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Principal new judgement of The Supreme Court regarding pension

July 2010 - Employment. Legal Developments by Wiersholm.

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On 7 April this year, the Supreme Court pronounced judgement in a case between Fokus Bank and a group of employees in the bank. The case concerned the matter of whether an employer may unilaterally change (“convert”) the employees’ pension scheme from performance-based to contribution-based. The Supreme Court concluded that Fokus Bank had the right to unilaterally convert the pension scheme to a contribution scheme. The Supreme Court’s reasons are principal and presumptive in the sense that employers have such a right, even when the new contribution scheme clearly is less beneficial for the employees than the old performance scheme.

The background of the case
Up until 2003, Fokus Bank had a performance-based pension scheme which mainly implied that the employees would, after reaching the age of retirement and achieving full contribution time, receive a pension of 70% of their annual salary at the time of retirement. In 2003, the bank decided to close the pension scheme for new employees and establish a new, contribution-based pension scheme for this group. Existing employees were given the opportunity to choose between continued membership in the closed performance-based scheme or be transferred to the new contribution scheme. This was done by checking off boxes in a form which, read in connection with the enclosed information material, might give the impression that the choice was binding for the employer as well.

In 2005, the bank decided to phase out the performance-based scheme and transfer the members thereof to the contribution-based scheme. The reasons given for this decision were financial, and the transfer resulted in considerable savings for the bank. However, for the employees the change implied that they got a pension scheme that was clearly less beneficial. The discounted loss for the respondents before the Supreme Court varied between approximately NOK 140,000 and approximately NOK 300,000.

A group of employees brought legal action against Fokus Bank with the claim that they were to be put in the same legal and financial position as if they had still been members of the phased out pension scheme. In short, the employees' submission were that the bank waived the right to phase out the scheme when they gave the employees the right to choose which scheme they wanted to be members of in 2003. They also submitted that the bank, based on an overall evaluation, did not have the right to phase out the scheme according to contract. In any case, procedural errors had occurred, and thus the decision had to be made invalid. The employees lost in the district court, but won in the court of appeal.

The Supreme Court's conclusions and arguments
The Supreme Court was unanimous in its conclusion, which was the same as in the district court. Thus, the court found in favour of Fokus Bank.

The Supreme Court based its conclusions on Rt 2002 page 1576 (the Hakon judgement) and Rt 2008 page 1246 (the Statoil judgement), both concerning the the employer's access to make changes to pension schemes. The first-voting judge's summary of the judgements is that the employer may, in principle, make changes to a group pension scheme, and - implicit - that this also applies to a conversion from a performance scheme to a contribution scheme. In order to grant exemptions from this main rule, the facts must carry a certain weight, cf. no. 37 of the grounds of the judgement.

As regards the employees' concrete submission, the Supreme Court does not agree that the employees, by way of their right to choose in 2003, got an individual right that limited the bank's right to make changes. The choice given to the employees was only to stay in the scheme in force at the time of contract, with inherent possibilities for change.

The Supreme Court also assumed that the matter of whether the employer, on an individual basis, has waived its right to make changes must be based on an interpretation of the individual employment contracts. However, the Supreme Court agreed that employment contracts do not regulate all rights and obligations between the parties, and that a settlement of the legal position must therefore be made based on a broad evaluation. However, the fact that the employees have had clear and long-term expectations of a good pension scheme was given little independent emphasis in this evaluation. For lack of documented, individually binding promises, nor was it decisive that the good pension scheme had been emphasised by the bank in employment processes and that the pension scheme had been a contributing factor in the employees' decision to start working for the bank. In his arguments the first-voting judge emphasised that the pension scheme was probably unilaterally introduced by the bank, that it was fully paid by the bank and that the articles of association of the pension fund had contained a provision on the access to make changes for many years. The latter substantiated the fact that the pension scheme could be changed. This indicated that the facts must be relatively clear in order for it to be assumed that other, individual solutions have been agreed.

The Supreme Court denied that procedural errors might have affected the validity of the phasing out of the scheme with reference to the fact that the employees had been involved in the decision and that any errors would nevertheless have affected the outcome of the process.

By way of this judgement, the Supreme Court has clearly stated that the employer has a right to unilaterally decide to convert the pension scheme from performance-based to contribution-based.

However, the judgement does not imply all changes are automatically permitted. Nor does it imply that all employers have such a right. The Supreme Court also states that the matter of whether there are any contractual constraints, and, if so, the content of such constraints, must be determined based on a broad evaluation in which other interpretation factors than the employment contracts are also relevant. Thus, employers who are considering changing their pension scheme must carry out a relatively complex evaluation based on comprehensive source material. Some employers might also have obligations according to wage agreements that limit their access to make changes or that impose procedural requirements. The judgement also shows the importance of carrying out such a process in a good and including manner, according to law and wage agreements.