says for a) had the member stayed through to normal retirement age (NRA) their 20/60ths FPS would have increased with salary and the scheme has been funded to achieve this. So, the ERF applied includes allowance for these future salary increases. For b) the entitlement is fixed to NRA and does not increase with salary, so the ERF does not include a salary increase allowance. Consequently, factors used for b) are different to those for a) to maintain cost neutrality, approximately 11.5% per annum reduction as opposed to 4% per annum.

• Not guaranteed and could change.

21 CAS-38298-S5D4

Full determination