Pension panic

First, the good news. Apocalyptic visions of the European Court ruling backdating the period for which part time workers can claim pensions rights cost up to £17bn are probably wide of the mark.

The not so good news is that there are a couple of flies in the ointment that business, and especially small business, may need to be alert to.

The most important thing to understand about the European ruling is that it was not, per se, about part-time workers but about sex discrimination. A claimant has to persuade an Industrial Tribunal that there has been sex discrimination because excluding part-time workers is not, in itself, illegal, until July, when the law changes. Also, like other Industrial Tribunal cases, the claim has to be brought within six months of leaving employment. These are the main reasons that the Federation of Small Businesses is cautiously relaxed about the ruling. A spokesman said that only a small number of its members stood to be affected.

But from a legal point of view, employers also have a fairly robust defence. Robin Ellisson, a pension lawyer at Eversheds, says that an employer can first argue that part time workers were not worth including in the scheme or that the pay was so low that it would have been a bad thing for them to join. The ruling is most likely to benefit staff with relatively well paid jobs with a strong traditional of part time work. Many of these, like teachers, are in the public sector. For many private sector part timers the arithmetic of joining a pension would not add up.

But also, employees must prove that they would have joined the scheme and to do this they must prove they were employed. Documentary evidence will be needed and employees are as unlikely as smaller businesses to have kept long term records.

There are also disincentives for staff thinking of making a claim, the biggest of which is that most pension schemes are contributory. This means that workers will have to make up missed contributions. Although Ellison believes that banks would look kindly on lending against a pension scheme, the administrative hassle and simple reluctance to take on debt may well put many claimants off.

There are two real concerns with the ruling, however. Terence O‘Halloran, pensions spokesman for the FSB, says: "The situation with defined benefits schemes is easy. The employee knows what is due." The problem arises with money purchase schemes. It is difficult to know how much has to be put ‘back in the pot’ because there is an element of lost growth. So far there has been no indication on what growth rate will be assumed. It may be set by the Financial Services Authority, as was the case with the pensions mis-selling affair, but it is possible that actually growth in equities and gilts will be used.

And another potential problem identified by Ellisson, affects businesses for sale. A buyer will want to know about any contingent liabilities or demand warranties, which could protract due diligence procedures.

But the best advice for smaller businesses is to sit tight. The case must be return to the House of Lords to determine how far back claims can be back dated and it may then return to Europe. There is unlikely to be a definitive ruling for at least a year. But if you are in a relatively well paid industry with a tradition of part-time work, there may be a case for contingency planning. As the FSB’s O’Halloran observes: "Any who gets caught is on a hiding to nothing."