Benefits
Revenue Pensions Manual
6.1. General
This chapter sets out the maximum total benefits that may be provided under approved schemes for members who remain in an employment until retirement. Please refer to Chapter 25: Limits on Tax Relieved Pension Funds as additional tax charges occur when individual benefits exceed specified amounts.
6.2. Other schemes of same employer
In determining whether the benefits to be provided under a scheme for an employee or class of employees are within approvable limits, they should be aggregated with benefits for those employees from all schemes relating to the same employment.
6.3. Benefits on retirement – other conditions
A pension shall not be assignable or capable of being surrendered, except (as outlined in Chapter 11.3) to provide pensions for spouses, civil partners or dependants. These conditions apply to all pensions payable under approved schemes. Chapter 11.2 covers pensions for persons other than employees – that is, pensions paid to surviving spouses, civil partners and dependents in their own right.
6.4. Maximum total benefits on retirement
The aggregate benefits payable on retirement to an employee who retires at normal retirement age after 40 or more years’ service with the same employer, when expressed as an annual amount payable for life (or for life subject to a guaranteed minimum period not exceeding ten years) and taking into account any benefits paid as lump sums, should not exceed two-thirds of final remuneration on retirement (section 772(3)(a) Taxes Consolidation Act 1997 (TCA). A basic maximum accrual rate of one-sixtieth of final remuneration for each year’s service is approvable for any period of service of 40 years or less (a pension on this basis is commonly described as a pension of N/60ths).
Please see Chapter 5.7 for the standard methodology for funding and benefit calculations.
An employer may wish to establish an occupational pension scheme that does not express the benefits on retirement as a pension of which part may be commuted, but which gives all members a lump sum of a specified amount plus a separate non-commutable pension. Such schemes are common in the public sector and, in practice, for the purpose of determining whether the total benefits under a scheme of this kind are within the approvable maximum, the ratio between pension and lump sum commonly found in public sector schemes will be used; that is, the accrual rate of the lump sum benefit will normally be divided by 9 to arrive at its pension equivalent. For example, a lump sum of 3/80ths of final pay for each year of
service will represent a pension annual accrual rate of 1/240 [3/80 divided by 9 = 1/240], and the approvable maximum rate at which the non-commutable pension may accrue for an employee with 40 years’ service will be 1/80th of final pay for each year [1/60 minus 1/240
= 1/80].
6.5. Other benefit formulae
Schemes such as defined contribution schemes may calculate benefits by reference to other formulae, provided that such benefits are within maximum limits.
6.6. Late entrants
Benefits in excess of those which would be produced by a basic rate of 1/60th of final remuneration for each year of service can normally be approved for employees who cannot, by reason of the date of their entry to employment, complete 40 years’ service before normal retirement age. A pension of two-thirds of final remuneration cannot be approved for very short periods of service but, subject to any deduction required for retained benefits from previous employment, approved schemes may provide a pension of two-thirds of final remuneration for service of not less than ten years to normal retirement age. An improvement on an accrual rate of 60ths is usually also permissible for employees with less than ten years’ service to normal retirement age as in the following scale known as “uplifted 60ths”.
Maximum Pension
Years of service to Expressed as a fraction Expressed as a fraction
normal retirement age of maximum approvable
pension for a full career of final remuneration
1
1/10th
4/60ths
2 2/10ths 8/60ths
3 3/10ths 12/6oths
4 4/10ths 16/60ths
5 5/10ths 20/60ths
6 6/10ths 24/60ths
7 7/10ths 28/60ths
8 8/10ths 32/60ths
9 9/10ths 36/60ths
10 or more 40/60ths
Maximum pension means pension before any commutation and including –
(i) the annuity value of any separate lump sum entitlement, and
(ii) any pension derived from voluntary contributions paid by the member.
This scale can be incorporated in the rules of a scheme if provision is made for any necessary restriction – for example, for retained benefits or service which does not qualify for benefits. Alternatively, the rules may provide for pensions to accrue at a rate of 1/60th of final remuneration for each year of service (N/60ths) “or such higher fraction as will not prejudice approval by the Revenue Commissioners for the purposes of Chapter 1, Part 30, Taxes Consolidation Act 1997” (or similar wording). A higher rate may be permitted in suitable cases where it is necessary to adopt an unusually early age for normal retirement.
6.7. Normal retirement age (NRA)
The rules of a scheme should specify the age, between 60 and 70 years, at which members will normally retire (section 772(3)(a) TCA). The “normal retirement age” (NRA) may differ for categories of member and may also be agreed on an individual basis. Section 772(4)(b)(ii) allows benefits to be payable on retirement within ten years of the specified age or on earlier incapacity.
Revenue may be prepared to accept a normal retirement age outside the above range for exceptional occupations. Submissions should be made on an individual basis, but 20% directors must be within the 60-70 years age range. All schemes/arrangements in respect of the same employment that provide benefits for an individual must have the same NRA.
6.8. Increases of pensions in payment
Section 772(3)(g) TCA provides that no benefits other than those mentioned in that subsection are payable under the scheme. However, subsection (4) of section 772 provides that Revenue may approve a scheme notwithstanding that it does not meet one or more of the conditions for approval in subsections (2) and (3) of that section. Revenue will use its discretion to approve a scheme, notwithstanding that a pension may over time increase above the level specified in section 772(3)(a) TCA (that is, two-thirds of final salary).
Increases in benefit after retirement must be in the form of non-commutable pension. Please refer to Chapter 25.4 for cases where increases in excess of the ”permitted margin” trigger a charge to chargeable excess tax.
6.9. Life assurance cover after retirement
Life assurance cover that continues after retirement or leaving service may be provided as a retirement benefit. Where such cover is provided, the annuity equivalent of the single premium cost required to secure the cover (other than cover extending up to normal retirement date only, where early retirement takes place on grounds of incapacity) must be taken into account for the purposes of determining aggregate maximum benefits.
7.1 General
This chapter sets out the maximum lump sum benefits that may be provided under an approved scheme. The level of lump sum benefits that is approvable is calculated by reference to an employee’s length of service and final remuneration with the relevant employer.
Lump sum benefits must only be paid once, normally at the time of retirement (that is, the date on which the pension becomes payable).
Please refer to Pensions Manual Chapter 25: Limit on Tax Relieved Pension Funds, as the payment of a lump sum benefit in excess of a specified monetary amount may trigger a tax charge.
7.2 Maximum Lump Sum Benefits
Lump sum benefits greater than 3/80ths of final remuneration for each year of service may be given on retirement at normal retirement age (NRA) in accordance with the table set out below, provided that the aggregate of the value of non-pension retirement benefits in respect of service with the current employer and any retained benefits does not exceed 1.5 times final remuneration.
Years of Service Eightieths (80ths) of final remuneration
9 30
10 36
11 42
12 48
13 54
14 63
15 72
16 81
17 90
18 99
19 108
20 or more 120
Please refer to Pensions Manual Chapter 23.8 for details of the calculation of lump sum benefits for retiring employees taking “ARF options”.
7.3 Commutation Factors
If an approved scheme permits a retiring employee to commute their pension up to the amount required to provide a lump sum within the permitted maximum, the reduction in pension must be commensurate with the amount of the lump sum. The relationship between lump sum and pension may be calculated using one of the bases explained below:
(a) If the scheme trustees do not wish to provide that the relationship between lump sum and pension should vary with age, gender or any other considerations, the scheme rules may provide for the same fixed relationship prescribed in Pensions Manual Chapter 6.4 for schemes with an independent lump sum – that is €1 of annual pension payment may be commuted for a lump sum of €9.
(b) A scheme may use a specifically designed table subject to actuarial review at intervals. Continued approval of the scheme will be dependent on the table being changed if any of the assumptions on which it is based are varied.
(c) A scheme may provide for individual calculations by a qualified actuary for every commutation. These must be consistent with other calculations made for the same individual and for other purposes of the scheme having regard to changing financial conditions.
A uniform basis should apply to all members (subject to variations of age) of one scheme and to all schemes that have a substantial common membership.
Commutation factors fall within two broad categories depending on whether they take account of the value of any entitlement to cost of living post-retirement increases of the pension. Factors that take account of such increases are commonly referred to as “enhanced factors” and are not appropriate to a scheme giving no entitlement to cost of living increases. [However, please see comment below on schemes which provide for regular reviews and an expectation of resultant increases.]
For schemes not using enhanced factors, commutation factors in the range 10.2 to 11.0 at age 60 and 9.0 to 9.8 at age 65 may be used for members. Values for other ages within the acceptable range for normal retirement may be calculated by adding or subtracting 0.02 per month of age difference. The factors are acceptable whether pensions are guaranteed for 5 or 10 years or not guaranteed at all, irrespective of whether payments are in advance or in arrears and regardless of the frequency of payments.
If the rules of the scheme provide for pensions to be reviewed regularly and increased (within the limit of the rise in the cost of living) at the discretion of the employer or trustees if funds permit, enhanced commutation factors may be used, provided that a certificate by an actuary is furnished which states the anticipated percentage rate of future increases on the basis of the current annual contributions without taking into account any future special contributions which the employer might make.
The pension equivalent of a lump sum taken from a defined contribution scheme is determined by application of the annuity rate used to determine the balance of the pension.
Where scheme rules permit the application of enhanced commutation factors and where post-retirement increases are not applicable on commuted pensions, the commutation factor may be calculated by reference to current open market annuity rates despite the amount of pension prior to commutation not being dependent on open market annuity rates.
7.4 Trivial Pensions
An approved scheme may permit full commutation of a pension if the aggregate benefits payable to an employee under that scheme and any other scheme relating to the same employment do not exceed the value of a pension of €330 per annum. Pensions for spouses, civil partners and dependants may also be commuted at the same time as commutation of the member’s pension if they are independently trivial. If commutation of part of a greater pension than €330 per annum leaves a residual pension within the “trivial” limits, this residual pension may not be commuted on triviality grounds.
In a defined contribution context, for the purposes of establishing whether benefits come within the “trivial” limit, the calculation should be based on the cost of a single life annuity with no escalation.
The 10% tax rate under section 781(3) Taxes Consolidation Act 1997 (TCA) also applies where members’ pensions are fully commuted on the grounds of triviality. The chargeable part of the payment may be calculated in the same manner as indicated for lump sum payments under the section dealing with serious ill-health (see paragraph 7.5). However, when calculating the maximum commutation (in the context of triviality), potential service should not be taken into account.
Where a trivial pension is a deferred pension, it may not be commuted until it begins to be payable. Furthermore, if such a pension is secured by an annuity contract or a policy which has been bought in the name of the employee, or assigned to the employee, because the scheme has been wound up or the employee has left service, commutation will be possible only if satisfactory arrangements have been made with the life office or pension provider concerned for payment of any tax due out of the policy proceeds. For the purposes of the
€330 limit, a deferred pension will be that pension as increased by virtue of the preservation requirements of the Pensions Act 1990.
The treatment described above in relation to the commutation of trivial pensions may also be offered in the same circumstances to holders of RACs, PRSAs and PEPPs.
As an alternative to the above, and with the agreement of the scheme beneficiary and trustees, there is no objection to the payment of once-off pensions. This may take place where the total of all funds available for pension benefits, following payment of any lump sum benefit, is less than €30,000. The quantum of retirement benefits from all sources must be taken into account for the purpose of calculating the €30,000 limit. In a defined benefit context, the pension benefit needs to be converted to a fund value to determine if the benefits are within the €30,000 limit. This should be done by reference to the scheme commutation factors. The rates of tax, USC and PRSI to be applied are those that apply to any other pension payment. Prior Revenue approval is not required.
The above option may be offered to all scheme members, including buy out bond holders, RAC, PRSA or PEPP holders, and may also be applied to residual funds available to secure spouses’, civil partners’ and dependants’ pensions.
7.4.1 Pension adjustment orders
Where benefits are payable under a pension arrangement in respect of which a pension adjustment order (PAO) has been made in favour of a non-member spouse or civil partner, the requirements described above may be applied to the separate entitlements of each party under the arrangement (having regard to the PAO) to determine if they independently satisfy the trivial “once-off pension” options.
7.5 Serious ill-health
An approved scheme may include a rule that permits for commutation of a pension if at the time it becomes payable the recipient is in “exceptional circumstances of ill-health”. This phrase is to be interpreted strictly and narrowly. It is not intended to refer to the kind of ill- health which prevents somebody from working but to cases where the expectation of life is unquestionably very short. Commutation on these grounds should not take place unless the administrator has been satisfied by receipt of adequate medical evidence that terminal illness is in point and that the expectation of life is measured in months rather than years.
Whether an individual is in this position is a matter for decision by the administrator (with the exception of cases involving “20% directors” and members of small self-administered schemes, which should be reported to Pensions Branch, Large Cases High Wealth Individuals’ Division) but the inclusion of a rule on these lines in an approved scheme is accepted on condition that it will be interpreted invariably in this sense.
To arrive at the taxable part of the payment, there may normally be deducted an amount (inclusive of the aggregate of any lump sums already permitted) not exceeding 3/80ths of the employee’s final remuneration multiplied by the number of years of service with the relevant employer. In this context final remuneration will, irrespective of any definition in the rules, be taken as the average annual remuneration of the last three years’ service. (This deduction will frequently eliminate any tax liability where a trivial pension is commuted.) The tax rate to be applied is 10%, by virtue of section 781(3) TCA.
An alternative deduction in arriving at the taxable part of the payment is the largest amount which could have been received apart from the special circumstances – that is, the triviality of the pension or the employee’s exceptionally serious ill-health. In calculating the largest amount, one must look at the rules of the scheme; if the scheme does not permit commutation except on serious ill-health grounds for the category of employee concerned, or ordinarily restricts the lump sum to 3/80th of salary per year of service or some lower amount, then no alternative deduction can be made. Where the rules leave the trustees or the employer discretion to determine (within approvable limits) to what extent an employee may normally commute his pension, or to increase the lump sum part of the benefits, it may be assumed for the purpose of calculating the tax charge that they would have exercised their discretion to permit the maximum lump sum.
Example
An employee with 40 years’ potential service retires 10 years early because of serious illness which has made their life expectancy extremely short. Their final salary is €12,000, and the average salary for the last 3 years’ service is €10,800. The actuarial value of the amount of their pension is €54,000, and payment of this sum is, in the circumstances, permitted under the rules of the scheme. The general rule of the scheme permitting commutation specifies that every employee may have a lump sum of 3/80ths of final remuneration (defined in the scheme rules to include remuneration for the final 12 months’ service) for each year of service.
Section 781(1)(i) permits an automatic deduction of
30 x 3/80 x €10,800 = €12,150
but Section 781(1)(ii) which applies in this case increases the permitted deduction to 30 x 3/80 x €12,000 = €13,500
Tax at 10% will therefore be charged on €54,000 less €13,500 = €40,500; tax due at 10% is
€4,050.
If the general rule of the scheme had given the scheme trustees discretion to approve, in normal circumstances, commutation of a greater amount, (see paragraph 7.2) the deduction under Section 781(1)(ii) could have been increased to
120/80 x €12,000 = €18,000
This leaves tax to be charged on €36,000 of the commutation payment (actuarial value of
€54,000 minus €18,000 lump sum). It is appropriate to take account of the fact that the employee is retiring on grounds of incapacity, and that the maximum lump sum would have been based on their 40 years potential service (see paragraph 9.4) rather than their 30 years actual service.
7.6 Normal lump sum plus lump sum from commutation of pension
Where the scheme provides for a lump sum 3/80ths of final remuneration per year of service separately from the pension and not in commutation of the pension, and the pension itself is commuted – for example, because the employee is seriously ill – the whole of the commutation payment will be chargeable to tax.
Lump sums receivable by way of commutation in special circumstances of pensions under two or more separate schemes relating to the same employment are to be aggregated for the purposes of determining the taxable part.
Cases
British Airways Plc v Airways Pension Scheme Trustee Ltd
Exercise Trust Powers
[2018] EWCA Civ 1533 (05 July 2018)
Lord Justice Patten :
There are two principal issues on this appeal. The first is whether the Trustees of the Airways Pension Scheme (“APS”) validly exercised the power of amendment contained in clause 18 of the APS Trust Deed of 8 October 1948 (“the Trust Deed”) when they conferred on themselves a power to review and at their discretion increase the annual rate of pension payable under the APS beyond what would otherwise be permitted under Rule 15 of the APS Rules. The second issue is whether, assuming that the change in the Rules was validly made, the power created by the amendment to Rule 15 was validly exercised in November 2013 when it was used to grant an additional pension increase of 0.2% over and above the increase stipulated by the application of the Consumer Price Index (“CPI”). British Airways Plc (“BA”) which is the employer for the purposes of the APS and is required to fund the additional pension increase challenges both decisions as unlawful. Morgan J (see [2017] EWHC 1191 (Ch)) held that both the clause 18 power to amend and the Rule 15 power to increase the pensions payable had been validly exercised.
The APS is a balance of cost defined benefit scheme which was established in 1948 as the pension scheme for the employees of BA and its predecessors including British Overseas Airways Corporation, British European Airways Corporation and British South American Airways Corporation (together “the Corporations”) all of which were established as state owned corporations under the provisions of the Civil Aviation Act 1946 (“CAA 1946”). The Minister was required by s.20 CAA 1946 to make regulations setting up one or more pension schemes to provide “pensions and similar benefits” in respect of the service of employees of the Corporations including benefits in the case of injury or death and the public ownership of the Corporations was reflected in the requirement in clause 18 of the Trust Deed as originally executed that the power of the Management Trustees to amend the provisions of the Trust Deed should take effect subject to regulations made by the Minister under s.20 CAA 1946. Regulation 7 of the Airways Corporations (General Staff Pensions) Regulations 1948 (“the 1948 Regulations”) provided that no amendment of or addition to the Trust Deed should have effect unless confirmed by Regulations made under s.20. The consent of the Minister (by regulation) to any rule change was therefore mandatory.
The 1948 Regulations and CAA 1946 were subsequently amended so that the reference in regulation 7 to s.20 CAA 1946 had by 1971 become a reference to s.24 of the Air Corporations Act 1967 (“ACA 1967”). But in 1971 a significant change occurred when the Secretary of State (in exercise of the powers contained in s.24 ACA 1967) made the Air Corporations (General Staff, Pilots and Officers Pensions) (Amendment) (No. 2) Regulations which by regulation 3(1) removed the requirement under regulation 7 of the 1948 Regulations that any amendment or addition to the provisions of the Trust Deed was required to be confirmed by regulations made under s.24 ACA 1967. The only exception to this was in respect of an amendment which provided for the admission to the APS of the employees of a corporation whose employees had not previously been admitted as members: see regulation 3(2).
There have been a number of amendments to the Trust Deed and to the APS Rules including by the introduction in 1973 of what is now Part VI of the Rules which contain the provisions in Rule 15 for the adjustment of pensions and allowances. Rules 9-14 of the original Rules which were contained in the schedule to the Trust Deed set out by reference to the First Table to the Rules the pensions payable to members based on their salary and contributions. Rule 28 provided that the Rules might be amended or added to in accordance with the provisions of the Trust Deed but there was no express provision in the original Rules for any pension increases and the evidence before the judge was that increases were occasionally granted on an ex gratia basis presumably by an ad hoc amendment to the APS under clause 18.
In April 2008 the Trustees prepared and approved a consolidated trust deed which contained the provisions of the original Trust Deed as amended up to 1 April 2008 together with Part VI of the Rules also as amended up to that date. Clause 23 of the consolidated Trust Deed (which I will continue to refer to as “the Trust Deed”) recorded the fact that the APS was closed to new members with effect from 31 March 1984 in advance of the privatisation of BA in 1987. The April 2008 version of the Trust Deed and the Rules remained current until the amendment to Rule 15 made on 25 March 2011 and the proceedings have been conducted on the basis that there were no material amendments to the APS between 1 April 2008 and that date.
As of 1 April 2008 the following were the most important and relevant provisions of the Trust Deed for the purposes of what we have to decide. The main object of the APS is set out in clause 2:
“The main object of the scheme is to provide pension benefits on retirement and a subsidiary object is to provide benefits in cases of injury or death for the staff of the Employers in accordance with the Rules. The scheme is not in any sense a benevolent scheme and no benevolent or compassionate payments can be made therefrom.”
In clause 3 each “Employer” covenants with the Trustees to pay “all contributions to be contributed by it and by members in its employment in accordance with the Rules”. By 1987 BA was the sole sponsoring employer under the APS.
The administration of the APS is carried out by the Trustees. At the time when the Rule 15 power was amended in March 2011 and subsequently exercised in 2013 the Management Trustees referred to in the Trust Deed were all individuals but they have subsequently been replaced by a corporate trustee which is the defendant and respondent to this appeal. Clause 4(a) provides:
“The Management Trustees shall manage and administer the scheme and shall have power to perform all acts incidental or conducive to such management and administration and the Custodian Trustees shall concur in and perform all acts necessary or expedient to enable the Management Trustees to exercise their powers of management or any other power or discretion vested in them accordingly for which purpose the Custodian Trustees shall have vested in them the power for and on behalf of and (if necessary) in the name of the Management Trustees to execute any deed or other instrument giving effect to the exercise by the Management Trustees of any power vested in them and the Custodian Trustees shall deal with the Fund and the income thereof as the Management Trustees shall from time to time direct and the Custodian Trustees shall be under no liability otherwise than by recourse to the trust property vested in them for making any sale or investment of or otherwise dealing with the trust property and/or the income thereof as directed by the Management Trustees.”
The Management Trustees are given (under clause 4(b)) the usual powers to raise money together with the power (in clause 4(b)(ix)) to do all such other things as are “incidental or conducive to the attainment of the objects of the scheme or any of them”. Their powers of investment are set out in clause 6. Under clause 10 they must produce accounts made up to 31 March in each year and supply them to the auditor.
Clause 11 sets out the duties of the scheme actuary. He is appointed and removed by the Management Trustees with the consent of BA: see clause 8. The actuary is required to carry out actuarial calculations of the assets and liabilities of the APS fund at least every three years and to provide a report and recommendations to the Management Trustees: see clause 11(a). As part of this exercise he must certify the amount of any deficiency or disposable surplus:
“(b) ….. if the Actuary certifies that a deficiency or disposable surplus as the case may be is attributable to an Employer he shall certify the amount thereof and the Management Trustees shall within three months after receiving such certificate make a scheme for making good the deficiency or as the case may require disposing of the disposable surplus PROVIDED THAT any such scheme shall be subject to the agreement of the Employer to which it applies or in default of agreement shall be referred to a Fellow of the Institute of Actuaries to be appointed in default of agreement on the application of either the Employer or the Management Trustees by the President for the time being of the Institute of Actuaries and shall come into force subject to such amendments (if any) as that Actuary may direct.
(c) If the Actuary certifies that there is a deficiency attributable to an Employer the scheme referred to in paragraph (b) above shall provide that the Employer shall contribute to the Fund in addition to any existing deficiency contribution payable under this clause and to the contributions prescribed by the Rules an equal annual deficiency contribution calculated to make good the deficiency over a period not exceeding forty years from the date of the valuation PROVIDED THAT an Employer may at any time or times pay to the fund such monies as the Employer shall think fit in or towards satisfaction of any deficiency contributions which it would otherwise have been liable to provide on any subsequent date or dates.
(d) If the Actuary certifies that there is a disposable surplus attributable to an Employer the scheme referred to in paragraph (b) above shall provide that:-
(i) the amount or outstanding term of any existing annual deficiency contribution shall be reduced to such extent as the disposable surplus will permit
(ii) if after having extinguished as aforesaid all outstanding annual deficiency contributions of an Employer a balance of disposable surplus still remains the contributions of the Employer shall be reduced to an extent required to dispose of such balance by annual amounts over such a period not exceeding 30 years from the date of the valuation as the Actuary shall advise.”
Under clause 13 the Management Trustees have full power to determine the entitlement of any person to any pension benefit from the fund and all matters, questions and disputes touching or in connection with the affairs of the APS. There is an arbitration clause in relation to disputes about pension entitlement.
Clause 18 contains the power of amendment. Following the privatisation of BA and the changes in the regulations this has been amended from the version which appeared in the original Trust Deed so as to exclude references to the Corporations and the Minister. It now reads:
“The provisions of the Trust Deed may be amended or added to in any way by means of a supplemental deed executed by such two Management Trustees as may be appointed by the Management Trustees to execute the same. Furthermore the Rules may be amended or added to in any way and in particular by the addition of rules relating to specific occupational categories of staff. No such amendment or addition to the provisions of the Trust Deed or to the Rules shall take effect unless the same has been approved by a resolution of the Management Trustees in favour of which at least two thirds of the Management Trustees for the time being shall have voted PROVIDED THAT no amendment or addition shall be made which –
(i) would have the effect of changing the purposes of the scheme or
(ii) would result in the return to an Employer of their contributions or any part thereof or
(iii) would operate in any way to diminish or prejudicially affect the present or future rights of any then existing member or pensioner or
(iv) would be contrary to the principle embodied in Clause 12 of these presents that the Management Trustees shall consist of an equal number of representatives of the employers and the members respectively.”
Although, as I have said, neither the Trust Deed nor the Rules originally contained express power to increase pensions, clause 24 does give the Employer the ability to increase benefits:
“(a) Subject to the payment to the Fund by the Employer of such sum or sums, if any, as may be advised by the Actuary to be necessary, the Employer may by notice in writing to the Management Trustees specify that there shall be provided under the scheme:
(i) increased or additional benefits to or in respect of any Member, Pensioner or category of Member or Pensioner; and
(ii) benefits on different terms and conditions from usual for or in respect of any Member, Pensioner or category of Member or Pensioner
and the Management Trustees shall thereupon provide the same accordingly.
(b) Subject to the payment to the Fund by the Employer of such sum or sums, as may be advised by the Actuary as the costs of the benefits, the Employer may, with the consent of the Management Trustees, specify that there shall be provided under the scheme benefits in respect of any employee, or former employee, of the Employer, or category thereof (other than Members or Pensioners), and the Management Trustees shall thereupon provide the same accordingly. The Employer shall make the payment to the Fund, as set out above, within four weeks of the commencement of the payment of benefits.”
I should also mention, because they feature in some of the arguments presented on this appeal, the provisions of clauses 18A and 18B. Clause 18A empowers the Management Trustees in conjunction with BA to “make or concur in arrangements for the constitution of separate pension schemes” for members of the APS. This includes the power to transfer such part of the fund to the new scheme as the actuary considers appropriate in respect of any members who become members of the new scheme. This power was exercised in 1984 when a new pension scheme (“the NAPS”) was set up for new employees of BA and some 17,007 members of the APS transferred to the NAPS. The NAPS was also closed to new members in 2003 and since then the only form of pension provision for new employees of BA was a defined contribution occupational pension scheme known as the BA Retirement Plan.
Clause 18B deals with members of the APS who cease to be employees of a participating employer either because their employer ceases to be associated in business with BA or because it disposes of part of its business. Clause 18B(d) requires the employer in such circumstances to ensure that members’ contributions continue to be paid to the Management Trustees up to the date when the employer ceases to be a participating employer and prohibits that employer from exercising after the date of the disposal of its business any power or discretion (for example under clause 24) which:
“might in the opinion of British Airways Plc or of the Management Trustees have the effect of increasing the amount or value of any benefit to which any person is or may become entitled under the scheme without the consent of British Airways Plc.”
Part VI of the Rules contain the provisions which govern pension entitlement including matters such as normal retirement age, contributions, deferment of pension and provision for dependants. Rule 13A gave the Employer in its absolute discretion the right to request the augmentation of the pension of certain members who retired before normal retirement age. The power had to be exercised by notice in writing given before 26 March 1986. After that date Rule 34 also allowed the Employer to give notice to the Management Trustees (up to 15 November 1989) requiring them to provide increased or additional pension benefits to any member or pensioner. From 1990 this provision was replaced by clause 24 of the Trust Deed. In the case of both Rules, as under clause 24 of the Trust Deed, the corollary was an obligation on the part of the Employer to fund the increases.
The only provision in the Rules which allows for the automatic adjustment of benefits is Rule 15. In the consolidated Rules prior to the amendment in 2011 it provided as follows:
“The annual rate of all pensions and allowances payable or prospectively payable under Rules 8, 9, 10, 11, 12, 13 and 34 hereof shall be adjusted as if the rates of increase as specified in the Annual Review Orders issued in accordance with section 59 of the Social Security Pensions Act 1975 were applicable thereto PROVIDED ALWAYS that if the said Act is repealed and not replaced or should it become necessary to review the basis of such annual adjustments steps shall be taken to ensure that the annual adjustments of pensions and allowances continue to be made based upon an appropriate national index or indices reflecting fluctuations in the cost of living PROVIDED FURTHER that without prejudice to compliance with the requirements of section 51 of the Pension Act 1995, any adjustment under the provisions of this Rule shall not apply –
(A) during the period of postponement, to pensions postponed under the provisions of Rules 8(a) or 13(c);
(B) in respect of the period from the date of cessation of contributions until the date of commencement of payment, to pensions deferred under the provisions of Rules 5(e), 20(e) or (subject to Rule 34(d)) 20(l);
(C) when the relevant pension or allowance is in payment, to any actuarial increase under Rule 5(e)(iii); nor shall such adjustment apply (subject to section 51 aforesaid) to any crystallisation uplift as described in Rule 5(e)(iv) (or to any part of a pension or allowance attributable to any such actuarial increase or crystallisation uplift), where in any such case an election to this effect has been duly made in accordance with the provisions of paragraph (iv) or (v) of Rule 5(e) as applicable.”
Rule 30 states:
“These Rules may be amended or added to in accordance with the provisions of the Trust Deed”.
As balance of cost defined benefit schemes both the APS and the NAPS impose on BA as sponsoring employer the obligation to fund the excess of cost of benefits over the amount provided by the employees’ contributions. The provisions of both schemes are supplemented by the provisions of ss.221-233 of the Pensions Act 2004 and the Occupational Pension Schemes (Scheme Funding) Regulations 2005 which contain detailed provisions for ensuring that what is described as the statutory funding objective is achieved and that there are sufficient assets of a suitable kind to make provision for the liabilities under the scheme. This will include taking into account on an actuarial basis any likely increases in benefits attributable to the exercise of a discretionary power under the APS.
Historically there have been surpluses identified under the actuarial valuations carried out in accordance with clause 11 of the Trust Deed. A significant surplus was identified as a result of the 1989 valuation which led to BA receiving a contribution holiday up to 2003. But both the APS and the NAPS are now operating in deficit. As of 31 March 2012 the APS has a deficit of £680m on a technical provisions basis and £1,583m on a solvency basis. The comparable figures for the NAPS are £2,660m and £9,125m respectively. Various measures have been taken to remedy the shortfall and BA is continuing to make deficit repair contributions of £55m per annum to the APS and £300m per annum (fixed until 2027) to the NAPS. These are on any view significant liabilities.
The provisions of Rule 15 for annual increases in the rate of pensions in line with Annual Review Orders issued in accordance with s.59 of the Social Security Pensions Act 1975 (“SSPA 1975”) are a feature of most public service pensions and of course reflect the historical origins of the present scheme. The provisions of the Pensions (Increase) Act 1971 link public service pensions to certain state benefits. The Secretary of State for Work and Pensions is required under s.150 of the Social Security Administration Act 1992 to review the general level of prices and following such review to make an order increasing (as necessary) certain specified social security benefits. In that event the Treasury is required by s.59(1) SSPA 1975 to make an order applying the same percentage increase to what are referred to as official pensions.
Annual increases of this kind by reference to rises in prices as a measure of inflation were until 2011 based on RPI. This is calculated by reference to a basket of goods and services designed to measure increases in expenditure of an average household in the UK. But it was replaced by CPI which has been used by the Government since 2003 to set the inflation target for the Bank of England and which over the long-term tends to produce a lower rate of inflation than RPI although there may be fluctuations between the two on a month by month basis. A paper published by the Office for Budget Responsibility in November 2015 estimated that the long-term gap between the two measures was likely to be in the range of one percentage point per annum.
The two main reasons for the difference in rates produced by RPI and CPI is that RPI (unlike CPI) uses an arithmetic mean known as the Carli formula and also includes in its basket of consumer prices a figure for owner-occupied housing costs. The CPI by contrast uses a geometric mean which assumes that customers will react to price increases in a particular commodity by selecting a suitable but cheaper alternative of the same type when available. It therefore provides what has been described as a more elastic economic model. On 22 June 2010 the Government announced that public sector pensions and certain other state benefits would in the future be increased by reference to CPI under Pensions Increase (Review) Orders with effect from April 2011. The Pensions Increase (Review) Order 2011 increased the pensions to which it applied by 3.1% based on CPI and took effect on 11 April 2011.
The change to CPI was controversial for obvious reasons and led to a challenge in the form of proceedings for judicial review brought by a number of unions representing public service employees: see R (FDA) v Work and Pensions Secretary [2013] 1 WLR 444. The proceedings challenged both the way in which CPI is compiled and the circumstances in which it was adopted as the Government’s chosen measure of inflation. The challenge failed both in the Divisional Court and in the Court of Appeal. The Court of Appeal held that the adoption of CPI was intra vires the powers contained in s.150 of the Social Security Administration Act 1992 and that the Secretary of State had not acted unlawfully in taking into account the effect on the national economy of adopting CPI in place of RPI. The cost to the public purse would be a relevant consideration provided that it did not lead the Secretary of State to select an index of inflation that was demonstrably less reliable or appropriate. The Master of the Rolls said:
“61. Viewing the matter more broadly, the applicants’ contention that, whatever the circumstances, the Secretary of State should, as a matter of course, be required wholly to put out of his mind the effect on the national economic situation when carrying out his functions under section 150(1) and (2)(a), seems to me unreal. The exercise required by section 150 is macro-economic in nature, unlike the micro-economic exercise involved in Chetnik Developments [1988] AC 858, and it has the obvious potential of having a significant effect on the country’s finances. It therefore seems to me unrealistic to say that the Secretary of State is required to ignore the wider economic realities, irrespective of the circumstances, when carrying out his functions under section 150.
62. I cannot, however, accept Mr Eadie’s argument without qualification. Thus, I do not consider that the Secretary of State could opt for an index which was clearly less good, and more detrimental to the recipients of pensions, than another index, simply because the former index was beneficial to the national exchequer. Indeed, if the Secretary of State thought that one index was significantly less reliable or less accurate than another, I find it very hard to conceive of any circumstances where he could select the former index merely because he thought it was just about acceptable for the estimating exercise required by section 150(1).
63. While I am not seeking to lay down a firm standard, it seems to me that, before the Secretary of State could invoke the benefit to the national exchequer by selecting an index he considered less good, three requirements would normally have to be met. Those requirements are (i) there would, in the Secretary of State’s view have to be little to choose between the indices in terms of reliability and aptness, (ii) the benefit to the national exchequer of choosing the less good index would have to be significant, and (iii) the need to benefit the national exchequer, in terms of the national economy and demands on the public purse, would have to be clear.
64. In other words, the Secretary of State could only select the less good index if it was proportionate to do so, and, bearing in mind the purpose of the up-rating exercise, the circumstances would normally have to be unusual before it could be proportionate to select an index, or other method, which the Secretary of State considered was less good than another.
…..
75. In all these circumstances, it seems to me that, irrespective of whether I am right about the Secretary’s right to take into account the effect of his selection of an index on the national economy, the Secretary of State’s decision to select CPI as the index by reference to which to up-rate under section 150 was valid.
76. As mentioned above, it was, in my view, open to him to take into account the effect on the national economy, provided that, in his rational view, (i) the index which he selected was not significantly less suitable for section 150 purposes than the alternative, (ii) the choice of index would have a significant effect on the national economy, and (iii) the state of the national economy justified it being taken into account. It seems to me that those three requirements were plainly satisfied here. The fact that the factor which initially drove the selection of CPI was the effect on the national economy does not alter the fact that CPI was considered on its merits to be an appropriate index for making the section 150(1) estimate for 2011.
77. As for the three requirements, the position appears to have been this in April 2011. (i) To put the point at its lowest, CPI was thought by the Secretary of State, by Lord Freud and Mr Webb, as well as by Mr Cunniffe and Dr Richardson, to be no worse than RPI. (ii) So far as the effect on the national economy was concerned, the effect of choosing CPI rather than RPI was significant. (iii) The Government clearly believed that the state of the national economy was grave, and that any savings which could properly be made should be made – and made as soon as possible; if that were not well known, it is obvious from the Chancellor’s statement of 22 June 2010.”
In the light of this decision the change from RPI to CPI was lawfully made and had the consequence for the members of the APS of limiting their legal entitlement under the terms of the scheme to CPI based increases in future years. For the same reason, whatever their personal expectations may have been, they had no expectation of continued increases in pension by reference to RPI which the Trustees of the APS had any legal obligation to fulfil.
Notwithstanding this the Trustees resolved on 3 February 2011, subject to consultation with BA, to insert a power in the Rules:
“to permit discretionary pension increases on top of those granted by the Annual Review Orders, on a two-thirds majority basis, and that the use of the power would be reviewed on at least an annual basis and take account of relevant professional advice.”
The decision was confirmed at a further meeting of the Trustees held on 1 March 2011 and on 25 March the Trustees approved a supplemental deed under which they purported to exercise the power contained in clause 18 of the Trust Deed so as to amend Rule 15 by adding a proviso in the following terms:
“PROVIDED FURTHER THAT the Management Trustees may at their discretion, and shall in any event at least once in any one year period, review the annual rate of pension payable or prospectively payable under Rules 8, 9, 10, 11, 12, 13 and 34 and shall have the power, following such a review, by resolution to apply discretionary increases in addition to those set out in this Rule, subject to taking such professional advice as appropriate. This discretion cannot be exercised unless at least two thirds of the Management Trustees for the time being vote in favour of the resolution.”
The supplemental deed was executed on 25 March 2011. On the same day the Trustees voted on whether to exercise the power but were split on the issue (as between member and employer nominated trustees) so that there was not a two-thirds majority for the proposal as required under the amended Rule 15. A further inconclusive ballot of the Trustees took place in February 2012 but on 28 February 2013 the Trustees agreed in principle to exercise the Rule 15 power so as to award an additional increase of 0.2% over CPI. The minutes of the meeting record:
“After discussion the Trustees present, being ten of the twelve currently in office, agreed unanimously that a discretionary increase of 50% (subject to decisions on treatment of specific groups of members) of the difference between RPI and CPI as at 30 September 2012 (RPI being 2.6% and CPI 2.2%) would be appropriate. The additional increase of 0.2% would be paid after completion of the valuation, with the amount of the increase to be reviewed before the increase was finalised but with at least two thirds of the Trustees then in office being required to vote in favour of any change to the amount to be paid. It was further agreed that:
no announcement of the decision to award a discretionary increase would be made until the valuation had been finalised
in the event that the valuation is not finalised by the end of June, the Trustees would consider whether to proceed with a discretionary increase without the valuation being finalised with at least two thirds of the Trustees then in office being required to vote in favour for an increase to be paid in those circumstances
the payment date to be finalised once the valuation had been finalised taking into account that BA Pensions would require a minimum of six weeks to implement the increase.”
On 26 June 2013 the Trustees agreed that the amount of the discretionary increase should remain at 0.2% and on 19 November 2013 they voted to exercise their Rule 15 powers so as to grant an increase in that amount with effect from 1 December 2013.
Before the judge BA challenged the 2013 decisions on a number of grounds. It sought a declaration that the amendment of Rule 15 so as to introduce the power to make discretionary pension increases was outside the power of amendment contained in clause 18 of the Trust Deed or involved the exercise of that power for an improper purpose. It also challenged the exercise of the clause 15 power both as carried out for an improper purpose and unlawful either because the Trustees had taken into account irrelevant factors or failed to take into account relevant factors when exercising the discretion or alternatively because the decision was in all the circumstances perverse or irrational. But at the trial BA applied and were given permission to amend their points of claim to allege that both the exercise of the clause 18 power to amend and the subsequent exercise of the amended Rule 15 power were ultra vires because they were carried out for a purpose not permitted by clause 2 of the Trust Deed and further that the exercise of the clause 18 power was also contrary to and therefore not permitted by proviso (i) to clause 18 itself. All those grounds turn on whether the amendment to Rule 15 or the subsequent exercise of the Rule 15 power resulted in the making of “benevolent or compassionate payments” to members of the APS in the form of the additional pension increases.
The width of BA’s challenge to both the 2011 amendment and the 2013 exercise of the amended Rule 15 power meant that the judge was forced to conduct a detailed examination of the history of the Trustees’ deliberations over this period and the reasons for the decisions which they made. He was satisfied that if and so far as they had validly conferred on themselves a power under Rule 15 to make discretionary increases in the amount of the pensions payable under the APS, they had not exercised that power without taking all relevant matters into account or in a manner which could properly be described as irrational or perverse and there is no challenge to that part of his decision on this appeal. We are concerned, broadly speaking, with two issues only: whether either the exercise of the clause 18 power of amendment in 2011 or alternatively the exercise of the Rule 15 power in 2013 was ultra vires the Scheme because it was for a purpose not permitted by clause 2 of the Trust Deed (what Mr Rowley QC for the Trustees described as a scope of power challenge) and secondly whether, even if the amendment of Rule 15 was within the Trustees’ power as properly construed, it nevertheless was unlawful because the Trustees acted for an improper purpose by setting rather than delivering the remuneration (in the form of pension) which BA pays to its former employees. The response of the Trustees to this ground of appeal is that it is in substance (even if not in form) a challenge to the scope of the Trustees’ powers and therefore stands or falls with the first ground of appeal.
For the purpose of considering these two grounds of appeal it is unnecessary to summarise in detail the judge’s findings about what motivated or informed the decision of the Trustees to amend Rule 15 and consequently to exercise the amended Rule 15 power. We are not, as I have explained, concerned with a challenge based on a failure to take relevant matters into account or on the rationality of the decision. In particular the judge accepted that sufficient regard had been had to the financial impact on BA of any discretionary increase and BA’s stated opposition to any attempt to increase pensions over what was already provided for under Rule 15 particularly in the light of the current funding deficit in respect of both the APS and the NAPS.
The judge’s finding was that in March 2011 there was such a serious division of opinion about whether in effect to restore RPI as the measure of any inflation-based increase in pensions that the Trustees simply postponed a decision on the issue by agreeing to amend the Rules but deferring any decision on whether to exercise the power. The judge summarises the position at [199]-[200]:
“199. Based on the above evidence, I make the following findings as to the wishes of the MNTs in the period up to the end of March 2011. In general terms, all of the MNTs wished to see the reinstatement of RPI as the basis for pension increases. This view was strongly expressed at trustee meetings and elsewhere. However, the possible reinstatement of RPI was never put to the vote and so the question whether the MNTs would actually have voted to restore RPI was never answered. It is far from clear that they would have voted to restore RPI if there had to be a CPI underpin. Further, all the trustees decided on 3 February 2011 to take counsel’s opinion as to their options. They had not obtained counsel’s opinion by 25 March 2011. The trustees (including the MNTs) could not have committed themselves to any particular position in relation to RPI whilst they were waiting to obtain counsel’s opinion. What they did instead, leaving matters open, was to vote to amend the rules to confer on themselves a discretionary increase power.
200. The MNTs appreciated that they would not secure a two-thirds majority for the reinstatement of RPI. They voted for an amendment to the rules to confer on the trustees a discretionary increase power. They regarded this power as less good than the reinstatement of RPI but nonetheless a power worth having. They understood that the availability of the discretionary increase power did not mean that it would be exercised in any particular way in the future. They understood that there needed to be a two-thirds majority in favour of any such exercise. They understood that the power referred to the trustees taking professional advice before exercising the power.”
The Trustees then sought advice from Mr Christopher Nugee QC (as he then was) about a possible future exercise of the Rule 15 power. There were at least two consultations with counsel and the judge set out the tenor of Mr Nugee’s advice in some detail. Many of the issues he was asked to consider do not bear on the grounds of appeal. This includes questions such as whether the members of the APS could argue that they had a contractual right to pension increases by reference to RPI or could rely on some kind of estoppel by convention to that effect. Mr Nugee rejected both possibilities. But more relevantly reference was also made to the purpose for which the clause 18 power had been conferred:
“212. Mr Nugee then considered the factors which should be considered by the trustees if they were considering amending the rules to reinstate RPI as the basis for pension increases. Subject to one matter, he generally agreed with the factors which had been identified in his instructions. However, those factors had referred to the trustees owing a duty to act in the best financial interests of the beneficiaries. Mr Nugee explained that that proposition was taken from a case concerning the investment powers of trustees. With the power to amend conferred by clause 18, one had to examine the purpose for which that power had been conferred. In this case, the power to amend was not for the purpose of giving members the best possible benefits so that the trustees should not exercise this power just to benefit members. The note of the consultation then recorded:
“However, Leading Counsel considered it was a legitimate consideration for the Trustees to take into account that members had an expectation, that had been shared by the Trustees and the company, that pension increases would be in line with RPI.”
213. Mr Nugee was then asked about possible challenges to a decision by the trustees to reinstate RPI as the basis for pension increases, alternatively, a decision not to do so. As to the former, the note of the consultation records:
“If the scheme were well funded with a strong employer covenant then Leading Counsel would not have an issue with the Trustees making an amendment to establish RPI into the Rules. In those circumstances, the Trustees could take into consideration the reasonable expectations of members, and that the change to CPI would cause a reduction in members’ pensions. However, Leading Counsel stated that the situation was very different where the scheme was in a significant deficit position with a weak employer covenant. In such a circumstance, Leading Counsel considered it would be a very difficult decision for the Trustees to establish RPI into the Rules.
…
Leading Counsel noted that the move from RPI to CPI as the relevant index will mean that members are likely to receive less money in their retirement. The fact that there is a deficit position does not completely rule out using the amendment power in order to try to deal with this. However, as funding improves Leading Counsel thought that there was a lot to be said for de-risking the scheme rather than incurring added liabilities, in circumstances where there was no entitlement to increases based on RPI.
When considering the discretionary power Leading Counsel thought it would be sensible to see RPI increases as an aspiration. However there were no black and white rules as to when the discretionary power can be used in a deficit position.
A move to RPI would be intended to satisfy the members’ reasonable expectations. If the scheme were better funded with a stronger employer covenant, this would be entirely proper. However the less well funded the scheme is, the more difficult the decision becomes.
Leading Counsel opined that the only core legal principle was that the Trustees must take into account relevant factors and ignore irrelevant factors. The Court would only interfere if the Trustees had failed to take account of a relevant factor or taken into account an irrelevant factor or if the decision were perverse or irrational. A successful challenge on this basis would be very unlikely.””
When the issue of a discretionary increase was considered in 2012 BA made it clear to the Trustees that it was strongly opposed to any increase over CPI. The Trustees were split on the issue and again no decision was made. On 20 March 2012 the Court of Appeal dismissed the appeal in FDA so that it was clear that RPI would not be used in the future to determine the rate of the annual increases under the Annual Review Orders and therefore under the formula in Rule 15.
The judge was asked to determine whether the decision to exercise the Rule 15 power so as to grant the 0.2% increase in pensions was made at the June or the November 2013 meeting. This was relevant to an argument about the matter being pre-determined which does not concern us. The gist of the reasons for the Trustees’ decision to exercise the power was set out in the evidence of Mr Douglas, one of the Trustees, which the judge summarised in the following paragraphs of his judgment:
“505. Mr Douglas gave detailed evidence as to his reasons for the conclusions he reached at the meeting on 19 November 2013. I will summarise that evidence as follows:
(1) there had been throughout an unequivocal expectation among the members of the APS that future pension increases would be based on RPI; secure protection against inflation would have been one of the reasons that approximately 50% of eligible APS members did not transfer to the NAPS in 1984 and until 2010 there had been nothing to change this view;
(2) the decision to award a discretionary increase was based on an understanding that it would only be paid from funds that BA had already pledged; as at November 2013, BA had signed up to the 2013 funding agreement so it could be presumed that BA was content that the contributions were affordable; PwC expressly advised the trustees that it was reasonable to expect that those contributions would be made; further, PwC advised that even if the discretionary increase cost an extra £24 million, this would still be immaterial to BA’s covenant; further still, PwC had previously advised the trustees that the Iberia merger, the British Midland acquisition, the agreement with American Airlines and the funding arrangements for the new fleet were all positive developments for its business; as far as the February 2013 decision was concerned, PwC had advised that the covenant was not significantly different to where it had been at the time of the 2010 funding agreement, and in fact there had been positive developments in BA’s business; Mr Douglas considered that it was clear from this that BA was as able to pay the recovery plan contributions as it had been in 2010;
(3) the DIF [Discretionary Increase Framework] and the actuarial advice were comprehensive and addressed all the points raised by tPR [the Pensions Regulator]; Mr Douglas considered that the DIF was a sensible way to consider the award of a discretionary increase especially as this would require annual review, thus allowing the trustees to respond to down-side events and exposure to risk as well as funding or covenant improvements;
(4) the trustees had adequately considered BA’s interests;
(5) the APS trustees had to have regard to the NAPS as a large creditor of BA but Mr Douglas considered that the NAPS had its own funding agreement in place for the interests of the NAPS members; and
(6) he considered that he could reasonably assume a value of at least £125 million from the total £250 million contingent payment as a source of funding.
…..
510. What emerges from Mr Douglas’ evidence is that matters were not static between the Budget announcement in June 2010 and the decision on 19 November 2013. The documents show that, initially, the MNTs saw matters in stark terms. The Budget announcement came as a shock, in particular, to the APS pensioners. The APS pensioners had, up to that point, expected that pension increases would continue to be based on RPI. The MNTs (not including Mr Douglas at this stage) had the immediate reaction that they should use whatever powers they had to restore RPI. The MNTs were sympathetic to the position of the pensioners and were not sympathetic to the position of BA. The MNTs were persuaded by their advisers not to hardwire RPI in the Spring of 2011. Instead they chose to introduce a discretionary power to increase pensions.”
Against this background I can now turn to consider the two main issues which arise on this appeal.
BA’s challenge to the vires of the amendment to Rule 15 and the subsequent exercise of that amended power is based, as I have mentioned, on clause 2 of the APS and, in particular, the requirement that it should not be used to make “benevolent or compassionate payments”. It is common ground that this is an immutable condition which is re-inforced by the proviso in clause 18(i) of the Trust Deed that no amendment should be made which would have the effect of changing the purposes of the Scheme. It is also all-embracing in the sense that it must govern any aspect by the Trustees of their administration of the APS including most obviously the payment of pensions. It follows that any exercise of the Rule 15 power even in its amended form must be compliant with clause 2 of the Trust Deed. The insertion of the new proviso in 2011 cannot therefore be said to be ultra vires on the ground that it would permit the making of benevolent or compassionate payments. The judge was therefore right in my view to say that the focus of any vires challenge by reference to clause 2 has to be on the subsequent exercise of the Rule 15 power.
A similar but different issue exists in relation to whether the creation of the amended Rule 15 power or its subsequent exercise can be said to have been carried out by the Trustees for an improper purpose. Putting aside for the moment the contention of the Trustees that this is in substance another argument based on the scope of the Trust Deed and therefore the vires of what was done, it is clear that the catalyst for the Rule change was the statutory switch from RPI to CPI and the likely consequent reduction in the amount of future index-linked pension increases under Rule 15. But the new proviso is framed in general terms and is subject to certain safeguards such as the requirement to take appropriate professional advice and for there to be a two-thirds majority in favour of a resolution to make a discretionary increase.
The 2011 decision to make the rule change was, on the judge’s findings, due in part to the inability of the MNTs to secure a majority for an immediate increase above CPI or even to re-instate RPI as the basis for any future annual increases. There was also a perceived need to take advice. All the Trustees therefore supported the rule change on the basis that it left all the options open. It could be exercised so as to restore the loss of pension due to the change to CPI. But that would depend on the circumstances then prevailing and any professional advice given to the Trustees at that time. Future pension increases by reference to RPI were in no sense a given. On the other hand, when the new Rule 15 power was in fact exercised in November 2013 it had only one objective purpose which was to go some way towards restoring the difference between CPI and RPI.
The general terms in which the new proviso to Rule 15 is formulated and the findings of the judge make it difficult to contend that the 2011 Rule change was made for the purpose of ensuring that any annual increases in benefits would reflect what the application of RPI would have required. BA’s argument on improper purpose therefore focuses (at least in relation to clause 18) not so much on whether the amended power was intended to be used to make good the gaps between RPI and CPI but more fundamentally on whether the Trustees stepped outside their legitimate role of managing and administering the APS and took it upon themselves to assume, as Mr Tennet put it, the rôle of paymaster in BA’s business with a wide power to determine increases in pensions or in theory other changes to benefits entitlement for which BA had never contracted with its employees but for which it would be the significant funder with no power of veto.
The question of improper purpose does therefore have to be considered both in relation to the Rule change made in 2011 and in relation to the subsequent exercise of the amended power in 2013. Because BA’s submissions challenge the legality of what was done by reference to the proper rôle of the Trustees in the structure of the APS both stages in the Rule change process need to be looked at. I propose therefore to start with the issue of improper purpose and then to consider the subsidiary argument that the payments authorised in 2013 also breached the terms of clause 2 of the Trust Deed.
It is a long-established principle in trust law that a discretionary power conferred on Trustees, however widely expressed, must not be exercised for an improper purpose. Although the rule has an obvious application where the trustee acts for what is traditionally described as a corrupt purpose (for example, in order to benefit himself) the scope of the rule is much wider. It also encompasses cases where there is no personal benefit or bad faith involved but where the trustee has exercised, for example, a power of appointment in order either directly or indirectly to benefit a non-object of the power. Closer to the present case, the Trustees of a pension fund have been held to have acted for an improper purpose when, in the absence of any power to return a surplus to the employer, they transferred funds to another scheme so as to enable the return of capital to be made: see Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862.
Cases of improper purpose therefore include circumstances where the appointee (under, for example, an appointment of capital) is literally outside the class of permitted objects of the power. But the rule is not limited to excessive exercises of this kind. As the decision in Hillsdown Holdings illustrates, the rule can equally apply where the Trustees act within the letter of their powers but do so for a purpose which is not permitted by or provided for under the trust instrument and is therefore beyond the scope and purpose of the power which was granted.
The problem which arises in the present appeal is to identify the circumstances in which the exercise of a widely drafted power of amendment may nonetheless be curtailed by resort to what can be identified as the purpose or purposes of the Scheme and in particular whether the purposes relied on in this case are in substance synonymous with and limited by the terms of the Trust Deed itself so that any challenge to the exercise of the power depends upon the construction of the Trust Deed (including any implied terms) and so becomes essentially a question of vires. Allied to this is the fact that a power of amendment is by its very nature designed to allow the Trustees to effect changes in the existing terms of the Trust Deed or the Rules. The objection that the Trustees are seeking to achieve an outcome not so far provided for under the Scheme is not therefore sufficient in itself. It must be possible to identify some other features or provisions in the Scheme which render the use of the clause 18 power so as to create the new Rule 15 proviso improper and invalid in this case.
It is important to observe at the outset that BA do not contend that by some process of construction it is possible to read the clause 18 power of amendment as qualified by a requirement to obtain the employer’s consent to any rule change or at least any rule change with financial implications for BA as the funding employer. Nor does BA suggest that as a matter purely of construction the scope of the clause 18 power does not extend to making rule changes which would enable increased benefits to be payable to members of the APS. Their case is that the 2011 exercise of the clause 18 power and the subsequent exercise of the amended Rule 15 power were carried out for an improper purpose because they had the effect of setting rather than delivering the remuneration which BA pays to its employees or former employees in the form of pensions. To have acted in this way is said to come within the principles referred to earlier because it involved the exercise of the relevant powers “for purposes contrary to those of the instrument” by which those powers were conferred. This is a familiar formulation of the relevant principle which one can see in the judgment of Lord Cooke in Equitable Life v Hyman [2002] 1 AC 408 at page 460F and more recently in the judgment of Lord Sumption in Eclairs Group Ltd v JKX Oil and Gas plc [2015] UKSC 71.
The latter was a case where the board of JKX served disclosure notices pursuant to s.793 of the Companies Act 2006 on the claimant companies (which were shareholders in JKX) requiring them to disclose, inter alia, any arrangements concerning their JKX shares. The board considered that JKX was the possible target of a takeover bid by the claimants which the board opposed. When the claimants failed to provide what were considered to be adequate particulars of the arrangements requested, the board proceeded to exercise the power contained in Article 42 of JKX’s articles of association to suspend the claimants’ rights as shareholders to vote at general meetings or to transfer their shares. This was challenged by the claimant companies as the exercise of the Article 42 power for an improper purpose on the basis that the board’s purpose in exercising the power was not to enforce the requests for information made under s.793 but rather to enable the board to block the claimants’ opposition to pending resolutions at the forthcoming AGM for the re-appointment of directors and the purchase of the company’s shares.
Lord Sumption’s judgment contains the following statement of the basic rule:
“14. Part 10, Chapter 2 of the Companies Act 2006 codified for the first time the general duties of directors. The proper purpose rule is stated in section 171(b) of the 2006 Act, which provides that a director of a company must “only exercise powers for the purposes for which they are conferred”. The rule thus stated substantially corresponds to the equitable rule which had for many years been applied to the exercise of discretionary powers by trustees. “It is a principle in this court”, Sir James Wigram V-C had observed in Balls v Strutt (1841) 1 Hare 146, “that a trustee shall not be permitted to use the powers which the trust may confer upon him at law, except for the legitimate purposes of the trust.” Like other general duties laid down in the Companies Act 2006, this one was declared to be “based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director”: section 170(3). Section 170(4) accordingly provides that the general duties are to be “interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding rules and equitable principles in interpreting and applying the general duties”.
15. The proper purpose rule has its origin in the equitable doctrine which is known, rather inappropriately, as the doctrine of “fraud on a power”. For a number of purposes, the early Court of Chancery attached the consequences of fraud to acts which were honest and unexceptionable at common law but unconscionable according to equitable principles. In particular, it set aside dispositions under powers conferred by trust deeds if, although within the language conferring the power, they were outside the purpose for which it was conferred. So far as the reported cases show the doctrine dates back to Lane v Page (1754) Amb 233 and Aleyn v Belchier (1758) 1 Eden 132, 138, but it was clearly already familiar to equity lawyers by the time that those cases were decided. In Aleyn’s Case, Lord Northington could say in the emphatic way of 18th century judges that “no point was better established”. In Duke of Portland v Topham (1864) 11 HLC 32, 54 Lord Westbury LC stated the rule in these terms:
“that the donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying into effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power.”
The principle has nothing to do with fraud. As Lord Parker of Waddington observed in delivering the advice of the Privy Council in Vatcher v Paull [1915] AC 372, 378, it
“does not necessarily denote any conduct on the part of the appointor amounting to fraud in the common law meaning of the term or any conduct which could be properly termed dishonest or immoral. It merely means that the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power.”
The important point for present purposes is that the proper purpose rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it as a matter of construction or implication. It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason. It follows that the test is necessarily subjective. “Where the question is one of abuse of powers,” said Viscount Finlay in Hindle v John Cotton Ltd (1919) 56 Sc LR 625, 630, “the state of mind of those who acted, and the motive on which they acted, are all important”.”
Some of this is controversial and did not command the support of the whole court. But there was unanimity about the Article 42 power being inserted in the Articles only for the purpose of re-inforcing a statutory request for information and not being intended to enable the board to frustrate any other exercise of a shareholder’s rights. Applying that to the case in point, Lord Sumption said:
“30. The submission of Mr Swainston QC, who appeared for the company, was that where the purpose of a power was not expressed by the instrument creating it, there was no limitation on its exercise save such as could be implied on the principles which would justify the implication of a term. In particular, the implication would have to be necessary to its efficacy. In my view, this submission misunderstands the way in which purpose comes into questions of this kind. It is true that a company’s articles are part of the contract of association, to which successive shareholders accede on becoming members of the company. I do not doubt that a term limiting the exercise of powers conferred on the directors to their proper purpose may sometimes be implied on the ordinary principles of the law of contract governing the implication of terms. But that is not the basis of the proper purpose rule. The rule is not a term of the contract and does not necessarily depend on any limitation on the scope of the power as a matter of construction. The proper purpose rule is a principle by which equity controls the exercise of a fiduciary’s powers in respects which are not, or not necessarily, determined by the instrument. Ascertaining the purpose of a power where the instrument is silent depends on an inference from the mischief of the provision conferring it, which is itself deduced from its express terms, from an analysis of their effect, and from the court’s understanding of the business context.”
The proper purpose principle or restriction has been applied in at least two reported cases to exercises of a power of amendment contained in the trusts of a pension scheme. In Re Courage Group’s Pension Schemes [1987] 1 WLR 495, Millet J (as he then was) held that it would be ultra vires and unlawful for a power of amendment to be used in order to substitute for the existing employer under the scheme a new company (Hanson Trust plc) which had recently taken over the group and had never therefore employed the members of the scheme. The proposed substitution was designed to enable Hanson Trust to sell the existing employer company and its subsidiaries without including a transfer of the pension scheme and its assets and to be able thereby to open the scheme to new entrants and to remove an existing surplus from the scheme for its own benefit. The judge accepted that it was desirable for a group pension scheme to include some provision for substitution in order to cater for events such as the liquidation or replacement of the employer company in the event of a group re-organisation. But this did not justify the introduction by amendment of an unlimited power of substitution designed to enable Hanson to gain access to the scheme surplus. The judge said (at pages 505 and 511):
“It is trite law that a power can be exercised only for the purpose for which it is conferred, and not for any extraneous or ulterior purpose. The rule-amending power is given for the purpose of promoting the purposes of the scheme, not altering them.
…..
In my judgment, the validity of a power of substitution depends on the circumstances in which it is capable of being exercised and the characteristics which must be possessed by the company capable of being substituted; while the validity of any purported exercise of such a power depends on the purpose for which the substitution is made. The circumstances must be such that substitution is necessary or at least expedient in order to preserve the scheme for those for whose benefit it was established; and the substituted company must be recognisably the successor to the business and workforce of the company for which it is to be substituted. It is not enough that it is a member of the same group as, or even that it is the holding company of, the company for which it is substituted. It must have succeeded to all or much of the business of the former company and have taken over the employment of all or most of the former company’s employees. In my judgment, the proposed power to substitute I.B.L.’s ultimate holding company for I.B.L. in undefined circumstances is far too wide, alters and is capable of defeating the main purpose of the schemes, and is ultra vires.
Even if this were not the case, I would not uphold the proposed exercise of the power. The amending deeds are not an academic exercise designed to improve the constitution of the schemes for the future. They were occasioned by, and prepared in contemplation of, the impending sale to Elders. The whole object in substituting Hanson for I.B.L. was to bring about a dissolution or partial dissolution of the schemes on the completion of the sale to Elders which would otherwise not occur. The purpose of the amending deeds was frankly acknowledged by Mr. Inglis-Jones to be
“to retain within the control of Hanson a surplus which has been contributed by companies which Hanson has bought, and for which surplus Hanson has paid, rather than allow it to be transferred to Elders.”
That purpose is foreign to the purpose for which the power to amend the trust deeds and rules is conferred, and invalidates any exercise of that power.”
In Bank of New Zealand v Bank of New Zealand Officers Provident Association Management Board [2003] UKPC 58 the Privy Council was also concerned with a pension fund in surplus and with whether the trustees could exercise a power of amendment so as to distribute the surplus not only to current members but also to former members who had received lump sums under the scheme on retirement rather than pensions as such and were not therefore “pensioners” within the terms of the scheme. Membership of the Scheme was confined to existing employees of the bank and pensioners. The exercise of the power of amendment so as to include non-pensioners on a distribution of the surplus was challenged on the basis that it was an attempt to confer benefit on persons who were not members of the scheme. But the Privy Council held that the critical question was whether the proposed amendment was within the powers of the Trustees when it was intended to be made.
The rules of the scheme defined its object as the maintenance of a provident fund “for the benefit of Members and Pensioners of the Association and their dependants”. As in the present appeal, there was no real dispute about the power of amendment being unrestricted and therefore wide enough to enable the proposed distribution of the surplus to be carried out. Lord Walker of Gestingthorpe identified the relevant question as being whether its exercise could nonetheless be restricted on the basis that what was proposed would involve the power being used for purposes outside those for which it was intended. The application of the proper purposes rule required, he said, an examination of the objects of the scheme as the first port of call. But the objects clause will not necessarily be decisive:
“21. An illustration of a situation in which the objects clause will not be decisive is where there have been changes in the organisation of an enterprise, through a process of natural development, making it necessary or expedient for the objects to be restated. If the trust deed of a pension scheme declares that its object is to provide pensions and other benefits for employees of X Ltd, and the business of X Ltd is restructured so as to be carried on by several subsidiary companies employing the workforce previously employed by the holding company, there can be no doubt that the scheme’s power of amendment (unless exceptionally and specifically restrictive) could be exercised so as to bring in employees of the subsidiaries. The amendment, so far from frustrating the commercial purpose of the scheme, would prevent it being frustrated, since otherwise the group’s management would have to choose between the unattractive alternatives of setting up a new pension scheme or abandoning an advantageous restructuring. On the other hand the amendments proposed in the Courage case were not permissible because they were part of an unnatural and manipulative plan which would have severed the pension fund from the workforce for whom it was established (see [1987] 1 WLR at pp 509–510).”
The reference to “members and pensioners” in the objects clause was held not to exclude former employees who had received lump-sum payments rather than pensions under the scheme. The detail of this does not matter for present purposes. But what the decision does indicate is that the identification of the purposes of the scheme and therefore of the powers it confers on the Trustees was at least in these two cases conducted at a fairly high level of generality by reference to the stated objects of the scheme.
Courage was on any view an extreme case because the amendment of the scheme to facilitate the substitution of Hanson Trust for the existing employer had no purpose other than to liberate the surplus from the fund by the dissolution of the scheme. It was not therefore difficult to conclude that this lay outside the purposes for which the power of amendment was granted. Bank of New Zealand by contrast is a case where the stated objects of the scheme were given a flexible rather than a narrow construction and were held not to impinge on the scope of the otherwise widely drafted powers of amendment.
In the present case a resort to the objects clause contained in clause 2 of the Trust Deed does not assist BA. Neither the creation of the new Rule 15 power nor its subsequent exercise were inconsistent with the APS as a scheme “to provide pension benefits on retirement”. Clause 18(i) also expressly provides that no amendment is to be made which would have the effect of changing the purposes of the Scheme so it is difficult to see (at least in relation to clause 18) what real scope there is for the operation of the proper purposes rule if its proper focus is on compliance with the stated objects or purposes of the APS. An amendment which would change the purposes of the APS is simply ultra vires.
Although the interests of the members of the APS and those of BA differ in relation to any increase in the amount of benefits payable under the scheme, the purpose of the rule change was in no sense inimical to the continuation of the scheme or inconsistent with its purpose as the provision of deferred remuneration to employees. It undoubtedly involved a re-adjustment of benefits against liabilities but that is a tension which the Trustees are called upon to resolve under any scheme which permits the Trustees to increase benefits without affording the employer a corresponding veto. The Trustees must of course balance the interests of the employer against those of the employees or former employees and must take the funding implications into account. But the judge has found that the Trustees properly carried out this exercise and there is no appeal from his decision on that issue. BA’s case therefore depends, as I have said, upon identifying in the terms and structure of the scheme as it existed in March 2011 a prior limitation on the circumstances in which the power of amendment may be used to effect an increase in benefits even though that power is in terms unlimited. To do this it is necessary, it seems to me, to descend to a level of particularity not seen in the authorities I have so far referred to. What on one view might be regarded as details of the structure of the APS: for example, the absence of an express power for the Trustees to increase benefits beyond the Rule 15 statutory formula; the power of the employer to sanction such increases; the function of the Trustees to manage and administer the scheme; and the rôle of the actuary to identify surpluses or deficiencies in the APS with a corresponding obligation on the part of BA or the Trustees to make provision for it; all these features of the existing scheme have on BA’s case to be treated as defining the purpose for which the power of amendment exists and the circumstances in which it can properly be exercised.
Having regard to clause 18(i) Morgan J held that the relevant purposes of the scheme in relation to the exercise of the power of amendment were, as I have said, the provision of pension benefits on retirement and negatively that the scheme should not be used to make benevolent or compassionate payments: see [411]. He accepted Mr Rowley QC’s submission that the ascertainment of the purposes of a scheme is normally conducted at this high level of generality. Mr Tennet submits that this is too wide an approach and that the fundamental purpose of any occupational pension scheme is to deliver to employees the pension benefits which their employer is willing to fund. If right, this formulation allows one to bring into account the particular structure of the scheme under consideration and the balance which it strikes between the function of BA as employer and the functions of the Trustees whose primary task is to administer the scheme and to deliver to members the benefits which the employer has committed itself to. Mr Tennet submits that the Trustees’ powers are not conferred to enable them to determine the appropriate remuneration package for BA’s employees and former employees and should not be exercised for that purpose. He says that it would be unprecedented for trustees of an occupational pension scheme to increase the funding burden on an employer by increasing the benefits payable under a scheme which is in deficit.
It is important to note at this stage that BA does not contend that clause 18 can never be used so as to increase benefits. Mr Tennet accepts that it would be open to the Trustees, for example, to increase benefits in order to remove an actual or potential surplus from the Scheme. The employer’s obligation to make contributions is limited to what is necessary to meet the liabilities under the Scheme: nothing more. The identification of a surplus by the actuary could lead to a contributions holiday for BA as part of a scheme under clause 11(d) of the Trust Deed which expressly provides for that event. But Mr Tennet accepts that it would also be open to the Trustees to use the power of amendment to increase benefits so as to eliminate what is referred to as a “trapped” surplus even though that is not catered for under clause 11. Such exercise would not be conditional on the consent of BA unlike a scheme under clause 11 which requires the employer’s consent: see clause 11(b). The only limitation on the use of clause 18 to remove a surplus is the bar (in clause 18(ii)) on the return of contributions to the employer.
This limited concession is consistent with the position taken by all counsel on the last occasion when the APS was considered by the Court. In Stevens v Bell [2001] Pens LR 99 Lloyd J was asked to consider the scope of clause 11 and its relationship with clause 18 in connection with a surplus which then existed in the scheme. Most of the questions raised in the proceedings are not relevant to this appeal but it is interesting to note that all counsel were agreed that if and so far as the clause 11(d) power was not wide enough to dispose entirely of the surplus, it would be possible for it to be amended and expanded under clause 18. The Court of Appeal (see [2002] Pens LR 247) affirmed the view of the judge that clause 11(b) of the Trust Deed operated independently of clause 18 but rejected the submission that clause 11(b) contained an implied power of amendment. It was not therefore possible to devise a scheme providing for the return of contributions to BA except by amendment under clause 18 but that was prohibited by clause 18(ii).
For present purposes the only significance of this earlier litigation about the APS and the scope of the Trustees’ powers in relation to a surplus is that it proceeded entirely as an exercise in construction of the relevant provisions of the Trust Deed. It was not suggested (perhaps because in relation to a surplus the point did not arise) that there was any other relevant limitation on the exercise of the power of amendment.
As part of his argument Mr Tennet made reference to some academic commentaries including observations by the late Mr Edward Nugee QC and Mr David Pollard in his book, the Law of Pension Trusts (2013). Mr Nugee is quoted for having said that “since it is the employer who has decided to set up the scheme, it is his purposes that are to be achieved. And those purposes can be summarised as the provision to the members of the benefits promised by the scheme”. Mr Pollard speaks of the purpose of a defined benefit occupational scheme being to provide the stated benefits to members “at a cost acceptable to the employer”. For my own part I do not find general statements of this kind, shorn of the context of a particular scheme, to be of much assistance. Although it is clearly right that the purpose of the scheme and therefore the duty imposed on the trustees is to deliver the benefits provided under the scheme, any consideration of what those benefits are or may be must take into account all the provisions of the relevant trust deed including any power of amendment. This is a point I will need to return to later in this judgment.
Turning then to the provisions of the Trust Deed, Mr Tennet accepts that the starting point must be clause 2 although he prays in aid Lord Walker’s caveat in Bank of New Zealand that the purpose of a scheme may not be entirely apparent from the face of the documentation. The stated object of the scheme as set out in clause 2 is of course relied on as making the increase in pensions ultra vires as “benevolent or compassionate payments”. But BA contend that the terms of clause 2 (“the main object of the scheme is to provide pension benefits on retirement”) also provides confirmation that the APS is designed to provide deferred remuneration earned by the members’ service and must be looked at having a business rather than a benevolent objective.
An important provision is clause 4(a) which assigns to the Trustees the duty of managing and administering the scheme. This is relied on as indicating that their rôle does not include the design of the benefits structure. Similarly, it is said that the balance of funding obligations imposed by clause 11 depending on whether the scheme is in deficit or surplus will be distorted if the Trustees are entitled to re-write the benefits provided so that a surplus can never arise.
In relation to clause 18 itself, Mr Tennet accepts that the power of amendment is widely drafted but does not at least in terms extend to the improvement of benefits. The exercise of the power is of course subject to a number of express restraints including that it should not be used to change “the purposes of the scheme”: see clause 18(i). The second ground of appeal (the ultra vires argument) relies on this. But Mr Tennet says that the question of improper purpose is a slightly different question which requires a wider consideration of the scheme than simply clause 2.
The other provision in the Trust Deed which featured in the argument is clause 19(d) which deals with the disposal of any remaining balance in the fund in the event of a winding-up of the scheme. Clause 19(c) provides for the purchase of annuities and a remaining balance then falls to be distributed in accordance with clause 19(d) which provides:
“In the event of there being any balance in the Fund upon the expiry of the scheme or remaining after application under the provisions of sub-clause (c) of this Clause the Rules of the scheme shall be amended in consultation with the Actuary, subject to paragraph (e) below, to provide additional benefits (in the form of pensions and/or allowances) for Members or pensioners by way of non-commutable annuities PROVIDED HOWEVER that the aggregate of the actuarial values of such additional benefits shall not be in excess either of such balance or of the actuarial equivalent of such additional pensions or allowances. Such annuities to be purchased in manner provided under the said sub-clause (c) of this Clause. Any balance then remaining being paid to the Employers in proportions determined by the Actuary.”
Mr Tennet emphasises that this is the only express power conferred on the Trustees to increase benefits but it applies only in the event of a winding-up and if there is a balance which requires to be disposed of. It cannot therefore be regarded as a power to set the levels of remuneration which BA must fund. It is given to the Trustees simply as a matter of good administration. The overall purpose of the Trustees’ powers remains one of delivering rather than setting the benefits to which the employees are entitled.
The deployment of the proper purposes rule in the way it has been relied on in this case is novel. Although it is not necessary to refer to them, we were shown a whole series of decisions (mostly at first instance) which Lewison LJ has referred to in his judgment in which judges have had to consider the legality of particular exercises of the powers conferred on trustees sometimes in relation to the disposal of a surplus or the alteration of benefits but in other cases more generally. Although the argument in these cases (such as Stevens v Bell supra) has involved a detailed examination of the provisions of the particular schemes, the legality of the trustees’ actions has been considered largely in terms of vires having regard to the proper construction of the terms of the trust deed and any rules. Where the proper purposes argument has been used it has been confined either to bolstering what would otherwise be a claim of ultra vires or where the action in question ran contrary to the fundamental purposes of the scheme as in Courage. There are no cases where on the proper construction of the trust provisions the trustees have had power to do what is proposed but that power has been held nonetheless to be limited not by reference to the overall purpose or object of the scheme but by reference to the existing scope of those very powers.
Although novelty is not a bar to principle, I have come to the conclusion that there are really insuperable difficulties in trying to construct out of the provisions I have referred to a purpose-based limitation on the proper exercise of the clause 18 power. In cases like Courage and Eclairs the courts were able to identify a governing purpose for the scheme or (in the case of Eclairs) the power conferred by the articles of association which was enough to invalidate what was proposed. The power to substitute a new employer in Courage could not properly be used to allow Hanson to dissolve the scheme and lay hold of the surplus. In Eclairs a power given to re-inforce a request for information could not be used to block opposition to the re-appointment of directors. But this high-level approach does not produce the result for which BA contends in the present case. The overall object and purpose of the APS is expressly identified in clause 2 as the provision of pension benefits on retirement in contrast to a benevolent scheme. The pension benefits are those provided for under the terms of the Trust Deed and the Rules.
Although neither the Trust Deed nor the Rules in their original form provided for increases in the benefits payable, both included a power of amendment which, as the judge found, was exercised from time to time to provide for pension increases. Rule 15 which provided for annual increases by reference to increases in other public-sector pensions was a later addition which must again have been introduced by the exercise of the power of amendment. Even if one ignores the history of these changes and starts with a consideration of the scheme and its Rules as of 1 April 2008, the structure of the APS was that it provided index-linked benefits to members and contained a power of amendment that was widely drawn. A consideration of the structure of the scheme and the derivation from it of an object or purpose must take into account not only the existing benefits structure but also the ability of the Trustees which has always existed to make amendments to it.
The equitable overlay embodied in the proper purposes rule can have no application in my view unless it is clear that the Trustees intend to use the powers they were granted to achieve something which can be characterised as improper. Even if one puts aside Lord Sumption’s suggestion in Eclairs that this involves a subjective test of intention, it clearly requires regard to be had to the terms of the trust instrument and any other relevant background material in order to construct the limits of the discretion. This means that the starting point in this case must be clause 18 itself and, in particular, clause 18(i) which expressly forbids an amendment that would change the purposes of the scheme. It must be highly debateable whether, in the light of this provision, there is any or very much room for the operation of the proper purposes rule in relation to clause 18. But even if it is not excluded, its content must equally depend on what the Trust Deed itself identifies as the purpose of the scheme. This is spelt out in clause 2 which I need not repeat.
The irony of this case is that although the amendment to Rule 15 is not limited in terms to adjusting the rate of annual increases, the exercise of that power which has precipitated this litigation did no more than in part to re-instate the application of RPI which had operated as the measure of inflation for the purposes of the scheme for a number of years. The change in government policy which led to the adoption of CPI operated to the benefit of BA but did not alter the principle of an annual index-linked increase as part of the benefits structure. The November 2013 increase to some extent reversed this change and undoubtedly imposed on BA additional financial obligations which it had not provided for and which it naturally objected to. But it did not confer on the members of the scheme a benefit that was different in kind from what they had always enjoyed.
Taking simply the amended rule 15 power, it is not possible in my view to treat the grant to the Trustees of a power to review the annual rate payable and to apply discretionary increases as something falling outside the provision of pension benefits in accordance with clause 2 so that unless one can construct from the other provisions of the Trust Deed a further qualification to the effect that the pension benefits should be only those which BA is willing to fund or can be provided for out of an available surplus, the proper purpose rule can have no application in this case.
If one drills down, so to speak, into the other provisions of the deed which Mr Tennet has relied upon it is undoubtedly the case that BA as the employer is the funder, that the Trustees or new Trustee are given the primary task of administering the scheme rather than setting the level of benefits, and that apart from Rule 15, there is no express provision for the increase of benefits. But none of these provisions nor anything in the relevant contextual background is relied upon as supporting a construction of clause 18 which excludes changes to benefits unless consented to by BA and if the amendment under consideration was not ultra vires then it is difficult in my view to see what purpose of the scheme it infringed. The amendment made was within the scope of clause 2 as drawn for the reasons I have given. BA’s argument seems to me to be an attempt to elevate particular provisions of the scheme which construed together do not impose a relevant restriction on the Trustees into a purpose of the scheme best expressed as a principle that there should be no increase in or alteration to the benefits structure which would impose on BA as employer a funding obligation it was not prepared to consent to.
In my view this is not a purpose or object of the scheme but a matter of detail which will differ from scheme to scheme depending on how they were originally constructed or have developed over time. It is not and cannot be part of BA’s argument that a power for trustees to increase benefits without the employers’ consent is by its very nature inimical to any occupational pension scheme and unless it can be regarded as fundamental in that kind of way I do not see how the equitable principles we are concerned with come to be engaged. The question becomes one of vires alone and, as to that, the parties are agreed that the amendment was lawful unless it resulted in the making of benevolent or compassionate payments to the members. The absence of any requirement for the employer to consent to an increase or change in benefits may be unusual but in the present case that is largely the product of the scheme’s history which I have set out in the earlier part of this judgment. I also agree with Mr Rowley’s submissions that the various qualifications which BA has accepted in its formulation of this principle, in particular its non-application when the scheme is in surplus, are likely to make it difficult in practice for the Trustees to know with any certainty what are the precise limits to the exercise of the power. With respect to Peter Jackson LJ, the formulation of the purpose of clause 18 suggested at [126] would in my view place the Trustees in a position of complete uncertainty about the scope of their powers. This is in sharp contrast to the express terms of clause 18 itself.
As the judge observed, the clause 18 power of amendment does embody a number of safeguards including the requirement for a two-thirds majority of the Trustees in favour of its exercise which will enable the employer-appointed trustees to exert a significant influence in any discussion about whether to increase benefits as they did in the present case. But more important is that it is to be exercised in good faith in a proper trustee-like manner which requires the Trustees to take into account and give proper weight to the obligations of the employer and issues such as the deficit in the scheme and the affordability of the increases. These do not of course give the employer the same level of protection as a veto but they do require the Trustees to carry out a rigorous and realistic assessment of the position which can be subject to review by the Court as it was in this case. Those are the control mechanisms to guard against any aberrant or excessive exercise of the power.
In my view there has been no breach of the proper purposes rule either in relation to amendment of the Rule 15 power or its subsequent exercise.
That takes me to the second issue which is whether the exercise of the amended Rule 15 power resulted in the making of benevolent or compassionate payments. This is a pure question of construction.
On the judge’s findings the Rule 15 power was exercised in order to give effect to an expectation among members of the scheme that any increase in pensions under Rule 15 would be based on RPI. BA’s case was that this amounted to an act of sympathy or generosity towards members of the APS which infringed the provisions of clause 2.
The judge had no difficulty in rejecting the argument that the increase amounted to a compassionate payment. He accepted Mr Rowley’s submission that this description could not be applied to a pension increase which had been awarded across the board to all pensioners regardless of their personal circumstances:
“476. It is easy to hold that the award of a 0.2% discretionary increase did not involve a compassionate payment. The trustees were not moved by compassion in making their decision. The increase was to be available to all pensioners whatever their personal circumstances, whether or not they were suffering hardship and whether or not their circumstances deserved compassion.”
But he found the question whether the award involved or amounted to the making of a benevolent payment more difficult. The Oxford English Dictionary definition of “benevolent” is “desirous of the good of others, of a kindly disposition, charitable, generous” and in one sense the Trustees’ decision to award an additional increase above the members’ strict legal entitlement could be described as generous or even charitable in its non-technical sense. But the judge took the view that the effect of clause 2 could not be determined simply by an application of these dictionary meanings but had to be considered in the context of the scheme as a whole. At [478] he said:
“478. I will not attempt a comprehensive definition of “benevolent payments” for the purposes of this scheme. However, the above arguments taken together powerfully suggest that the prohibition in clause 2 of the trust deed on the making of benevolent payments was not intended to prevent the trustees conferring on themselves, and then exercising, a power to make discretionary payments which would be available to all of the pensioners irrespective of their personal circumstances. I therefore conclude that the decision of 19 November 2013 to award a discretionary increase was not contrary to clause 2 of the trust deed.”
The evidence before the judge was that the reference in clause 2 to the scheme not being a benevolent scheme can be traced back to two earlier pensions schemes, the 1936 Imperial Airways Limited Pension Scheme and the 1942 British Overseas Airways Corporation Pension Fund. The researches of the parties did not indicate much more than that clause 2 was probably inserted into the APS to ensure that it obtained Revenue approval. Benevolent schemes had existed for a long time in order to provide financial assistance on the basis of need. But tax concessions for pension schemes were introduced by the 1921 Finance Act and the draftsman of the APS is likely to have wanted to emphasise that the scheme was one which provided only pension benefits to members entitled to them and did not make benevolent or compassionate payments.
It seems to me that clause 2 is designed to draw a distinction between the provision of pension benefits on retirement in accordance with the provisions of the scheme and purely gratuitous payments of a benevolent or compassionate kind which are not pension payments. The fact that the motivation for a general increase in the pensions payable may include an element of generosity does not make the payment a benevolent one for the purposes of clause 2. The judge was right in my view to reject BA’s contention that the 2013 pension increases were ultra vires clause 2 of the Trust Deed.
I would therefore dismiss this appeal.
Lord Justice Lewison:
I have had the privilege of reading the judgment of Patten LJ in draft. I adopt with gratitude his exposition of the relevant facts and the relevant instruments. I agree entirely on the question whether the increases in pension were “compassionate” or “benevolent” and thus prohibited by clause 2 of the Trust Deed. For the reasons he has given they were not. Where I have more difficulty is in relation to the “proper purpose” argument, in relation to which I have reached a different conclusion.
The proviso under attack is the amendment to rule 15 which provides:
“the Management Trustees may at their discretion, and shall in any event at least once in any one year period, review the annual rate of pension payable or prospectively payable under Rules 8, 9, 10, 11, 12, 13 and 34 and shall have the power, following such a review, by resolution to apply discretionary increases in addition to those set out in this Rule, subject to taking such professional advice as appropriate.”
As Lord Sumption pointed out in Eclairs at [15]:
“The important point for present purposes is that the proper purpose rule is not concerned with excess of power by doing an act which is beyond the scope of the instrument creating it as a matter of construction or implication. It is concerned with abuse of power, by doing acts which are within its scope but done for an improper reason.”
There have undoubtedly been cases in which the court has upheld the exercise of a power of amendment by pension fund trustees either to augment benefits or to increase contributions payable by sponsoring employers. But I think that it is necessary to examine those cases more closely.
In The PNPF Trust Co Ltd v Taylor [2010] Pens LR 261 the trustees of the pilots’ pension fund exercised a unilateral power of amendment in order to seek additional contributions from participating employers. The purpose of the increased contributions was to repair a deficit funding gap. As I understand that case the increase in contributions was required in order to enable the fund to pay the benefits that had already been promised to members; not to alter the extent of the promise. In the course of his judgment Warren J reviewed a number of authorities, some of which I will come back to in due course.
Stena Line Ltd v Merchant Navy Ratings Pension Fund Trustee Ltd [2010] Pens LR 411 was another such case where a power of amendment was used to widen the class of employers required to contribute towards a deficit in the fund. Again, it was not a question of increasing the promised benefits. In a subsequent round of litigation about that scheme (Merchant Navy Ratings Pension Fund Trustee Ltd v Stena Line Ltd [2015] EWHC 448 (Ch), [2015] Pens LR 239) Asplin J said at [233] that a power of amendment could be exercised “as long as the primary purpose of securing the benefits due under the Rules is furthered”. The feature of the deficit cases is that the trustees are doing no more than taking steps to secure for members the benefits that they have been promised under the rules.
Edge v Pensions Ombudsman [2000] Ch 602 was a case in which there was an actuarial surplus. This, then, was a case in which the trustees of the scheme already had the assets in question under their management and control, and the question was whether in those circumstances they were entitled to introduce a contributions holiday. As Chadwick LJ explained at 623:
“First, the purpose of the scheme is to provide the retirement and other benefits to which the members, pensioners and dependants are entitled under the rules. The scheme is a “defined benefits” scheme: the benefits are fixed by the rules.”
He added on the same page:
“… it is no part of the trustees’ function, in a fund of this nature, to set levels for contributions which will generate surpluses beyond those properly required as a reserve against contingencies.”
Other cases, including the previous round of litigation about this very scheme, have also been concerned with dealing with a surplus. One such case was the decision of my Lord Patten J in The Law Debenture Trust plc v Lonrho Africa Trade and Finance Ltd [2003] Pens LR 13, where the rules already contained an express power of augmentation on the part of the trustees. The feature of all the surplus cases is that the trustees are doing no more than managing assets that have already been entrusted to them.
Clause 11 of the deed in our case deals with what is to happen in the event of a deficit. The trustees must make a scheme for making good the deficiency; and that scheme must provide for the employer to make additional contributions. There is provision for employer’s consent and for any dispute to be referred to an actuary. The scheme will come into force subject to any amendments directed by the actuary. If the trustees are right, they could, by exercising the power of amendment, delete the dispute resolution procedure.
Again, clause 11 of the deed deals with what is to happen in the event of a surplus. In essence, the employer gets a contribution holiday for up to 30 years. If the trustees are right, they could, by exercising the power of amendment, deprive the employer of that contribution holiday, and augment benefits instead.
In the present case, however, the proviso to rule 15 introduced by the amendment gives the trustees unlimited power, in effect, to design the scheme. The difficult question is whether that goes beyond the proper purpose of the power of amendment.
In PNPF Warren J referred to the decision of the House of Lords in Hole v Garnsey [1930] AC 472. That was a case in which the rules of an industrial and provident society were altered by amendment so as to compel members to subscribe for additional shares. The amendment was held to be invalid. Lord Dunedin said at 487:
“First it was decided that a rule of this kind if it took its place among the original rules, or was assented to as a new rule, was not bad in itself as being struck at by the provisions for limitation of liability, and secondly it was decided that such a rule was not bad because it prescribed an expanding liability to take extra shares, inasmuch as it gave a method by which that expanding liability could be accurately calculated. But when we come to the question of admitting a rule of that kind for the first time only by virtue of a general power of amendment, all seems to me to be altered. You are then supposed to be under a contract to be bound by any extension of your liability which a three-fourths majority may enforce without any power of prescience as to what form that liability may take. Take the present case. If, instead of the 5l. nominal value the rule had said 100l., it would be all the same. I therefore come most determinately to the conclusion that a contract to take extra shares and incur extra liability, which is not set forth but only introduced through a general power of the amendment of the rules, is too vague to be enforced and is bad at common law.”
Lord Tomlin said at 500:
“In construing such a power as this, it must, I think, be confined to such amendments as can reasonably be considered to have been within the contemplation of the parties when the contract was made, having regard to the nature and circumstances of the contract. I do not base this conclusion upon any narrow construction of the word “amend” in Rule 64, but upon a broad general principle applicable to all such powers.”
Warren J also referred to the decision of the House of Lords in Society of Lloyd’s v Robinson [1999] 1 WLR 756, where Lloyd’s exercised a power of amendment so as to require names to provide additional security. In explaining why that amendment was valid, Lord Steyn said at 767:
“The 1995 amendments do not impose any new liability on Names. They do not require Names to pay more than they were already obliged to pay. They simply provide for additional security for pre-existing obligations.”
It is, of course, necessary to try to delimit the proper purpose for which the power has been conferred. I agree with Patten LJ that the objects clause in clause 2 of the trust deed is not enough on its own to invalidate the exercise of the power of amendment. But in my judgment that is not the end of the inquiry.
As Patten LJ has pointed out, by reference to Bank of New Zealand, the objects clause is the first port of call, but it is not decisive. As Lord Sumption said in Eclairs at [30]:
“Ascertaining the purpose of a power where the instrument is silent depends on an inference from the mischief of the provision conferring it, which is itself deduced from its express terms, from an analysis of their effect, and from the court’s understanding of the business context.”
In my judgment particular importance should be placed upon the constitutional functions given to the trustees under the Trust Deed. Clause 4 (a) describes their functions:
“The Management Trustees shall manage and administer the Scheme and shall have power to perform all acts incidental or conducive to such management and administration…”
I would draw from this that the function of the trustees is to manage and administer the scheme; not to design it. The general power that is given to them is limited to a power to do all acts which are either incidental or conducive to that management and administration. That is my understanding of the “business context”. This is consistent not only with Chadwick LJ’s description of the purpose of a pension scheme, but also with the observations of Park J in Smithson v Hamilton [2007] EWHC 2900 (Ch), [2008] 1 WLR 1453 at [87]:
“A decision to have a pension scheme and the consequential decisions about the structure and design of the scheme are matters for the employer, or at least matters primarily for the employer. If the scheme is to have a pension trust fund there will be trustees, but the design of the scheme is still a matter for the employer, not for the trustees. This is not to say that the trustees are compelled to accept the employer’s design. If the trustees object to it they cannot be compelled to join in executing the deed and rules. However, I persist that it is the employer which takes the lead in formulating the design of the scheme. If in the event the trustees do not object and are content to execute the documents in the terms prepared by the employer or the employer’s advisers, then the scheme is the employer’s scheme, not the trustees’ scheme. Once the scheme is established the trustees will have important functions to carry out and duties of a fiduciary nature to perform in connection with the scheme, but the trustees do not have a major role in determining what the rules of the scheme are to be.”
These are, to paraphrase Lord Sumption in Eclairs at [37], “the respective domains” of the trustees and the employer. I do not consider that the design of the benefit structure falls within the purpose of the general power given to the Trustees under clause 4 (a). The design of the benefit structure is neither the management nor the administration of the scheme. In addition, even where a power is apparently unlimited, its use to alter the constitutional balance of an entity can amount to a breach of the proper purpose principle.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 concerned the exercise by directors of a power to allot or otherwise dispose of shares to such persons on such terms and conditions and either at a premium or otherwise and at such time as the directors might think fit. Although the company was in need of fresh capital, the directors issued shares primarily to fend off a takeover bid. Giving the advice of the Privy Council, Lord Wilberforce said at 835:
“In their Lordships’ opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not.”
In holding that the exercise of the power was invalid, Lord Wilberforce said at 837:
“The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office … so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company’s constitution which is separate from and set against their powers.”
Lord Sumption made much the same point in Eclairs at [16]:
“A company director differs from an express trustee in having no title to the company’s assets. But he is unquestionably a fiduciary and has always been treated as a trustee for the company of his powers. Their exercise is limited to the purpose for which they were conferred. One of the commonest applications of the principle in company law is to prevent the use of the directors’ powers for the purpose of influencing the outcome of a general meeting. This is not only an abuse of a power for a collateral purpose. It also offends the constitutional distribution of powers between the different organs of the company, because it involves the use of the board’s powers to control or influence a decision which the company’s constitution assigns to the general body of shareholders.”
At [29] he approved Briggs LJ’s observation:
“Furthermore, I consider it important that the court should uphold the proper purpose principle in relation to the exercise of fiduciary powers by directors, all the more so where the power is capable of affecting, or interfering with, the constitutional balance between shareholders and directors, and between particular groups of shareholders.”
It is to be noted that:
i) The impugned proviso imposes an obligation on the trustees to review the annual rate of pension; and
ii) The power to apply increases is not limited to increases in the cost of living.
It is true that the trustees are required to take actuarial advice. But there is no restriction on the nature of the advice. The actuary may, for example, advise the trustees that if they wish to augment benefits they must require additional contributions from the employer. The rules would then require the employer to pay them.
I would readily accept that managing and administering the scheme entitles the trustees to deal (if necessary by amendment) with assets which already form part of the scheme (i.e. where there is a surplus); or to require (if necessary by amendment) additional contributions to be made in order to secure the benefits promised under the rules. As I have said, clause 11 in fact makes provision for these eventualities. But I do not agree that, in effect, the trustees can do whatever they like so long as their ultimate purpose is to provide pensions. It is true, as Patten LJ points out, that exercise of the power conferred by the proviso requires the trustees to balance the interest of the employer against other considerations. But I do not regard that as detracting from the fundamental point that the trustees are arrogating to themselves the responsibility for designing as opposed to managing and administering the scheme, in circumstances in which (a) the fund is in deficit and (b) the employer would be required to make additional contributions not for the purpose of funding benefits already promised but for funding additional benefits decided upon by the trustees. That is not the trustees’ constitutional function under the trust deed. In my judgment the amendment goes beyond the purpose of the power of amendment contained in clause 18 of the trust deed.
I would allow the appeal.
Lord Justice Peter Jackson:
I have had the real advantage of seeing the above judgments in draft and I also gratefully adopt the comprehensive account of the facts given by Patten LJ.
Like the other members of the court, I do not accept BA’s argument that the exercise of the amended Rule 15 power fell foul of clause 2 of the Trust Deed as being benevolent or compassionate. I agree with Patten LJ that the provision is likely to have been designed to differentiate the scheme from benevolent schemes of the kind that were common before the advent of occupational pensions and that the payment in this case would have been a pension payment and not a benevolent or compassionate one. Although the result is the same, I prefer this route to the reason given by the judge at [478], which relies on the fact that the payment was made to all pensioners regardless of personal circumstances. It is possible to envisage a payment made to all pensioners that would nonetheless be benevolent and it is, I think, the nature of the payment and not the cohort of recipients that matters in this context.
The further question is whether the addition in 2011 and subsequent exercise in 2013 of the proviso to Rule 15, allowing the trustees to apply discretionary pension increases in addition to the automatic increases already provided for by that rule, was a valid exercise of the power of amendment contained in Clause 18. This calls for consideration of the purpose of that clause, which itself (by its first proviso) requires identification of the purpose of the scheme as a whole, so that it can be determined whether a proposed amendment would bring about an impermissible change.
Like all such documents, the Trust Deed seeks to identify the areas of responsibility and competence of the parties in a way that reflects the intentions of the settlor. For our purposes, the essential contours of the scheme within which Clause 18 sits are seen in these clauses:
Cl. 2 Objects clause
Cl. 3 Employer covenant
Cl. 4 Trustees’ duty to manage and administer
Cl.11 Employer’s duty to remedy certified deficiency
Cl.13 Trustees’ power to determine entitlement and resolve disputes
Cl.24 Employer’s power to increase benefits
Rule 15 Automatic PIRO [Pensions (Increase) Review Order] increase
The question therefore is: what is the purpose of the power of amendment in the context of the purpose of the scheme as a whole? It seems to me that the answer to this will be affected by the manner in which the inquiry is undertaken. In the first place there must be an understanding of what is meant by ‘the purpose of the scheme’. Is this restricted to the result that the scheme exists to produce, or is it a wider concept encompassing both the result and the essential means by which it is to be produced? In my view, the latter is correct. As the authorities show, the inquiry begins with but is not limited by the objects clause (‘to provide pension benefits’). The scheme’s purpose is wider than that, in particular in the way that it ordains the balance of powers as between employer and trustees so as to ensure a durable scheme that balances all interests. The purpose of the scheme is therefore not simply to provide pensions, but also to provide the machinery whereby pensions are provided. I therefore respectfully part company from Patten LJ when he characterises core elements of the scheme, listed above, as matters of detail. This effectively limits the inquiry to what appears in the objects clause and overlooks the essential character of the scheme that was designed to achieve those objects.
Consideration must then be given to the level of detail to which it is appropriate to descend when scrutinising the scheme. I accept that one must take a broad view (‘a fairly high level of generality’), but this does not require the view to be so broad as to be essentially uninformative. Patten LJ notes that the trustees did not confer on the members a benefit that was different in kind from what they had always enjoyed. That is so, but it does not take one further forward in the inquiry into the purpose of the scheme and of clause 18.
Approaching the matter in this way, there are in my view a number of matters that shed light on the question.
The design of the scheme as contained in the Trust Deed specifically mandates circumstances in which the employer is or may be required to pay more: for example, as a result of rule 15 (automatic increases), clause 11 (remedying deficiencies), or clause 13 (if adding beneficiaries). At the same time, the deed allocates a discretionary power to increase benefits to the employer (clause 24).
In contrast, there is self-evidently no provision for unilateral discretionary increases by the trustees, that omission being the entire reason for the contested amendment. Mr Rowley argues that this absence from the face of the deed is of no significance, and that it is implicit that the trustees’ wide power under Clause 18 can validly be deployed to remedy this (see transcript 2.5.18 p.127: “…the core of our submission is that the power of amendment can be used to change a scheme’s benefit structure.”) This submission was accepted by the judge, who concluded at [635(8)] that the trustees had the unilateral power “to define the benefits of the scheme”.
The description at clause 4 of the trustees’ role as being to manage and administer the scheme is unsurprising and is in my view of clear significance. This does not preclude them from making decisions that have financial repercussions for the employer, indeed almost all management and administration decisions will have some effect, however small, on the employer’s liabilities. But there is nothing to suggest that the power of amendment was intended to give the trustees the right to remodel the balance of powers between themselves and the employer. In my view, the amendment to Rule 15 resulted in a scheme with a different overall purpose, in which the trustees effectively added the role of paymaster to their existing responsibilities as managers and administrators. The observations of Sir Andrew Park in Smithson, cited by Lewison LJ, are in my view persuasive.
It is no answer to this to say that the power of amendment is framed in general terms and contains safeguards in requiring proper trustee-like behaviour, the taking of advice and the achievement of a supermajority. These are brakes on the power of amendment, but the question here is not whether the brakes are working but whether the journey itself is permitted.
It is also true that a fundamental change in the scheme’s balance of power was effected by the removal of the ministerial veto, but the remaining provisions of the scheme were unaffected by that. The removal of the veto and the unusual historical context does not imply a more expansive power of amendment of the kind argued for by the trustees.
Further, it is said that this deployment of the proper purposes rule would be novel, even unprecedented. In my view, it is the actions of these trustees that are novel, not the application of the rule. It may be no coincidence that all the authorities arise from cases involving surpluses, and I would consider the trustees’ actions in taking steps to dispose of a surplus to be conceptually different from actions that would increase the employer’s liability for a scheme already in very substantial deficit.
I would not, however, accept Mr Tennet’s submission that the fundamental purpose of any occupational pension scheme is to deliver the benefits that the employer is willing to fund. The purpose of a scheme is to be ascertained from the contents of the instrument, an analysis of their effect and an understanding of the business context: Eclairs at [30].
Taking all these matters into account, I conclude that the true purpose of clause 18 is to give the trustees a wide power to (as was described in Courage) make those changes which may be required by the exigencies of commercial life. The amending power granted to these trustees was never intended to permit them to impose discretionary increases upon BA and the amendment of Rule 15 in 2011 and the exercise of the purported power in 2013 were ‘for purposes contrary to those of the instrument’: Equitable Life at 460F. I would firmly reject as mere polemic the submission that this conclusion emasculates clause 18 and reduces the trustees to little more than a cypher.
For these reasons, and in full agreement with the reasoning much better expressed by Lewison LJ, I would allow this appeal.
Wedgwood Pension Plan Trustee Ltd v Salt
Interpretation of Scheme
[2018] EWHC 79 (Ch) (26 January 2018)
Miss Penelope Reed QC:
Application
I have before me an application by the trustee (“the Trustee”) of the Wedgwood Group Pension Plan (“the Plan”) for directions as to whether a notice served by the employers in 2006 had the effect of closing the Plan to the future accrual of benefits for all members from 30 June 2006 and with there being no continued final salary link for those members.
There are a number of further issues raised in the Part 8 claim form, some of which, by the time of the hearing were no longer live and others which evolved as a result of discussions between the Trustee and the representative beneficiary joined to these proceedings (“the Representative Beneficiary”). Various issues also changed and evolved in the course of oral argument.
The Trustee was represented by Mr. Andrew Spink QC and Mr. Saul Margo and the Representative Beneficiary by Mr. Jonathan Hilliard QC. I am extremely grateful to them for their excellent written and oral submissions.
Background
The Plan was established by an Interim Trust Deed dated 20 February 1978 with effect from 1 April 1978. A Trust Deed dated 12 October 1983 adopted rules by which the Plan was to be governed (“the 1983 Rules”). A Deed was entered into on 19 March 1993 which adopted new rules from which the Plan was to be governed from 1 August 1988 (“the 1988 Rules”). On 27 March 1995 a composite version of the 1988 Rules as amended was adopted (“the 1995 Rules”) and it is those rules which are significant for this application.
On 8 October 2001 a Replacement Definitive Deed and Rules were entered into (“the 2001 Rules”) which were expressed to take effect from 6 April 1997. The 2001 Rules represented a complete re- write of the 1995 Rules. I will deal with the relevant provisions of the 1995 Rules which empowered the trustees to amend the rules and other significant rules below.
On 26 June 2006 the participating companies in the Plan (“the Participating Companies”) served notices on the trustees under rule 62(a) of the 2001 Rules (to which I will come in a moment) terminating their respective liability to contribute to the Plan in respect of employees’ currently in pensionable service (“the Employers’ Termination Notice”). The notices were stated to come into effect from the end of June 2006. The notices provided as follows:-
“The principal employer of the Plan, Wedgwood Limited (“Wedgwood”) has agreed to meet any future contributions in respect of those members and this letter has been signed on behalf of Wedgwood to confirm its agreement to this.
The effect of this notice is that under Rule 5(e) of the Rules, the active members in respect of whom the Company terminates its liability to contribute will become deferred members of the Plan and their pensionable service will end immediately before 1 July 2006.
For the avoidance of doubt the Company is not terminating its liability to contribute to the Plan in respect of any employees or former employees who are already deferred or pensioner members of the Plan.”
On 5 January 2009 Waterford Wedgwood plc, the parent company of the Participating Companies went into administration, as did Josiah Wedgwood & Sons Limited and Stuart & Sons Limited. Both those latter companies went into liquidation in May 2011. The entry into administration of those two companies in January 2009 was a “relevant event” for the purpose of section 75 of the Pensions Act 1995. As at that date the Plan had a difference between the value of its assets and the value of its liabilities for the purposes of section 75 of £139.1m. Only £167,680 was recovered by the Trustee of the Plan in 2015 as an unsecured creditor in the insolvency of these two companies.
The Plan is what is known as a “last man standing” pension scheme so that remaining Participating Companies became liable to fund the whole scheme. In this case that was the Wedgwood Museum Trust Limited. On 31 March 2010 the scheme actuary calculated Wedgwood Museum Trust Limited’s liability at £134.7m. As a result, that company also went into administration. The assets held by the museum were sold (following an application to the court, see: Re Wedgwood Museum Trust Ltd (in admin) [2011] EWHC 3782). As a result the Trustee received £8,656,185.10 on 2 March 2015 and £107,078.43 on 29 June 2015.
The insolvency of the Wedgwood Museum Trust Limited was a “qualifying insolvency event” for the purposes of section 132 of the Pensions Act 2004 and the Plan commenced an assessment period for the purposes of the Pension Protection Fund (“PPF”) in April 2010. It seems unlikely the Plan’s assets will be sufficient to cover its “protected liabilities” for the purpose of section 131 of the Pensions Act 2004. Therefore I understand that the PPF will be likely to take over the assets and liabilities of the Plan at the end of the period of assessment. Consequently the PPF is also interested in the outcome of this claim.
The Issues
The Plan has been administered since 30 June 2006 (the date specified in the Employers’ Termination Notice) as closed to the future accrual of benefits. Members have not contributed to the Plan and, as stated above, the Plan is now in a period of PPF assessment. The question is whether the Employers’ Termination Notice was effective to close the Plan to the future accrual of benefits for all members and with the calculation of those benefits not linked to the final salary of those members. That involves looking at whether rule 62 of the 2001 Rules was validly introduced or is effective subject to a limitation on its exercise, having regard to the scope of the power of amendment contained in rule 48(i) of the 1995 Rules.
The Trustee and the Representative Beneficiary have agreed the issues which arise out of that broad question:-
Issue 1
Was rule 62 of the 2001 Rules validly introduced in its entirety such that it allowed future accrual to be terminated by the Employers’ Termination Notice in respect of all members with there being no continued salary link? The Trustee’s position is that the rule was validly introduced and the Employers’ Termination Notice was effective both to terminate future accrual to all members and to break the final salary link. The Representative Beneficiary takes the opposing view.
Issue 2
This issue arises if the answer to issue 1 is answered negatively. It was originally divided into two alternative parts but the Trustee in the end argued only the first limb of the issue, namely: whether future accrual was terminated and the final salary link broken by the Employers’ Termination Notice on the basis that the introduction and exercise of the rule 62 power was valid subject to an overriding limitation that brought it in line with the fetter on the amending power. This, the Trustee argues, can be achieved by construing rule 62 so that it provided whatever additional protection was required by rule 48 of the 1995 Rules. The Representative Beneficiary argues to the contrary.
Issue 3
This issue (which arose if the answers to issues 1 and 2 were no) was whether the Employers’ Termination Notice was effective to terminate future accrual of benefits for some or all of the members but subject to the final salary link being maintained? This issue was not in fact argued before me because it was agreed between the Trustee and the Representative Beneficiary that if the Court found that the fetter was engaged, that would result in the Plan being closed to future accrual but the final salary link for existing members would not be broken.
Issue 4
This issue also only arises if I am not with the Trustee on issues 1 and 2 and is whether rule 62 was validly introduced in respect of members who joined the Plan on or after 8 October 2001 (that is, after the 2001 Rules came into effect)? The Trustee argues the rule was validly introduced in respect of those members (I shall refer to them as “New Members”); the Representative Beneficiary argues that it was not.
Issue 5
Issue 5 arises if any member is entitled to accrue benefits after 30 June 2006 (in other words the fetter in rule 48 protects future as well as existing rights of members) and subdivides into a number of issues:-
(a) Does the scope of rule 10 (or rule 28A) of the 2001 Rules permit the Claimant (i) to adjust the pensionable service and/or rate of accrual and to make some other actuarial adjustment to the benefits that would otherwise be payable to members who did not pay their contributions for the period from 30 June 2006 up until the Termination Date (which is the earliest date of: the date the member left service with a participating employer; the date the member’s participating employer ceased to make contributions following entering administration in accordance with rule 62 of the 2001 Rules or 27 October 2009 the date the trustee of the Plan resolved to wind up the Plan under rule 63 of the 2001 Rules). Both parties agree that rules 10 and 28A do permit this; (ii) permit the Claimant to deduct any outstanding contributions that have not been paid by a member at the time that their pension comes into payment from the benefits that would otherwise be payable to the member at the time of the payment of such benefits. Both parties agree that as a matter of scope rules 10 and 28A enable the Trustee to deduct contributions but subject to section 91 of the Pensions Act 1995 which prevents the Trustee from deducting outstanding contributions from members’ pension benefits as this would amount to an impermissible set off.
(b) If the answer to issue 5(a) is yes, the next issue is whether rules 10 and 28A were validly introduced into the 2001 Rules and if not, whether they were validly introduced for New Members? The Trustee argues those rules were validly introduced for New Members; the Representative Beneficiary that they were not validly introduced for any member.
(c) If the answer to 5(b) is yes, the issue arises whether the Trustee can exercise the rule 10 and 28A powers in respect of any members who had not made contributions between 30 June 2006 and the Termination Date and if not, whether they could exercise those powers in respect of New Members? The Trustee says that it can exercise those powers in respect of New Members; the Representative Beneficiary argues the powers cannot be exercised in respect of any members.
(d) If the answer to issue 5(c) is yes, would PPF compensation reflect any of the potential adjustments raised in issue 5(a)? The Trustee says that the compensation would reflect those adjustments in respect of New Members; the Representative Beneficiary says that it would not.
The Relevant Rules
The 1995 Rules provide for a member who retires at Normal Pension Age (normally 65 or between 60 and 70 as agreed) to receive a pension “equal to the aggregate of one sixtieth of his Final Plan Salary for each Year of Pensionable Service as an ‘A’ Member together with one seventieth of his Final Plan Salary for each year of Pensionable Service as a ‘B’ Member.” There is therefore a link between the pension payable on retirement and the member’s final salary. There are (as one would expect) provisions for calculating short service benefits.
The rule at the heart of this case is rule 48 of the 1995 Rules which provides as follows:-
“The Principal Company may at any time and from time to time by instrument under its Common Seal alter or modify all or any of the Rules for the time being in force or make any new Rules to the exclusion of or in addition to all or any of the existing Rules aforesaid and any Rules so made shall be deemed to be Rules of the same validity as if originally embodied herein and shall be subject in like manner to be altered or modified and any alteration modification or addition of or to the Rules which may be effected in exercise of the power contained in this Rule shall be notified to the Members by posting the same in some conspicuous place in all the works and offices of each of the Participating Companies provided always that no alteration modification or addition shall be made which (i) shall prejudice or adversely affect any pension or annuity then payable or the rights of any Member.”
[my emphasis]
As stated above, the 2001 Rules were a complete re-write of the rules. Rule 62(a) which was the rule under which the Employers’ Termination Notice was given reads as follows:-
“A Participating Employer
(a) an stop contributing in respect of all or some of its employees by giving written notice to the Trustees
(b) will stop contributing
(1 )if it stops being a Qualifying Employer, from a date 12 months after it stops being a Qualifying Employer, unless the Board of the Inland Revenue has agreed it can contribute after that date,
(2) if it stops carrying on business because of liquidation or otherwise, or
(3) if it fails to observe and perform all or any of its obligations under the Plan and the Trustees give written notice to the Participating Employer that its participation in the Plan is to end
and, as soon as that happens, Member’s Contributions in respect of any Members affected will stop.
If a Participating Employer stops contributing and Rule 63 (Winding Up) does not apply the provisions of Rule 17 (Benefits on leaving the Plan) will apply to each Member then in that Participating Employer’s service and for whom contributions have been stopped. If a Member is not a Qualifying Member, the Principal Employer can direct the Trustees to treat him as a Qualifying Member for the purpose….”
The predecessor of this clause in the 1995 Rules was rule 45 which is headed “Winding up and determination of trusts” and which reads:-
“If an Order shall be made or an effective resolution passed for the winding- up (otherwise than for the purpose of reconstruction or amalgamation with any other Participating Company) of any Participating Company other than the Principal Company or if from any cause it shall at any time thereafter be found by any such Company other than the Principal Company to be impracticable or inexpedient for such Company to continue to participate in the Plan or if any Company for the time being participating in the Plan shall cease to be a Subsidiary or Associated Company (as defined in the Rules) such Company shall retire from the Plan and the following provisions shall apply…”
The rule then goes on to look at length at the consequences of the above provisions applying to a Participating Company. The question therefore is whether the power to amend contained in rule 48 of the 1995 Rules could be exercised to change rule 45 to rule 62 without infringing the fetter on that power that no alteration modification or addition should be made which would prejudice or adversely affect the rights of any member.
That is a matter of construction of the rules and before turning to the specific issues raised which have been enumerated above, I will deal with the authorities which have been cited to me on the approach to construction.
Approach to Construction
The principles summarised in the following paragraphs can be derived from the case law. I do not understand them to be in dispute between the parties.
The rules of a pension scheme are to be interpreted in the same way as any other written instrument (Buckinghamshire v Barnado’s [2016] EWCA Civ 1064 ).
As with any other document, the Court must focus on the meaning of the relevant words in their documentary, factual and commercial context and that meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [instrument], (iii) the overall purpose of the clause and the [instrument], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.” (Arnold v Britton [2015] UKSC 36; [2015] AC 1619; applied in Buckinghamshire v Barnado’s);
Reliance on background and commercial common sense must not be allowed to undervalue the importance of the words of the instrument. In addition, commercial common sense cannot be invoked retrospectively (Buckinghamshire v Barnado’s);
There are, however, at least three points of special relevance to the interpretation of pension schemes. First, all or almost all pension schemes are intended to be tax efficient and to comply with Inland Revenue requirements. So Inland Revenue requirements are relevant to their interpretation. Secondly, pension schemes should be interpreted to have reasonable and practical effect. Thirdly, since the rules of a pension scheme affect all those who join it (in some cases many years after its inception) other background facts have a very limited role to play (Buckinghamshire v Barnado’s).
The following principles are further taken from the judgment of Arden LJ in Stevens v Bell [2002] Pens LR 247 as recently summarised by Morgan J in British Airways Plc v Airways Pension Scheme Trustee Ltd. [2017] PLR 16 at para 409.
(a) Members of a scheme are not volunteers; the benefits they receive under the scheme are part of the remuneration for their services; the relationship of members to the employer is to be seen as running in parallel with their employment relationship;
(b) A pension scheme should be construed so as to give a reasonable and practical effect to the scheme bearing in mind that the scheme has to be operated against a constantly changing commercial background;
(c) As a corollary of that point, it is important to avoid unduly fettering a power to amend the provisions of the scheme as it was important for parties to be able to make those changes which might be required by the exigencies of commercial life;
(d) Technicality in the consequences of a possible interpretation was to be avoided;
(e) The meaning of a clause in the scheme must be ascertained by examining the instrument as it stood when the clause was first introduced;
(f) In the case of an amending provision, the provision is to be construed against the background circumstances at the date when it was adopted;
(g) The relevant background circumstances include the practice and requirements of the Inland Revenue;
(h) The function of the court is to construe the instrument without any predisposition as to the correct philosophical approach;
(i) A pension scheme should be interpreted as a whole.
The Trustee particularly relies on the principles set out at sub-paragraphs (b) and (c) above that the rules should be construed so as to give a reasonable and practical effect of the scheme bearing in mind that the scheme has to be operated against a constantly changing commercial background and it is important to avoid unduly fettering a power to amend the provisions of the scheme as the amending party should be able to make those changes which might be required by the exigencies of commercial life (see Millet J in Re Courage Group’s Pension Scheme [1987] 1 WLR 495 at 505 F).
Issue 1
Mr. Spink QC divided his argument on this issue into two parts. The first part of the argument relates to whether the fetter as a matter of construction applies to rights which a member has accrued by his service at the date of the amendment or whether it is also protects rights which would accrue following completion of future pensionable service which I will refer to as “future rights”. The second part of the argument relates to whether the fetter is engaged in terms of the introduction of rule 62.
Part 1 of Issue 1
There are numerous reported cases which deal with the way in which fetters on powers of amendment in pension schemes should be construed. However, I was told by Counsel that there is no case which deals with a fetter in the terms of the proviso to rule 48. Many of the cases deal with fetters on powers of amendment which prevent interference with members’ “accrued” or “secured” rights rather than just the reference to “the rights of any member” contained in rule 48.
The Trustee argues that the fetter prevents an amendment which results in accrued rights being prejudiced or adversely affected and accepts (for this first part of the argument at least) that those accrued rights are to be calculated on the basis of the link to final salary. Mr. Hilliard QC argues that not only are accrued rights protected by the fetter in rule 48, but also future rights acquired by future service with the Participating Company.
There is (it seems) only one English case where the Court has found that a fetter contained in a power of amendment protected future rights and that is Lloyds Bank Pension Trust Corporation Ltd v Lloyds Bank plc [1996] PLR 263. That case concerned a fetter with wording very substantially different from the words of rule 48. The power of amendment in question provided that no alteration could be effected “which in the opinion of the Scheme actuary may have the effect of either increasing the contributions of any members who are: (a) employees who joined the Scheme before 1 November 1983; or (b) female employees who were members of the women’s scheme and who joined the Scheme on 1 July 1983; or decreasing the pecuniary benefits secured to or in respect of such members under the Scheme will be made unless the sanction in writing of no less than three- quarters of those members is obtained;”.
The focus of the judgment of Rimer J was quite clearly on the words “pecuniary benefits secured….under the Scheme”. As he said in paragraph 42 of his judgment:-
“I regard it as a fair and natural use of language to describe the scheme under which the promised pension benefits are to be provided as ‘securing’ the benefits, including both those benefits which at any particular moment can be regarded as earned by past service and also those benefits which at the same moment are in the nature of promised future benefits. Moreover, I not only regard such word as a natural one to use in that context, I regard it as probably the most appropriate one. I have referred above to the benefits being ‘promised’ by the employer, and it is his promise which provides the essential commercial substratum to pension schemes such as the present one. But despite the fact that an important element in the trust which establishes the scheme is the employer’s balance of cost promise. I agree with Mr McDonnell that an English lawyer would ordinarily hesitate before describing the benefits to which a beneficiary is entitled under a trust, even one such as that establishing the Scheme, as being ‘promised’ by it. ‘Provided by the scheme’ is an acceptable alternative, but ‘secured by the scheme’ is in my view even more appropriate. In suggesting this I do not think that I speak with a lone voice.”
Later on at paragraph 51 he said:-
“To describe the relevant benefits as being those ‘secured … under the Scheme’ is to use language which I regard as most naturally referring to all the benefits promised by the Scheme, both accrued and future.”
It is quite clear that Rimer J was heavily influenced by the wording of the fetter which referred to benefits and not rights; did not specify that the benefits were accrued and used the words “secured under the scheme” which he construed as meaning promised future benefits. Indeed Rimer J contrasted the clause he was construing with the fetter which applied to deferred members which referred to “pecuniary rights of any member who has left pensionable service …” At paragraph 53 of his judgment he said:-
“In my view the drafting differences between rules 9(1) and (3) convey an obvious distinction as to the types of interest with which the two sub- paragraphs are respectively concerned. The latter is in terms concerned with ‘the pecuniary rights of [deferreds and pensioners]’ being interests in the nature of rights which have truly accrued, in the sense that the beneficiaries have become entitled to defined rights. By contrast, the ‘pecuniary benefits secured to or in respect of [actives]’ in general rule 9(1) are not interests in the nature of accrued rights, either actual or notional, at all. The actives have periods of service to their credit, which will count towards the quantification of their eventual rights, but the determination of those rights is still dependant on future, and uncertain, events and in, for example, the event of an active’s premature death in service the rights which will then crystallise may be enjoyed directly by others without even passing though his estate”.
The importance of this paragraph ought not to be overstated in the sense that all that deferred members have are accrued rights but the point Rimer J was making was that the draftsman in the Lloyds case took trouble to distinguish between the rights which the deferred members had and the benefits secured under the scheme for the active members.
Cited to Rimer J in the Lloyds case was the Australian case of Gas & Fuel Corporation of Victoria v Fitzmaurice [1991] PLR 197. The fetter to the power there was that no amendment “shall have the effect of reducing any benefit then provided by or under this Trust Deed for or in respect of any contributor or pensioner unless the contributor or pensioner consents in writing thereto”. The argument was whether the words “any benefit” captured future rights as well as those which had accrued. The decision turned on the wide meaning the Court gave to “any benefits” which it considered justified in the context of the scheme in question.
It seems to me that neither of these cases really assists me in construing the terms of rule 48. They both turned on the construction of very specific wording, quite different from the words used in rule 48.
On the other hand, neither is it of great assistance to say that there are other cases where the Courts have found that future rights are not protected by a fetter to an amendment clause where the wording is also significantly different. So for example in Re Courage Group’s Pension Schemes [1987] 1 WLR 495 the fetters on amendment powers which the Court was considering were, in respect of one scheme, that the committee of management could not “vary or affect any benefits already secured by past contributions in respect of any member without his consent in writing”; and in the case of the other two schemes they must not “reduce…the accrued pension of any employed member” except in the circumstances specified. It was clear that the wording of the fetters clearly encompassed rights which had accrued and not future rights. The real question was whether the fetters prevented the pension which had accrued being linked to final salary. Millett J said:
“Accrued pensions” is defined in the rules to mean pensions based on salary at the relevant date. There was some dispute whether “benefits already secured by past contributions” means the same thing, or includes the prospective entitlement to pensions based on final salary. In the absence of express definition, I see no reason to exclude any benefit to which a member is prospectively entitled if he continues in the same employment and which has been acquired by past contributions, and no reason to assume that he has retired from such employment on the date of the employer’s secession when he has not. The contrary argument places a meaning on “secured” (and “accrued)” which is not justified.” (The words “and accrued” do not appear in the All England Reports version of the judgment and it seems likely that is the more accurate report).
Mr. Spink did not seek to argue before me that Courage was wrong as far as the final salary link was concerned (although he reserved his position if the matter went further) and accepted that a fetter which prevented interference with accrued rights, would also protect the link to final salary of those accrued rights. His argument in relation to the breaking of the final salary link in this case is that the fetter is not engaged which I will deal with in due course.
A similar conclusion to the Courage case was reached in IMG Pension Plan, HR Trustees Limited v German [2010] PLR 23 where the amendment was the conversion of a defined benefits scheme to a defined contributions scheme. The fetter in that case was that “no amendment shall have the effect of reducing the value of benefits secured by contributions already made”. The Court found that the amendment was only permissible if the money purchase entitlement was underpinned to secure the final salary link. The wording in that case: “contributions already made” quite clearly excluded any future rights and the case is therefore not of great assistance as far as the construction of this fetter is concerned.
Mr. Spink also asked me to consider the rules which preceded rule 48 in considering its construction. I note that in the Lloyd’s Bank case Rimer J resisted such an invitation from Counsel and confined himself to the wording of the scheme as it stood, stating that he would “not attempt to find inspirational guidance in doing so by interpreting the earlier deeds or rules which they have superseded” (paras 25-27 of his judgment). In The National Grid Company plc v Laws [1997] PLR 157 at first instance Robert Walker J considered Rimer J’s approach but held that “the superseded provisions did at one time stand as part of the scheme, and a comparison of the old and the new may sometimes help to explain the purpose and meaning of the new provision.” However, having concluded that the court could look at superseded provisions of a pension scheme, he said “…the court should be slow to do so, both because of the inconvenience involved and because of the uncertainty (apart from exceptional cases) of deriving any useful assistance from the exercise”.
While I accept that there is no bar on the court looking at previous incarnations of the rules (or the archaeology as Mr. Spink put it) I consider that only limited assistance can be derived from doing so. However, in this case consideration of the previous rules does throw at least some light on the situation. Mr. Spink in particular relies on the rules superseded by rule 48 in the 1995 Rules. In the 1983 Rules, the rule read as follows:-
“no alteration modification or addition shall be made which i) shall prejudice or adversely affect any pension or annuity then payable or the rights of any member who is then excused from or not liable for contributions”[my emphasis]
By the 1988 Rules, the words in bold above had been deleted. Those words limiting the fetter to the rights of any member who is then excused from or not liable for contributions referred to deferred members and pensioners and not active members. Somewhat surprisingly, therefore, there was no fetter on the power of amendment protecting the rights of active members. However, it seems clear that “rights” in the context of the 1983 Rules must have meant existing and not future rights because pensioners and deferred members were not in a position to acquire future rights.
Mr. Spink also relied on the judgment of Briggs J (as he then was) in Naradas- Girdhar v Bradstock [2016] 1WLR 2366 which involved using words which had been deleted in an individual voluntary arrangement proposal as an aid to construction on the basis that they demonstrated what the parties had not agreed. I am not sure that matters are taken much further by applying that principle here in very different circumstances.
However, these arguments do go some way to dealing with the point made by Mr. Hilliard that if the proviso to the amendment power had been intended to cover rights which had been already earned by past service, the word “accrued” would have been included. It seems to me that argument has less force because it is clear that the amendment made to the 1988 Rules was by way of deletion of the final words in order to encompass amendments which affected active members.
Mr. Hilliard argued that without any reference to accrued rights, the natural meaning of the “rights of any member” included not only the rights to a pension which they had derived from previous years of service but also any rights which they might acquire as a result of future service. He argued that it was as much a “right” of the member to accrue a pension in the future when in continued service with the employer, as the right to receive a pension in the future commensurate with the period of service already accomplished.
He pointed to the fact that it was accepted by the Trustee that the proviso to rule 48 would not permit an amendment which would break the final salary link and therefore the rights which a member has under a pension scheme assume that member remains in employment. It seems to me, however, that there is a distinction between the rights to a pension which a member acquires as a result of past service and the method by which the rules of the pension scheme provide that the pension payable is to be calculated. The right which a member has to a pension by reason of past service includes the right to have that pension calculated by reference to final salary. That does not answer the question as to whether the member can be described as having a right to a pension which may accrue as a result of future service.
It seems to me that the natural meaning of the words “the rights of any member” in rule 48 is as contended for by Mr. Spink. They mean, at the time the amendment was introduced, the rights which had accrued to a Member as a result of past service. The word “rights” does not, in my view, naturally cover benefits which might in the future be obtained as a result of future service with the employer. It seems to me that this conclusion is consistent with the proper approach to construction of a pension scheme and in particular that the rules should be construed so as to give a reasonable and practical effect to the scheme bearing in mind that the scheme has to be operated against a constantly changing commercial background. I also bear in mind that it is important to avoid unduly fettering a power to amend the provisions of the scheme as it is important for the parties to be able to make changes which might be required by the exigencies of commercial life. A power of amendment which prevented the employer from curtailing the right of existing members to continue to accrue benefits in circumstances where the employer was in financial difficulties and finding it difficult to fund the Plan makes far less sense than a construction which protects rights which members have gained through past employment but enables the employer to stop those benefits accruing in the future.
Part 2 of Issue 1
The second part of issue 1 is a question as to whether the fetter is engaged in any event by the introduction of rule 62. That question arises on the basis that the fetter, even if it did not protect future rights (as I have found), protected the final salary link. It involves a comparison of rule 45 of the 1995 Rules and rule 62 of the 2001 Rules to see whether the introduction of rule 62 enabling the Participating Companies to cease to continue contributions in respect of employees prejudiced or adversely affected the rights of any members.
Rule 45 and rule 62 are framed in different terms. The heading to rule 45 reads “Winding up and determination of trusts” and it is clear that if it were invoked, the Participating Company would retire from the Plan and the members’ pensionable service would terminate. This would have the effect (it is common ground) of not only terminating future accrual of benefits but also of breaking the final salary link.
Mr. Hilliard argued for a construction of rule 45 which at first sight seemed to me to be very attractive. Rule 45 puts forward three situations in which the employer will retire from the Plan:-
(a) Winding up (except for the purposes of amalgamation or reconstruction) of any Participating Company other than the Principal Company; or
(b) “if from any cause it shall at any time thereafter be found by any such Company other than the Principal Company to be impracticable or inexpedient for such Company to continue to participate in the Plan” (Mr. Hilliard’s underlining)
(c) Any Company ceasing to be a subsidiary or associated company.
Mr. Hilliard argued that b. above was only engaged in circumstances where there had been a winding up of one of the Participating Companies and after that event one of the other Participating Companies found it impracticable or inexpedient to continue to participate. That construction clearly gives weight to the words “at any time thereafter”. It also makes sense in that once a Participating Company is being or has been wound up, other Participating Companies may not find it practicable or expedient to continue to contribute to the Plan.
However, I am ultimately persuaded by the construction placed on rule 45 by Mr. Spink. He argued that “at any time thereafter” referred back to “any cause” which is a very wide expression if it only refers to the winding up of another Participating Company. He made the further point that it would be unnecessary to include the words “other than the Principal Company” for a second time if the reference to “such Company” was a reference back to the company being wound up.
Therefore rule 45 in my view enabled a Participating Company to retire from the Plan if, for any cause, it found that it was impracticable or inexpedient to continue to participate in the Plan. Mr. Spink suggested that the wording of rule 45 did not place any material restriction on the circumstances in which the Participating Company could retire from the Plan and it could do so legitimately on the basis of the Participating Company’s own subjective reasoning.
It seems to me that latter point must be wrong. The cause which prompts the Participating Company is not restricted but in order to fall within the wording of rule 45 the Participating Company must find it impracticable or inexpedient by reason of that cause to continue to participate. Impracticability has been said to be “a conception different from that of impossibility; the latter is absolute, the former introduces at all events some degree of reason and involves some regard for practice” (per Veale J. in Jayne v National Coal Board [1963] 2 All E.R. 220). It is therefore a high bar. As for “inexpedient”, the dictionary meaning is “not practical suitable or wise” which, while a lower bar than impracticable, nevertheless requires there to be some appreciable difficulty in the way of the Participating Company continuing to participate in the Plan.
Having determined the meaning of rule 45, the question is whether rule 62 and in particular rule 62(a) is less restrictive than rule 45, thereby enabling the Participating Company to cease contributions to the Plan more easily. To recap, rule 62(a) provides that the Participating Company can stop contributing in respect of all or some of its employees by giving written notice to the Trustees. There is therefore nothing to prevent a Participating Company for whom it was both practicable and expedient to continue contributing, serving such a notice. Mr. Spink argued that it would be artificial to regard rule 45 as more restrictive than rule 62, as in practice it would make no commercial sense for the Participating Company to give notice unless it was inexpedient or impracticable to continue to participate.
I do not accept that argument. It seems to me that without implying some term into rule 62(a) to that effect (and nobody argued for such an implication) there is nothing to prevent a Participating Company from serving notice on the trustees that it no longer wishes to participate in the Plan and the notice would not be open to challenge. However, under rule 45 a Participating Company wishing to retire from the Plan would have to demonstrate that it met the conditions in the second part of rule 45, albeit more widely construed than Mr. Hilliard contends for. That, it seems to me, is an amendment to the rules which prejudiced or adversely affected the rights of any members because it made it easier for the Participating Companies to cease to contribute to the Plan.
Mr. Hilliard also argued that there is a clear difference between the way in which rules 45 and 62(a) operate in that rule 45 is “all or nothing”. A Participating Company deciding to take advantage of rule 45 retires from the Plan and ceases to have any further legal relationship with the Plan. A Participating Company serving notice under rule 62(a) may choose (as was the case with the Employers’ Termination Notice in this case) to stop contributions in respect of some only of its members with the effect that they would be treated thenceforth as deferred members with future accrual stopped and the final salary link broken. Mr. Spink argued that this was not necessarily prejudicial to the rights of members or adversely affected them because of the degree of flexibility imported. The question is whether the Participating Company would be more likely to serve notice under rule 62(a) than take the more draconian step of leaving the Plan altogether. It seems to me that the answer lies in the need for the Participating Company to have found it impracticable or inexpedient to participate. If it does so, its only option under rule 45 is to leave the Plan. Under rule 62(a) it has the option to serve notice in respect of only some of its members and it seems to me that is less prejudicial to the members than a retirement under rule 45.
Conclusions on Issue 1
I therefore consider that rule 62 was validly introduced such that it allowed future accrual to be terminated by the Employers’ Termination Notice but that the introduction of rule 62 did engage the fetter that protected the final salary link for existing members because the lack of any requirement that the Participating Company find it impracticable or inexpedient to continue contributions prejudiced or adversely affected the rights of the members.
Issue 2(a)
Having found that the exercise of the power of amendment fell outside the scope of the rule 48 power, the next question is whether that invalidates the introduction of rule 62 in toto or whether, as the Trustee argues, the amendment should be held to be valid insofar as it does not infringe the fetter on the power of amendment. The way in which it is suggested by the Trustee that the new clause 62 should be read so as to validate it in part is as follows:-
“A Participating Employer can stop contributions in respect of all or some of its employees [e.g. can stop contributions in respect of actives but retain its deficit repair obligations in respect of deferreds and pensioners] by giving written notice to the Trustees as long as it has first from any cause been found by the Participating Employer to be impracticable or inexpedient to continue to participate in the Plan rather than to cease to participate by stopping all deficit repair contributions i.e. deficit repair contributions in respect of actives, deferreds and pensioners.”
In other words, the Participating Company must be able to show when serving notice under rule 62(a) that it has met the bar set in rule 45. The starting point for this submission is the judgment of Neuberger J as he then was in Bestrustees plc v Stuart [2001] PLR 283 where he was considering amendments proposed to a pension scheme to equalise the normal retirement date for men and women to 65. Part of the amendment purported to be retrospectively disadvantaging female members of the scheme and engaging the fetter on the power of amendment. Neuberger J held, however, that the amendment was valid as regards its prospective effect albeit invalid insofar as it purported to have retrospective effect. He based his judgment on the following passage at paragraph 48:-
“To my mind, the correct approach is not one of language – it is one of concept. One is, after all, here concerned with equity. I consider, therefore, that one looks to see what is the valid exercise of the power and what is the invalid exercise. The valid exercise, if there was an exercise of the power, was to effect a variation with effect from 26 April prospectively. The invalid attempted exercise was to effect a variation retrospectively to 6 April 1994. To my mind, conceptually those two components of the single exercise are easily separable one from the other. It seems to me, however, that one must not only ask oneself whether they are easily severable conceptually, but also whether there is anything in the exercise of the power which leads one to believe that, had the trustee been told that it was not entitled to exercise the power retrospectively, it would not have exercised the power as it purported to do prospectively at all, or, in the alternative, in the way that it did. In that connection, it seems to me that that approach is consistent with the approach of the Court of Appeal in Re Hastings-Bass [1975] Ch 25 , to which I shall refer in a little more detail shortly.”
It is quite clear that Neuberger J was approaching this as a case of excessive execution of a power, the invalid parts of which may, in appropriate circumstances, be severed from the good. He relied on various passages in Thomas on Powers, namely, that “the effect of an excessive execution of a power is either that such execution is good in part and bad in part, or, alternatively, it does not amount to an execution at all.” [paragraph 45 of his judgment] and “In order for the appointment to be valid, it must be distinct and absolute, and not so tied up with the whole series of limitations as to form one system of non- severable trusts” [para 46].
There turned out to be some considerable debate between the Trustee and the Representative Beneficiary not foreshadowed by their skeleton arguments as to the precise nature of the jurisdiction being exercised by Neuberger J in Bestrustees. I permitted Counsel to put in further submissions in writing on the matter after the hearing had taken place. Mr. Spink argued in his oral reply that insofar as the test adumbrated by Neuberger J suggests that there is a second limb to be satisfied by the Principal Company (as the donee of the power), the case was wrong on that point. This “second limb”, as it has been referred to by Counsel, is whether the Principal Company would have exercised the power of amendment in the way that he had purported to do, if it had known that it was in breach of the fetter? Mr. Spink argued that Neuberger J’s requirement for the second limb had to be looked at afresh in the light of the Supreme Court’s decision in Pitt v Holt [2013] 2 AC 108 which analysed the ratio of Hastings-Bass rather differently from the way in which it was generally understood and applied prior to that decision. Mr. Spink further argued that if one looked at the cases which applied Bestrustees there was clearly no requirement for a second limb to be satisfied and that the matter had been approached as one of construction, implying into the exercise of the power a limitation in order to give it effect, rather than dealing with the question as a matter of severance.
Mr. Spink relied in particular on the decision of Lightman J in Betafence Ltd. v Veys [2006] Pens. L.R. 137 where he said (at paragraphs 68 and 69):
“68.The question is raised whether (assuming that the 1993 Amendment is otherwise valid) having regard to the proviso to Rule 23, which invalidates the consent requirement as regards benefits entitlements accrued prior to the 17th November 1993 (the date of the 1993 Deed), the consent requirements under the 1993 Deed are valid as regards benefits accruing thereafter (as the Claimant contends) or whether the consent requirements are incapable of severance and wholly invalid (as the Beneficiaries contend).
69. The Claimant is plainly correct. The 1993 Amendment must be construed as having effect subject to the overriding limitation on the power of amendment contained in the proviso. Questions of severance do not arise, but if they did the principles governing severance in a case such as the present (as the cited authorities establish) lead to the same conclusion. There is no requirement or scope for application of the ‘blue pencil’ test deleting what is objectionable and leaving standing what is unobjectionable. All that is required is that the distinction between what is and what is not objectionable is clear and that the meaning and application of what is unobjectionable is clear.”
I note that Bestrustees does not appear to have been cited to Lightman J, but certainly in respect of general principles, I do not consider that he was operating in a different jurisdiction from Neuberger J. It seems to me that Lightman J was considering whether the exercise of the power was good in part because there had been an excessive execution of a power just as Neuberger J was in Bestrustees. He was approaching it on the basis that the answer was the same whether one approached the matter on the basis of construction of the amendment so that it could take effect insofar as consistent with the limitations in the power, or severance in the sense of disregarding what could not be achieved when regard was had to the scope of the power. His reference to the blue pencil test perhaps gives some indication as to why he was not approaching this as a question of severance properly so called in that the exercise of the power could not be saved simply by the deletion of an objectionable part.
However, what Mr. Spink places most reliance on is the fact that Lightman J does not suggest that he had to be satisfied that the power would have been exercised in the way it had, if the trustees appreciated it went beyond the scope of their powers. That is clearly the case.
In IMG Pension Plan, HR Trustees v German [2010] Pens LR 23 there does not appear to have been any consideration of what the trustees would have done had they taken the fetter into account and appreciated that the exercise of the power was subject to the implied underpin.
More recently in IBM United Kingdom Holdings Ltd. V Dalgleish [2017] EWCA Civ 171 the Court of Appeal considered an appeal against a decision of Warren J who had held that an exclusion power was validly introduced by a power of amendment but subject to a limitation that it could not be used to break a final salary link. Warren J based his decision on a consideration of Bestrustees, Betafence and IMG ([2014] PLR 335 at para 208). It should be noted that the primary argument by the beneficiaries in IBM was that the exercise of the power had been for an improper purpose, not that there had been excessive execution of the power. The reasoning of Sir Timothy Lloyd rewards setting out in full:-
“173 As regards the other part of Mr Stallworthy’s argument, relying on IBM’s intention, which it could not fulfil, to break the final salary link, this is a different kind of situation. It is not really a case of improper purpose at all but, at most, of what is sometimes called excessive execution, that is to say a purported exercise of a power which, for some reason, cannot take effect in full. That is quite unlike the classic cases of improper purpose where the defect lies not in the terms of the execution of the power but in the motive lying behind it. The judge considered this very line of authority earlier in his judgment when addressing the first issue, whether the exclusion power had been validly introduced into the Main Scheme trust deed at all. He referred at B199 and following to several authorities, including Bestrustees v Stuart: [2001] EWHC 649 (Ch), [2001] PLR 283, which Mr Simmonds also showed to us. The judge held that the Exclusion Power was validly introduced, but was subject to an implied limitation such that it could not be used to break the final salary link: B289(i) and (iii).
174 By the same reasoning, it seems to us that there is no reason why the exercise of the Exclusion Power by the notices actually given in this case should not be held valid to the extent permitted by the implicit limitation on the power. If one were to ask whether Holdings would have given the same Notices if it had been aware that it would not be able thereby to break the final salary link, the answer would have to be that it would. The object of terminating DB accrual was the principal reason for using the power. That it could not break the final salary link would perhaps have been seen as a disadvantage, but not at all as a reason for not exercising the power to the full extent available, not least because that feature was also to be dealt with by the NPAs as a separate element of Project Waltz..”
Returning to Bestrustees which the Court of Appeal was clearly following in IBM, It seems to me that there are two aspects to the test applied by Neuberger J. The first is as set out in the passage from Thomas on Powers on which he relies (paragraph 8.03) that where there is an exercise of a power which is excessive, the question arises as to whether it is good in part, or not an execution of the power at all and whether the bad part of the execution can be conceptually separated from the good in order to sever. That is the test which Lightman J applied in Betafence and Arnold J in IMG.
The second question which Neuberger J was considering, was the requirement that trustees take into account in exercising their powers relevant considerations and disregard irrelevant considerations. At the time he decided Bestrustees that was of course regarded as the rationale of the so-called rule in Hastings-Bass rendering the exercise by trustees of their powers void if they had failed to undertake that exercise. Trustees who are exercising powers in ignorance of their true scope are not taking into account a highly relevant consideration. If, however, they would have exercised the power in any event (albeit with the excessive part of the exercise ineffective) then the rule in Hastings-Bass would not apply.
The law has of course moved on since Bestrustees as a result of the decision of the Supreme Court in Pitt v Holt. Mr. Hilliard suggested in his written submissions post hearing that Mr. Spink was arguing that Bestrustees had been overruled by Pitt v Holt. I did not understand Mr. Spink’s submissions to go that far and his written submissions made it clear they did not. However, he argued that the second limb of the test had to be reviewed in light of the change in the law and the other cases such as Betafence.
It is clear since the decision in Pitt v Holt that the failure by trustees to take into account a relevant consideration will not render a decision void. However, it may amount to a breach of fiduciary duty on the part of the donee of the power which renders the exercise of the power voidable at the instance of the beneficiaries. Lord Walker expressly did not decide the question of whether the Court would only intervene if it was satisfied that the trustees would not have exercised their discretion as they did had they taken relevant considerations into account or not taken irrelevant considerations into account but he said in relation to Buckley LJ’s statement of principle in Hastings-Bass :-
“Buckley LJ’s statement of principle in the Hastings-Bass case …cannot be regarded as clear and definitive guidance, since Buckley LJ was considering a different matter-the validity of a severed part of a disposition, the other part of which was void for perpetuity.” [Para 91]
Therefore, where the Court is considering whether the invalid part of the excessive exercise of a power can be severed from the good, or (to use the language of cases such as Betafence and IBM) the exercise of the power takes place subject to a limitation to keep it within the scope of the power, this factor does have to be taken into account. As the authors of Lewin on Trusts 19th edition say at paragraph 29-241:-
“Where there is an excessive execution, it is plain that such part of the exercise as is not warranted by the terms of the power or infringes some rule of law cannot stand. The principal question which then arises is whether the whole exercise is vitiated or whether it is possible to sever the invalid part from the remainder of the exercise and so allow the latter to take effect. That question will ordinarily arise in connection with dispositive powers. Severance is possible if, as a conceptual matter, it is possible to distinguish the boundary between the valid and the invalid; but in the case of a fiduciary power it is then material to enquire also whether the trustees would not have exercised the power at all, or would have exercised it differently, if they had been properly instructed as to the limits on the power, for otherwise, though the exercise will not be void, the so-called principle in Re Hastings-Bass may make it liable to challenge.”
Bestrustees is referred to in a footnote to the above passage. There is a similar view expressed in Thomas on Powers at para 8-04. When looked at in this way, it seems to me that this was the approach taken by the Court of Appeal in IBM. The Court first considered whether it was possible to import a limitation into the power which had been introduced by amendment into the scheme in order to save the valid parts and then, asked itself the question whether Holdings, if it knew that the exercise of the new power could not break the final salary link, would have gone ahead in any event and exercised the power. It concluded that Holdings would have done so on the facts of that case. I do not accept Mr. Spink’s argument that this part of Sir Timothy Lloyd’s judgment was obiter. It seems to me that he was dealing with an issue, which, if not dealt with, would have left the exercise of the power open to attack. I therefore consider that it is a requirement to show that the trustees would have exercised the power notwithstanding the limitations on the scope of their power. It may be that in Betafance and IMG there was no argument but that the power would have been exercised notwithstanding the implied limitation.
The first question, therefore, I have to decide is whether the exercise of the power of amendment introducing rule 62(a) is valid in part. As set out above, the way it is suggested that it can be saved is by the implication of a limitation which means that the Participating Companies can only serve notice that they intend to stop contributing in respect of all or some of their members if it can be shown from any cause they have found it inexpedient or impracticable to participate in the Plan.
As Mr. Hilliard points out this is a very different case from others where a limitation has been implied in order to save the exercise of a power in the pension’s context. He pointed out that cases such as Bestrustees, Betafence, IMG and IBM all dealt with limitations preserving the benefits of members of the scheme. This would be quite different, in that the limitation would be as to the process the trustees have to go through in order to terminate future accrual of benefits for some or all of its members.
However, it seems to me that this is not a good reason to reject the implication of a limitation into the rule 62(a) power requiring the Principal Company to establish that it was impracticable or inexpedient to continue participation in the Plan, in the sense of remaining liable for all contributions in respect of all members. The reason that the exercise of the power of amendment in this case was in breach of the fetter was that the Principal Company could cease to participate in the Plan without having any reason to do so under the new rule 62(a). That was what was prejudicial to the rights of the members. The thrust of the decided cases is that if a limitation can be implied with prevents the members being prejudiced, then the Court should not be slow to make that implication.
The next question is whether the Parties would have exercised the power to amend the rules in 2001 to introduce rule 62 had they been advised that they could only do so with a limitation on the Participating Companies’ power to serve notice under rule 62(a) so that it was limited to situations where they found it impracticable or inexpedient to continue participation in the Plan. The question of what the relevant parties would have done in Bestrustees and IBM was rather easier to answer in that it could be easily inferred that they would have wished to go as far as they could in exercising the power in question in those cases.
In this case the answer to that question is not so easy, not least because the evidence, such as it is, does not focus on that question. Mr. Hilliard points to several factors which he says militate against the Principal Company wishing to include such a limited power:-
(a) In 2001 the Plan was in surplus and nobody’s mind would have turned to the possibility of financial difficulties which the Plan might face in the future; by 2004 the Plan was in deficit.
(b) The amendment exercise in 2001 was regarded as a tidying up exercise;
(c) Nobody was that concerned about the termination provisions or turned their mind to them;
It is clear that the terms of the proposed rule 62 were brought to the attention of the Principal Company but there is little, if any, contemporaneous evidence that anyone gave any real consideration to the matter. Mr. Spink submits that even subject to the implied limitation the new clause 62(a) imported flexibility into the rules and enabled the Participating Companies to make a more nuanced decision should there be financial difficulties so that it would not be “all or nothing”. There was a clear advantage to their being able to decide to stop contributions for some or all of their members without leaving the Plan altogether. Mr. Spink relied on the fact that deficit repair contributions could continue to be paid if a notice were served under rule 62(a) whereas the Participating Companies would simply leave the Plan if rule 45 were invoked.
On balance, I consider that the Principal Company would have included the rule 62(a) power if told of the necessary limitation because of the flexibility it would have afforded them compared to the rule 45 power. While the Plan was in surplus in 2001, the amended rules were designed to govern the Plan on a long term basis when matters might well change as indeed they did within a very short time frame.
The next question is therefore whether in exercising their powers in 2006 by serving the Employers’ Termination Notice the Participating Companies can establish that they found it impracticable or inexpedient to participate in the Plan.
There is no doubt that nobody turned their minds to this specific question in 2006. Originally the Trustee had included in its submissions, an argument that if the rule 62 power had not been validly introduced, then the service of the Employers’ Termination Notice was an exercise of the rule 45 power. That argument was sensibly not pursued but it was argued that rule 62(a) with its implied limitation had been complied with when the Employers’ Termination Notice was served.
Mr. Spink argues that there is evidence before the Court from which it can be concluded that the Participating Companies in 2006 found that it was financially inexpedient for the Plan to remain open for future accrual. It is very clear that the Waterford Wedgwood Group was experiencing financial difficulties in 2006. There was a substantial refinancing exercise and a restructuring which led to job losses. Closure of the Plan to future accrual was part of the plan to turn the fortunes of the companies round. The Trustees considered at the time that it was in the interests of the Plan to close it to future accrual in light of the financial position of the Group. The actuarial report prepared shortly before the service of the Employers’ Termination Notice in 2006 showed contributions by the Participating Companies at 16% of Plan salaries.
It seems to me that these factors were sufficient for the Participating Companies to conclude legitimately in 2006 that it was impracticable and inexpedient for them to continue to participate in the Plan because of their difficult financial position. Continued participation in the Plan would have jeopardised the possibility of turning round the financial position of the Participating Companies. Under rule 45 of course they would have had no choice but to leave the Plan altogether. In 2006, they had the option of ceasing contributions in respect of active members while continuing to meet their deficit repair obligations, but it still seems to me that the financial position was such that they could equally have reached the conclusion that the financial position of the Participating Companies dictated that it was inexpedient to participate in the Plan at all.
Mr. Hilliard (who had not had a great deal of opportunity to explore these matters because they arose at a late stage) sensibly did not seek to say any of this was factually incorrect but argued that nobody had directed their minds to the question of whether it was inexpedient. That of course is right, but the exercise is being looked at in light of the scope of the power subject to the limitation which protects the rights of the members. There seems little doubt to me that the Participating Companies could have relied on their rule 45 power on these facts. Therefore it seems illogical that the exercise of the rule 62(a) power by the service of the Employers’ Termination Notice in 2006 in circumstances which fell within the limitation ought not to be valid.
Therefore in respect of issue 2(a) I consider that the introduction and exercise of rule 62 is valid but subject to a limitation that notice cannot validly be served by the Participating Companies under rule 62(a) unless it has first from any cause been found by the Participating Company to be impracticable or inexpedient to continue to participate in the Plan. I further hold that the Principal Company would have exercised the rule 48 power to amend to the rule 62 power if it had realised the need to comply with the fetter. I also consider that there is evidence to the effect that the Participating Companies in 2006 would have found it inexpedient to continue to participate in the Plan.
Summary
On that basis, I hold that the Employers’ Termination Notice in 2006 was effective both to stop future accrual and to break the final salary link. That being the case, the remaining issues 3 (which was in any event agreed) and 4 and 5, do not arise. As all those issues involve questions of law and therefore I do not see any merit in expressing any views on them.
The Trustee and the Representative Beneficiary are invited to submit a form of order to reflect this judgment.
Barnardo’s & Ors v Buckinghamshire & Ors
[2016] EWCA Civ 1064 (02 November 2016)
Lord Justice Lewison:
Under the 1988 rules of the Barnardo’s pension scheme pensioners are entitled to annual increases in their pensions. The annual increase is the lower of 5 per cent and increases in prices. Increases in prices have hitherto been measured by reference to the Retail Prices Index (“the RPI”). The main issue on this appeal is whether the trustees of the scheme have the power under the 1988 rules to substitute the Consumer Prices Index (“the CPI”) or some other index for the RPI. Warren J held that in current circumstances they had no such power. With his permission Barnardo’s, as sponsoring employer, appeals. The judge’s very full judgment explains the factual background in detail. It is available at [2015] EWHC 2200 (Ch), [2015] Pens LR 501.
The answer that we give to the main issue will affect other versions of the rules applicable to the scheme, and also the method by which pensions not yet in payment are revalued. The question is an important one because if the trustees have that power and choose to exercise it the substitution of the CPI or some other index for the RPI will on the one hand significantly reduce the deficit in the pension fund; but, on the other hand, is likely significantly to reduce future increases in pensions payable to pensioners.
The answer to the question posed by the appeal depends on the interpretation of the rules. The two most immediately relevant rules are the definition of “the prescribed rate” in rule 30.1.3 and the definition of “Retail Prices Index” in rule 53. The first of these provides:
“… an increase at the rate of the lesser of:-
(a) 5%, and
the percentage rise in the Retail Prices Index (if any) over the year ending on the previous 31 December”.
The second provides:
“Retail Prices Index means the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval. Where an amount is to be increased “in line with the Retail Prices Index” over a period, the increase as a percentage of the original amount will be equal to the percentage increase between the figures in the Retail Prices Index published immediately prior to dates when the period began and ended, with an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period.”
“Approval” standing alone is not defined in the rules, although it is defined in the Appendix to the rules. The rules define “Tax Approval”. Tax Approval is defined to mean approval as an exempt approved scheme under Chapter I of Part XIV of the Income and Corporation Taxes Act 1988. “Approval”, standing alone, is similarly defined in the Appendix.
The critical words in the definition of the RPI are “or any replacement adopted by the Trustees without prejudicing Approval.” Does the definition mean:
i) The RPI or any index that replaces the RPI and is adopted by the trustees; or
ii) The RPI or any index that is adopted by the trustees as a replacement for the RPI?
The first of these is a two stage process in which first, the RPI is replaced by something else which the trustees then adopt. The second is a single step by which the trustees simply choose another index, whether or not the RPI itself has been replaced. I should also record that it is no part of Barnardo’s case, presented by Mr Rowley QC, that the RPI has in fact already been replaced independently of any exercise of discretion by the trustees. Any replacement will come about if and when the trustees exercise the discretion which he says they have to choose a replacement index.
There is no significant dispute about the applicable principles of interpretation. The rules of a pension scheme are, in principle, to be interpreted in the same way as any other written instrument. As the Supreme Court said in Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [15] the court must focus on the meaning of the relevant words in their documentary, factual and commercial context.
“That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [instrument], (iii) the overall purpose of the clause and the [instrument], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.”
Reliance on background and commercial common sense must not be allowed to undervalue the importance of the words of the instrument. In addition commercial common sense cannot be invoked retrospectively.
There are, however, at least three points of special relevance to the interpretation of pension schemes. First, all or almost all pension schemes are intended to be tax efficient and to comply with Inland Revenue requirements. So Inland Revenue requirements are relevant to their interpretation. Second, pension schemes should be interpreted to have reasonable and practical effect. Third, since the rules of a pension scheme affect all those who join it (in some cases many years after its inception) other background facts have a very limited role to play.
One further point of general application is that in principle one would expect words and phrases to be used consistently in a carefully drafted instrument. Judicial statements to this effect are legion, but I take as representative the observations of Tomlinson LJ in Interactive Investor Trading Ltd v City Index Ltd [2011] EWCA Civ 837 at [29] that “it should ordinarily be presumed that language is used consistently within the four corners of an agreement.”
The importance of Inland Revenue requirements is reflected in the drafting of the pension scheme itself. First, the rules contain many prohibitions on things that would prejudice Tax Approval: for example limits on additional contributions under rule 6.2; dates when pension may become payable under rule 12.2; limitation of benefits under rule 32, and winding up under rule 48, all in addition to the uprating of pensions under rule 30. Second, the rules contain an Appendix which sets out the Inland Revenue limits which were understood to apply at the date when the rules came into force. Those limits include, at paragraph 6 of the Appendix:
“The maximum pension … may be increased whilst in payment at 3% p.a. compound or (if greater) in line with RPI.”
Although the rules themselves contain a definition of “in line with the Retail Prices Index” the Appendix contains its own definition in very similar terms:
“‘in line with RPI’ over a period means in proportion to increases between figures in the General Index of Retail Prices published by the Department of Employment (or a replacement of that Index not prejudicing Approval), immediately prior to the dates when the period began and ended with appropriate restatement of the later figure if the Index has been replaced or re-based during the period.”
At the time when the rules came into force Inland Revenue requirements were contained in a statement of practice known as IR12. The particular point to emerge from IR12 was that it permitted pensions in payment to be increased and deferred pensions to be revalued in certain specified ways, including by reference to “increases in the cost of living”. A footnote to that statement said:
“Increases in the cost of living may be measured by the index of retail prices published by the Department of Employment or by any other suitable index agreed for the particular scheme by the Superannuation Funds Office.”
It is now necessary to say something about the indices that were in existence at the time when the 1988 rules came into force. The history of measuring changes in prices is contained in a report by Mr Paul Johnson, the Director of the Institute for Fiscal Studies, addressed to the UK Statistics Authority. Although the report itself long post-dates the rules, its historical parts are uncontroversial. The UK Government had been collecting data on prices since 1914. At that time the index was intended to measure the costs faced by working class households and was called the Cost of Living Index. A committee convened after the end of the Second World War was asked to consider the future of the Cost of Living Index. It recommended stopping the index in 1947, and replacing it with the Interim Index of Retail Prices. The recommendation was accepted and the Interim Index of Retail Prices replaced the Cost of Living Index. In 1956 the Interim Index was itself stopped and replaced by the Index of Retail Prices. It was a comparison of changes in prices for a basket of different goods and services. Mr Johnson comments that:
“This measure was to evolve in time to become the Retail Prices Index (RPI).”
It is not entirely clear when the Index of Retail Prices became the Retail Prices Index, but it does appear that it did so by a process of evolution rather than substitution, in contrast to the way in which the Interim Index of Retail Prices had replaced the Cost of Living Index, and the Index of Retail Prices had replaced the Interim Index of Retail Prices. As the RPI developed certain categories of the population were excluded (e.g. pensioners dependent on state benefits), and the composition of the basket and the relative weightings given to the different goods and services was changed from time to time. During the 1960s variants of RPI were produced to meet specific user needs. Thus state pensioner indices were introduced in 1969. Later, in 1979, a Tax and Prices Index was introduced. Rather than measuring the change in a representative basket of goods and services as the RPI did, the TPI measured the change in the average person’s gross income (after income tax and national insurance) needed to buy the basket. In 1981 the Government began to issue index-linked gilts, for the purpose of which increases in prices were measured by reference to the RPI. From 1992 the Government set its inflation target by reference to RPIX (which was a variant of the RPI excluding mortgage interest payments). In the 1980s the Rossi index was introduced, which excluded most housing costs. It was used to uprate state benefits.
From time to time the RPI has been rebased; that is to say that the starting point for measuring changes in prices is reset to 100. The process of rebasing was carried out by the authority responsible for publication of the RPI.
The origins of the CPI lie in Europe. The Maastricht Treaty of 1992 required EU member states to develop a harmonised measure of consumer price inflation principally for the purpose of assessing whether member states met the criteria for joining the European Monetary Union. This resulted in the Harmonised Index of Consumer Prices (HICP), which the UK first published in 1997. By degrees the HICP has evolved into the CPI. The publisher of the RPI has also changed. In the 1950s responsibility for the index was that of the Ministry of Labour; in the 1960s the Department of Employment and Productivity and latterly the Department of Employment. In the early 1990s responsibility for RPI passed to the Central Statistical Office which became part of the Office for National Statistics in 1996.
In recent years statisticians have come to accept that there are flaws in the RPI which no longer meets international standards. HM Government has since 2010 used the CPI rather than the RPI for the uprating of pensions and other benefits. It sets its macro-economic inflation target by reference to the CPI rather than the RPI. In 2013 the UK Statistics Authority stripped the RPI of its status as a National Statistic. However despite its shortcomings the National Statistician recommended its retention; and it has been retained to this day. As Mr Johnson explains in his report:
“The RPI … still attracts widespread attention despite it no longer being accredited as a National Statistic. In part, this reflects the wide range of uses still made of the RPI. A significant proportion of UK government debt is linked to the RPI, and it is used for uprating rail fares, utilities and other contracts, as well as many index-linked private sector pension schemes. It does not, however, meet international standards.”
The current position, at least at the date of Mr Johnson’s report, is that the Office of National Statistics publishes four principal measures of inflation: the CPI, CPIH (which includes owner occupiers’ housing costs), RPIJ (in which the “J” signifies use of a Jevons formula that uses a geometric rather than an arithmetic mean) and the RPI. Mr Johnson also tabulates a number of variants on these indices. Three of them are variants of the CPI, and two are variants of the RPI. In addition there is the TPI, the Pensioner Price Indices and the Rossi Index. The CPI is now the headline measure of inflation largely because of EU rules, although Mr Johnson recommended moving towards making CPIH the main measure.
Against that background I can now turn to the interpretation of the definition of the RPI in rule 53.
Mr Rowley pointed to the difference in language between the 1988 rules and their predecessor 1978 rules. The 1978 rules contained a definition in the following terms:
“INDEX shall mean the Government’s Index of Retail Prices or any other official cost of living index published by authority in place of or in substitution for that Index.”
Although in cases about the interpretation of commercial contracts judges have held that an earlier agreement between the same parties is admissible for the purpose of interpreting a later one, they have rarely found that to be of much help. The 1988 rules are not an amendment of the 1978 rules: they are a completely new set of rules. As the judge said at [30] the structure and wording of the two sets of rules is very different, and to fasten on one particular difference between the old rules and the new is likely to be misleading. Moreover, in a case like this, where the 1988 rules would apply to subsequent joiners who would have had no knowledge of what a previous version of the rules might have said, I do not think that this exercise in forensic archaeology is profitable. As Robert Walker J said in National Grid Company plc v Mayes [1997] Pens LR 157 at [70]:
“… it is often hard enough for trustees and their advisers (and even harder for members or pensioners who may not have easy access to advice) to interpret a pension scheme as it stands, without also having to delve into the archaeology of the scheme.”
I will, however, deal with the point that Mr Rowley made about the 1978 rules. It was common ground that under this definition any replacement of the RPI would be an index published by authority; and that if there were only one replacement index it would be substituted automatically for the RPI. From this Mr Rowley argued that the definition of “Retail Prices Index” in the 1988 rules departed from this in two significant respects. First, it gave the trustees a discretionary role which was absent in the 1978 rules. Second, it referred to “Approval” which the 1978 rules had not. There is in fact a third difference, which was not touched on during argument. Whereas the 1978 rules referred to “the Government’s Index of Retail Prices”, the 1988 rules referred to “the General Index of Retail Prices published by the Department of Employment”. In addition the definition in the 1978 rules did not cater for the possibility that there might be more than one replacement index. Mr Rowley said that under those rules if there were more than one replacement index there would have to be an amendment to the rules under the power of amendment contained in them. As we know from Mr Johnson’s report even in the 1960s there were variants of the RPI, and I do not consider that it is at all fanciful to suppose that the draftsman of the 1988 rules wished to cater for the possibility that any new index would also have variants. The possibility of more than one replacement index is, to my mind, at least a possible explanation for the change from the 1978 definition to the 1988 definition, because in such an event (a) the trustees would have the power of selection but (b) that power could not be exercised so as to prejudice Approval. That there might be more than one index acceptable to HMRC was treated as a possibility by Newey J in Arcadia Group Ltd v Arcadia Group Pension Trust Ltd [2014] EWHC 2683 (Ch), [2014] 067 PBLR (018) at 31 (iii); and that there might be one index that was acceptable to HMRC and another that was not was canvassed by the judge at [55]. I might also add that even where there has been a change in language between one version of a scheme and a later version, the new language may still mean the same as the old, as indeed turned out to be the case in National Grid Company plc v Mayes [2001] UKHL 20, [2001] 1 WLR 864 at [24]. I do not, therefore, consider that this point advances the case either way.
Mr Rowley argues that the second sentence of the definition in the 1988 rules plays no active part in the rules (as opposed to the Appendix) because nothing in the rules themselves requires any payment to be adjusted “in line with [RPI]”. From this he argues that the second sentence of the definition should simply be ignored. The judge rejected this argument at [32] and [64] and so would I. First, it is trite law that any instrument must be construed as a whole. Where the court is confronted with a difficult question of interpretation it is surely entitled (if not bound) to look for such linguistic clues as there are. The second sentence of the definition is part of the “documentary context” of the first sentence. Second, the first sentence of the definition uses the word “Approval” which is not defined in the rules, but which is defined in the Appendix. Third, clause 3 of the deed governing the scheme provides that:
“… as from 1 April 1988 the Scheme will be governed by the Rules (including the Appendix) contained in this deed…”
So the scheme includes both the rules and the Appendix. The Appendix is referred to again in rule 32 which says that the Revenue limits “are summarised in the Appendix to this Deed.” So there is further clear linkage between the rules and the Appendix. As Mr Rowley acknowledges the Appendix is replete with references to payments being adjusted “in line with RPI”. Fourth, it is now established that in interpreting a written instrument the court may look at words which the parties have deleted: see Narandas-Girdhar v Bradstock [2016] EWCA Civ 88 [2016] 1 WLR 2366 at [20]. Ex hypothesi deleted words have no operative force in the contract as made, but nevertheless they may be used as an aid to interpretation. Where parties have not deleted the words in question, that seems to me to be a stronger case. Fifth, as Mr Simmonds QC submitted on behalf of the members, if the inverted commas round “in line with the Retail Prices Index” are ignored (rather than the whole of the sentence) the second sentence of the definition can be read as a gloss on rule 30.1.3. (b) so that it does have at least some function within the rules.
Starting with the first sentence in the definition, both the word order and the grammatical construction of the sentence lead me to conclude that the natural meaning of the phrase in issue is that replacement precedes adoption by the trustees. It is, to my mind, an unnatural reading to attribute to the phrase the meaning “any other index adopted by the trustees as a replacement” which is the meaning that Mr Rowley urges. This is, perhaps, an intuitive reaction to the use of language, so it is necessary to consider the context in which the disputed phrase is used.
What light does the second sentence of the definition in the rules shed on the first sentence? In my judgment quite a lot. That sentence refers to “an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period”. First, it is plain that the RPI can only be re-based by the authority responsible for publishing it. The natural meaning of the phrase “replaced or re-based” is that the same person is doing the re-basing or replacing. This appeared to be common ground at the start of the appeal although Mr Rowley modified his position during the course of argument. But in my judgment it is an unnatural use of language to specifically contemplate different actors in the same composite phrase. Mr Rowley submits, in the alternative, that the reference to “replacement” in the first sentence of the definition refers to a decision taken by the trustees rather than a decision taken by the authority responsible for publication of the RPI. At [32] the judge said:
“It might be thought that the concepts of ‘replacement’ and ‘replace’ were intended to be the same in each sentence.”
I agree. Not only “might” it be thought, that is the obvious meaning to give to the recurrence of a cognate expression in the same definition. This conclusion also chimes with the definition of “in line with RPI” in the Appendix to the rules which also refers to an “appropriate restatement of the later figure if the Index has been replaced or re-based during the period”. As Mr Simmonds points out there is no redundant second sentence in the latter definition, and it would be extraordinary if replacing and re-basing allowed the two activities to be carried out by different persons when each is spoken in the same breath. The way in which the definition in the Appendix is drafted makes it clear that “the replacement of that Index” is replacement by the authority responsible for publishing it and not by the trustees. Again, one would expect the concept to be consistent throughout the document. Since there is clear linkage between the rules and the Appendix, this interpretation makes far better linguistic sense in the documentary context than that for which Mr Rowley contends.
In my judgment this also accords with the factual background at the time the rules came into effect. As the history shows official government indices had been replaced from time to time, in each case by the government. Thus the Cost of Living Index was discontinued and replaced by the Interim Index of Retail Prices, and the Interim Index of Retail Prices was discontinued and replaced by the Index of Retail Prices (later the RPI). It is not at all surprising that the draftsman made provision for that eventuality. In addition the definition in the rules refers to the RPI published by the “Department of Employment.” The index as thus defined is no longer published. It is now published by the Office for National Statistics. That change of publisher fits comfortably within the definition. We also know from Mr Johnson’s report that (contrary to what the judge thought) there was more than one measure of changes in prices published by the government (and there still are). But I do not consider that the judge’s error in this respect undermines his conclusion. Rather, it reinforces the possibility that the draftsman foresaw that if the RPI were discontinued there might be several other indices from which to choose.
Mr Rowley argued that the requirement in the definition that adoption of an alternative index should not prejudice “Approval” was a strong pointer in favour of his interpretation. If the RPI were to be replaced by another official measure of inflation, it is inconceivable that Approval would be jeopardised. There is some force in that point if the RPI were to be replaced by a single official measure of inflation. But equally it might be replaced by a number of different measures, such as the variety of different measures that now exist and which are used for different purposes. It is by no means certain (and the draftsman of the rules could not have been certain in 1988) that in that event the Inland Revenue would approve all potential measures of inflation. But in any event the draftsman has been at pains throughout the rules and the Appendix to stress the importance of Inland Revenue approval. Necessarily, in the case of this part of the definition he was dealing with a future unknown and unknowable event, and a cautionary approach to drafting is readily understandable.
Mr Rowley also placed considerable reliance on IR12 and the possibility that it envisaged of agreeing an index other than the RPI with the Superannuation Funds Office. The first point to make is that although Inland Revenue practice is relevant background to the interpretation of the rules, it is no more than that: background. If the draftsman had wanted to stick to IR12 he would surely have tracked its language (as has happened in other cases). With the precedent of IR12 before him he chose different language. Second, although the requirements of IR12 needed to be satisfied before the scheme could secure approval from the Revenue, there was no mandatory requirement to include provision for a change in the index within the rules, and it is plain from IR12 that a scheme whose rules specified the RPI alone as the chosen index for increases in payment would have achieved approval at least in that respect. There is no reason to suppose that the draftsman intended more than the obtaining of approval under IR12 particularly since other parts of IR12 contained a list of alternatives which are not reflected in the drafting of the rules. Third, Inland Revenue approval to a different index could (and I suspect normally would) be obtained before a particular pension scheme was set up. In other words the agreement of the Inland Revenue to a different index under IR12 could relate to the initial choice of an index rather than to a change from one index to another in an existing pension scheme. Whether such a change would be lawful would depend primarily on the rules of the scheme and not on Inland Revenue practice. But that is the very question we have to decide; and the wording of the rule in this case differs significantly from the wording in IR12 which does not refer to replacement. So reliance on Inland Revenue practice, in my judgment, begs the question. IR12 says nothing in terms about a change from one index to another in an existing pension scheme. Fourth, the Appendix (rather than the rules) contains the draftsman’s understanding of Inland Revenue practice. So one would expect IR12 to tie in with the definition of “in line with RPI” in the Appendix. But that definition militates more strongly against Mr Rowley’s interpretation than the definition in the rules themselves. The definition in the Appendix does not, in my judgment, contemplate a choice between indices unless and until the RPI is replaced. It may be that the draftsman understood IR12 to be dealing only with the initial choice of index which would explain why the definition in the Appendix is drafted as it is. I do not consider that IR12 militates against the interpretation of the definition that I favour.
For much the same reasons I do not consider that an examination of the wording of different pension schemes (or the single published precedent that we were shown) casts any light on the meaning of the definition in this pension scheme. Every instrument must be interpreted in accordance with its own terms. Other decided cases are only of help if they lay down some principle of interpretation.
Finally, Mr Rowley argued that the interpretation propounded by the members and adopted by the judge was uncommercial. This seems to me to be a classic case of the invocation of commercial common sense with 20:20 hindsight. There is nothing inherently uncommercial in the specification, in 1988, of a measure of inflation that was the primary measure specified by the Inland Revenue and the principal measure used by HM Government, with a provision that applied in the event that the Government replaced that index as it had done at least twice before. This, to my mind, is the key flaw in Mr Rowley’s case. He starts from the end result for which he argues and then seeks to bend the natural meaning of the words to fit that result. From the perspective of the employer (whose interests Mr Rowley advanced so persuasively) that end result is plainly preferable. But as Lord Neuberger emphasised in Arnold v Britton the starting point is the language of the instrument itself and, in particular, its ordinary and natural meaning. It is not legitimate to search for drafting infelicities in order to facilitate a departure from the natural meaning of the words: Arnold v Britton at [18].
Mr Rowley also said that adherence to RPI has, as things turned out, been to the members’ benefit, but things could have turned out differently with the result that pensions no longer kept pace with inflation. The implications of that submission, if correct, would be that the trustees had power to impose greater financial obligations on the sponsoring employer without obtaining the employer’s consent. That is, in my judgment, an unlikely conclusion.
For these reasons, which are essentially those of the judge, I would dismiss the appeal. The members raised a point on section 67 of the Pensions Act 1995 by way of cross-appeal. Since we heard full argument on that cross-appeal; and I have reached a clear view, it is right to deal with it, even on an obiter basis, particularly since we do not all agree on the outcome of the appeal itself.
The cross-appeal proceeds on the basis that Mr Rowley’s interpretation of the definition of the RPI is correct. Thus it is to be interpreted as meaning “the RPI or another index adopted by the trustees as a replacement.” I add that the question of “Approval” as defined has fallen away as a result of changes in pensions legislation.
Section 67 provides that the exercise of a power to make a regulated modification to an occupational pension scheme is voidable unless certain conditions are satisfied. We are not concerned with the conditions. The point at issue is whether the selection of the CPI or some other index in place of the RPI is a regulated modification. There are two kinds of regulated modification: a protected modification and a detrimental modification. We are concerned with the latter.
Section 67A (4) provides:
“”Detrimental modification” means a modification of an occupational pension scheme which on taking effect would or might adversely affect any subsisting right of–
(a) any member of the scheme, or
(b) any survivor of a member of the scheme.”
The key provision is the definition of “any subsisting right” which is contained in section 67A (6). That provides, so far as material:
“Subsisting right” means–
(a) in relation to a member of an occupational pension scheme, at any time–
(i) any right which at that time has accrued to or in respect of him to future benefits under the scheme rules, or
(ii) any entitlement to the present payment of a pension or other benefit which he has at that time, under the scheme rules…”
Section 67A (10) (b) provides:
“… a modification would or might adversely affect a person’s subsisting right if it would alter the nature or extent of the entitlement or right so that the benefits, or future benefits, to which the entitlement or right relates would or might be less generous.”
Both Mr Simmonds and Mr Rowley said that the right to an increase in a pension in payment fell within section 67A (6) (ii). I am bound to say that to the uninitiated the right to a future increase falls more naturally within sub-paragraph (i) as being an accrued right to a future benefit rather than an entitlement to “present payment” of a pension. However, I do not think that at least in this case anything turns on that. The real question is what accrued rights or current entitlement the members have.
Mr Simmonds submitted, and I agree, that the policy underlying section 67 is that a pension is treated as deferred pay earned by service, and that the purpose of section 67 is to prevent a person’s deferred pay from being retrospectively reduced. But that does not answer the question: what is that deferred pay? So once again the real question is what accrued rights or current entitlement the members have.
There are three cases that bear on the question. The first is the decision of this court in Aon Trust Corpn v KPMG (a firm) [2005] EWCA Civ 1004, [2006] 1 WLR 97. Rule 7 of the pension scheme under consideration in that case provided for the calculation of a pension by reference to two possible components. The first was the product of contributions made by employer and employee in a relevant year of service. The second was the possible addition of a bonus (under clause 8.4) if the scheme was in actuarial surplus or a reduction in benefits (under clause 8.5) if the scheme was in actuarial deficit. The combination of these two factors dictated the amount of pension which the member would actually receive.
There are two important points to be made about the scheme. First, the question whether a bonus would be added or a deduction made was a matter for the discretion of the trustees, subject, in the case of a bonus, to the employer’s consent. Second, the application of a bonus or reduction could be made at any time before the pension came to be paid, so that in the case of an active or deferred member it could be made long after the period of service which gave rise to the pension.
The argument for the employer was that the power to make adjustments (either by way of bonus or deduction) were “integral to the process of calculating the amount of a member’s pension entitlement”. The application of the formula to the contributions at stage 1 only gave rise to a provisional figure. Since the power to make adjustments was an integral part of the calculation of the member’s pension entitlement the exercise of that power could not be described as the modification of the scheme.
The Court of Appeal rejected this argument. Jonathan Parker LJ (with whom Chadwick and Mummery LJJ agreed) said:
“[163] So I conclude that, on the true construction of clause 8.4 and 8.5, the existence of a surplus or a deficit (as the case may be) does no more than set the scene for the possible exercise of the powers of adjustment of benefits conferred by those clauses. The relevant power may not be exercised at all; or it may be exercised in a way which leaves some part of the surplus or deficit still in existence. There is, therefore, no question of any automatic adjustment of benefits following an actuarial valuation which reveals the existence of a surplus or a deficit; still less of an adjustment which will have the effect of extinguishing the entirety of that surplus or deficit.
[164] There is also the time factor to be considered. Even if the trustee, with the employer’s consent and acting on actuarial advice, decides to exercise the appropriate power of adjustment (according to whether the actuarial valuation has revealed a surplus or a deficit) there will inevitably be an interval of time (which may be substantial) between the date when the surplus or deficit first arose and the date when the power is exercised. Yet during that time rights will inevitably have accrued under the scheme and benefits will inevitably have been paid out, notwithstanding the existence (by definition) of a continuing mismatch between assets and liabilities. Moreover, the effect of any adjustment of benefits (whether upwards or downwards) will usually take effect over time, by gradually eroding the surplus or deficit. Thus even in a situation where the adjustment is designed entirely to extinguish the surplus of deficit, the mismatch between assets and liabilities may continue for a substantial period of time after the adjustment has been made.
[165] In the light of the above analysis, I conclude that [the employer’s] basic submission must be rejected. So far as the clause 8.4 power to increase benefits is concerned, the declaration of a bonus will give the member the right to an increased pension. But it does not follow that the member has no right to a pension under rule 7 until the trustee has considered whether or not to exercise that power (and, it may be, decided not to exercise it, or to exercise it not by declaring a bonus but by reducing contributions). The same consideration applies, in my judgment, to the clause 8.5 power. In my judgment it does not follow from the existence of that power that a member has no right to a pension under rule 7 until the trustee has taken a decision as to whether the power should be exercised, and if so how.
[166] The correct analysis in law, in my judgment, is that on the true construction of the scheme a member has an accrued right to a pension under rule 7 in the (unadjusted) amount calculated by aggregating the total amounts referred to in rule 7.2(1), but subject to any adjustments made under clause 8.4 or clause 8.5. I therefore reject the notion that that calculation produces only a “provisional” sum… In my judgment, to read the scheme in that way is to attempt to force a square peg into a round hole.”
Having decided that as a matter of construction of the scheme a member had a right to a pension by reference to the unadjusted application of the contributions to the formula, it was a relatively simple step to conclude that a downward adjustment was caught by section 67 (in its then form). The mere fact that the adjustment would be made in the exercise of a power contained in the rules of the scheme did not prevent it from being a “modification” for the purposes of the then section 67.
There are two subsequent cases which have considered Aon. The first is Danks v QinetiQ Holdings Ltd [2012] EWHC 570 (Ch), [2012] Pens LR 131, a decision of the Chancellor (when sitting as Vos J); and the second is the decision of Newey J in Arcadia Group Ltd v Arcadia Group Pension Trust Ltd [2014] EWHC 2683 (Ch). Both these decisions held that where an increase in pension was to be calculated by reference to an index whose definition admitted of alternatives, there was no accrued right to payment until the index had been selected. Because there were two first instance decisions directly in point, the arguments on the cross-appeal were not ventilated before the judge, who would in practice have been bound to follow those two decisions.
In Danks v Qinetiq a member was entitled to an increase calculated in accordance with the “Index”. “Index” was a defined term which meant:
“the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees”.
The issue was whether the trustees were entitled to select the CPI in place of the RPI without engaging section 67. That in turn required the judge to decide what their entitlement (or accrued right) was. At [55] Vos J held that the right of a member to an increase in pension was not a right to an increase at any particular rate, but was only a right to an increase “since it is only a right to have an increase each April ‘by an amount equal to the percentage increase in the Index …’, and the Index is defined as being RPI or ‘or any other suitable cost of living index selected by the Trustees’.” He continued:
“Thus, the point is really one of timing. A member with a pension in payment, who has had an increase under Rule 49.1 at RPI on 1 April 2011 (for example) could not have that increase reduced without there being a detrimental modification. But, in advance of the next Rule 49.1 increase date (1 April 2012), the member has no entitlement to an increase at any specific rate, since the Trustees always retain a power to change the Index by which the increases are to be calculated. To repeat the point, the member has only a right to a future increase at RPI ‘or any other suitable cost of living index selected by the Trustees’. The difference in Aon was that the members with pensions in payment were entitled to pensions calculated in accordance with rule 7, and the exercise of the Clause 8(5) reduction would obviously have been a detrimental modification. Here the entitlement is only to a future increase at a rate that the Trustees have power to change.”
Newey J took the same approach in Arcadia in which the “Retail Prices Index” was defined (with immaterial differences in some scheme documents) as:
“the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of HM Revenue and Customs”
Having considered both Aon and Danks v QinetiQ Newey J said at [58]:
“On balance, it seems to me that Vos J’s analysis in Danks v QinetiQ Holdings Ltd must have been correct. Far from being persuaded that that case was wrongly decided, I respectfully agree with the decision. The better view, I think, is that members have a “subsisting right” to increases and revaluation at rates consistent with the definitions of “Retail Prices Index”, but not to increases and revaluation specifically by reference to RPI.”
Both Mr Simmonds and Mr Rowley agreed that the question whether section 67 applies to a change in index must turn on the substance of the right given to members under the rules of the scheme, rather than on the details of drafting. There is a lot to be said for that approach, although drafting may well have a significant role to play, as examples canvassed in the course of argument demonstrated. It is, I think, better to stick with the actual drafting than to attempt to imagine other forms of words.
Mr Simmonds argued that the definition of “Retail Prices Index” in rule 53 was analogous to a power of appointment over trust property. Unless and until the trustees made a positive decision to exercise their discretionary power to select another index, members had the right to an increase in pensions in line with the RPI. The RPI, he argued, was the “default rule” unless and until something happened to change it.
This, too, is at bottom a short point of construction. It seems to me that if a person has a right to “A or B” one cannot say that he has an accrued right to A. He has a right to one or other of them. As Newey J put it a member has the right to an increase consistent with the definition; or as Vos J put it the member has a right to a future increase at RPI or any other suitable cost of living index selected by the Trustees. I agree with both of them. I do not consider that there is a default rule in the way that Mr Simmonds suggested. On the basis of Mr Rowley’s construction of the definition, the trustees have a choice; and until that choice has been exercised, it is not possible to say that the member has a right to an increase measured in any particular way.
I would dismiss the cross-appeal.
Lord Justice McFarlane:
Whilst I am, of course, most grateful to Lord Justice Lewison and to The Chancellor, Sir Geoffrey Vos, whose judgments I have read in draft, for the clarity of reasoning by which they have each reached opposing conclusions upon the construction of the 1988 Rules of the Barnardo’s Pension Scheme, the fact that they have been able to do so goes to demonstrate that there is no clear and unambiguous answer to the issue at the centre of this appeal. It now falls to me to express my own conclusion on that issue and, as I do so, where I am forced to differ with either of My Lords, it is with the greatest respect to their superior experience in matters of this nature.
It is not necessary for me to rehearse the details of the scheme or the various important points in the submissions of each side which have already been described in full. I agree that the two conflicting interpretations can be formulated in the manner suggested by The Chancellor at paragraph 74 (i) and (ii) below.
At the centre of the dispute on construction there is a difference of opinion as to the significance of the ‘second sentence’ in the definition of “Retail Prices Index” and the significance of The Appendix and the definition of “in line with RPI” which appears there. Neither of My Lords take Mr Rowley’s extreme position, which is to hold that these provisions should effectively be ignored. Lewison LJ, in common with Warren J at first instance, holds that the second sentence and the Appendix fall to be construed as part of the scheme. The Chancellor takes a more nuanced position by accepting that the second sentence cannot be ignored, but holding that it may not help a great deal with the construction of the first sentence. With respect to the Appendix, Sir Geoffrey considers that it is relatively clear that any replacement of the “General Index of Retail Prices published by the Department of Employment” would be one published by the Department of Employment and not another different index adopted by the Trustees for the reasons that he gives at paragraph 79. However he goes on to distinguish the identification of the Index in the Appendix from the terms of the Rules of the pension scheme themselves because the Appendix is intended to be no more than a summary of the existing Revenue Limits in place at the time.
Having now considered the competing arguments, with the assistance that each of my lords has provided by the clarity of their judgments, I am persuaded that Lewison LJ’s construction of the key passages is to be preferred for the reasons that he has given. In expressing this conclusion I would wish to highlight the following points which I regard as being of particular weight (I need only refer to these in headline form):
i) The document should be construed as a whole and it is artificial to afford no, or very little weight, to the second (longer) sentence of a two sentence definition that appears in the Rules when interpreting the first sentence;
ii) The pension scheme includes both the Rules and the Appendix. The Appendix refers to adjustments “in line with RPI” which phrase, in turn, falls to be interpreted in line with the definition of that term in the Appendix;
iii) The reference to “a replacement” in the definition of “in line with RPI” must, as The Chancellor explains, be a reference to a replacement published by the Department for Employment, and not another index chosen by the Trustees;
iv) Interpreting the document as a whole, the construction of “replacement” in that context in the Appendix should weigh significantly in the interpretation of “any replacement” in the definition of “Retail Prices Index” in the Rules. This must be particularly so where the phrasing of both definitions is, as Lewison LJ observes, in very similar terms;
v) The natural meaning of the first sentence in the definition is that replacement of the index precedes adoption by the trustees, and not the other way about;
vi) In the second sentence there is some welcome solid ground, which is accepted by all parties and in both of my lords’ judgments, namely that the reference to an index that has been “re-based” in the context of the Retail Prices Index can only be to action by the authority responsible for publishing it;
vii) From that solid ground, I agree entirely with Lewison LJ’s analysis at paragraph 28 to the effect that it would be an unnatural use of language to bisect that short phrase and hive off “replaced” from its neighbour “re-based” so as to contemplate the trustees undertaking replacement, in contrast to the authorities who are responsible for re-basing, where there is no indication at all that the two elements of this composite phrase fall to be understood in such a manner;
viii) I do not agree that it is clear that something has gone wrong with the drafting of the second sentence or that it has no real place in the Rules. Whilst the phrase “in line with RPI” does not appear in the Rules, it does appear in the Appendix. The inclusion of a definition of the phrase within the Rules is not so perverse or out of kilter with the document as a whole as to justify holding that it should be afforded very little weight;
ix) Construing the scheme as a whole, and starting from a position that the two sentences in the definition of “Retail Prices Index” should be read as a whole, I regard the interpretation of “replaced” in the second sentence as being of significance in any understanding of the meaning of “any replacement” in the first sentence. For the reasons given by Lewison LJ at paragraph 29, looking at these key words overall, and taking account of the Appendix as part of the scheme, the interpretation given by the judge makes far better linguistic sense than the alternative argued for by Mr Rowley.
Although it does appear that the judge fell into error in his understanding that at the time when the 1988 Rules were introduced the RPI was the only official index published, the position before this court is clear. There were four additional relevant indices in existence at the time. Any error by the judge has not, therefore, compromised our attempts on appeal to construe this scheme.
Secondly, in terms of any potential error by the judge, whilst it may be unusual for the exercise of interpretation to start with consideration of the Appendix, it is clear that, by the time he had concluded his analysis, the judge had considered all of the relevant provisions before reaching a decision. Again, in this court, the exercise has been undertaken afresh and any apparent error, if error there be, on the part of the judge must be of little relevance.
Finally, although the authority of Arnold v Britton was introduced into the process of submissions by the court rather than counsel, attempts to consider whether one interpretation or the other is, or is not, in accord with commercial common sense do not seem to be of any great assistance given that the exercise has to be looked at in terms of the world as it was in 1988. Mr Rowley’s argument clearly, but wrongly, invited the court to look at the matter from the perspective of 2016. There is, however, no evidence that we have seen that suggests that, if the question of commerciality is considered against the backdrop of 1988, the interpretation argued for the appellants should be preferred.
I therefore conclude, for the reasons that I have summarised and on the basis that I am in full agreement with the analysis contained in the judgment of Lewison LJ, and for that matter the judge, that this appeal should be dismissed. I also agree that the cross-appeal should be dismissed for the reasons given by Lewison LJ.
Sir Geoffrey Vos, Chancellor of the High Court
I shall not repeat the facts and background so clearly explained by Lord Justice Lewison. I shall also use the same defined terms.
It is useful, however, to set out the main clauses contained in the 1988 Rules that are to be construed as follows:-
i) Rule 53 defines “Retail Prices Index” as meaning “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval. Where an amount is to be increased “in line with the Retail Prices Index” over a period, the increase as a percentage of the original amount will be equal to the percentage increase between the figures in the Retail Prices Index published immediately prior to the dates when the period began and ended, with an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period”.
ii) Rule 30 provides for pensions and deferred pensions over the Basic GMP (as defined) to be increased by the “prescribed rate”, which is defined by Rule 30.1.3 as meaning “an increase at the rate of the lesser of:- (a) 5%, and (b) “the percentage rise in the Retail Prices Index (if any) over the year ending on the previous 31 December”.
iii) Rule 32 provides that “Benefits payable under the Scheme must not be of amounts or paid on conditions or in a manner or in circumstances which would exceed Revenue Limits or otherwise endanger Tax Approval. The Revenue Limits are summarised in the Appendix to this Deed. The Trustees must observe the terms of any undertaking they have given to the Board of Inland Revenue. If a combination of payments would prejudice Tax Approval or cause the Trustees to be in breach of such an undertaking, the Trustees will reduce all or any of them in such a manner as they think fit but to the extent only as may be necessary to prevent Tax Approval being prejudiced or a breach of the undertaking”.
iv) The Appendix to the Rules summarises the Revenue Limits. The Appendix uses the term “in line with RPI” on 5 occasions. Paragraph 2(3) limits the increase of deferred pensions between leaving pensionable service and normal retirement date to “5% p.a. or in line with RPI (whichever is greater)”. Paragraph 6 limits increases in pensions in payment to “3% p.a. compound of (if greater) in line with RPI”.
v) The term “in line with RPI” is defined in paragraph 10 of the Appendix to the Rules as follows: “”in line with RPI” over a period means in proportion to increases between figures in the General Index of Retail Prices published by the Department of Employment (or a replacement of that Index not prejudicing Approval), immediately prior to the dates when the period began and ended, with an appropriate restatement of the later figure if the Index has been replaced or re-based during the period”.
I would start by endorsing what Warren J said about the proper approach to the construction of pension scheme documentation in paragraphs 10 and 11 of his judgment. I agree, however that there is also a useful summary of the principles applicable to pension schemes in paragraphs 26-32 of Arden LJ’s judgment British Airways Pension Trustees Ltd & others v. British Airways plc & others [2002] PLR 247. I also agree that the principles of statutory construction most recently summarised by Lord Neuberger in Arnold v. Britton [2015] AC 1619 at paragraphs 15-23 are applicable, although they do not deal specifically either with pension schemes or with a situation where there is obvious ambiguity.
Neither party has contested the judge’s summary of the applicable law. It has, however, been submitted for the employer that the judge failed properly to apply his own summary. What is said, in effect, is that the definition of RPI was ambiguous (i.e. it admitted of two possible constructions) so that the court should have preferred the construction that was consistent with business common sense and rejected the other. For my part, I do not think the judge departed from his summary of the applicable law, since he implicitly recognised that there were two possible constructions, and held that neither had more commercial reality than the other (paragraph 68). He chose the meaning he did on the basis of the language used in the Rules and his view of the context.
I do, however, think that the judge adopted an over-complex approach, and that he fell into error in three important respects. His first error was to say at paragraph 20 that the evidence before him established that “at the time when the 1988 Rules were introduced, RPI was the only official index published” (see also paragraph 41, which is similarly in error). It is and was common ground that that is not the case. The following other “official” indices were published in and after 1988:-
i) A Pensioner Price Index introduced in 1969.
ii) RPIX (RPI excluding mortgage interest payments) introduced in 1975 RPIX was adopted as the UK inflation target between 1992 and 2003, and was therefore the precursor of CPI in one regard at least.
iii) The Tax and Price Index introduced in 1979.
iv) The Rossi Index used at times to uprate income-related state benefits, introduced in 1981.
The judge’s second error in my judgment was in relation to his approach to IR12. At paragraphs 51-55 and 62 he explained why he derived no assistance either from the 1978 Rules or from the propositions (i) that the change in wording was intended to provide the Trustees with a new discretionary power and (ii) that this change was reflective of IR 12. But in my judgment, each of the previous definition of “INDEX” in the 1978 Rules, the new discretionary power accorded to the Trustees by the Rule 53 definition and IR12 were of importance to the construction process. Arden LJ made this clear in British Airways supra when she said at paragraph 30 that the factual situation at the time included the “practice and requirements of the Inland Revenue at the time” (see also National Grid Co plc v. Mayes [2001] 1 WLR 864 where Lord Hoffmann said at paragraphs 18-21 that pension schemes must be construed against their fiscal background).
The judge’s third error was, in my judgment, one of approach in that it seems to me that it is appropriate to start the process of construction of the relevant rules by looking at the Rules themselves rather than the Appendix, which is expressly included only to summarise the applicable Revenue Limits. Moreover, it is noticeable that the Appendix uses the term “RPI” whilst the Rules use the term “Retail Prices Index”. The judge started his approach to construction with the Appendix and worked backwards. That approach was, I think, a mistake.
In construing then the definition of “Retail Prices Index” in Rule 53, one should also recall that, whilst words are normally used in the same sense in the same document, that is not always the case. The context will play an important part (see, for example, Lord Hofmann at paragraph 27 in Oxfordshire County Council v. Oxford City Council [2006] UKHL 25, where he construed the word “locality” used twice in the same sub-section as meaning “a single locality” when first used and “locality or localities” when used for the second time).
Taking the words of the first sentence of Rule 53 first, it seems to me that at least two possible meanings are available. I have interposed words in square brackets to make those meanings more apparent in the following formulations:-
i) the General Index of Retail Prices published by the Department of Employment or any replacement [for that General Index of Retail Prices published by the Department of Employment which is then] adopted by the Trustees without prejudicing Approval.
ii) the General Index of Retail Prices published by the Department of Employment or any replacement [index of prices which is] adopted by the Trustees without prejudicing Approval.
There are other more refined possibilities but these two will do, I think, for the purposes of this discussion.
It is also important to note that, assuming the Retail Prices Index or RPI are the same, the provisions for pension increases as defined in Rule 30 and in paragraph 6 of the Appendix do not appear to be in conflict. If RPI is below 5%, the lower RPI will be the prescribed rate, which will not contravene the limit in paragraph 6 of the Appendix (which is 3% or RPI if greater). If RPI is above 5%, the higher RPI will be the prescribed rate, which will also not contravene the limit in paragraph 6 of the Appendix.
Taking the Rule 53 definition alone, I cannot agree with Mr Keith Rowley QC, leading counsel for the employer, that one should wholly disregard the second sentence. It is true that the second sentence makes a reference to the term “in line with RPI” used in the Appendix, even if the term is “in line with Retail Prices Index” in the second sentence of the Rule 53 definition. But I am not sure that the second sentence helps a great deal with the construction of the first. In the first place, the second sentence is, as Mr Rowley pointed out, strictly redundant since it attempts to define the term “in line with the Retail Prices Index” that is used nowhere else in the document, not even in the Appendix. It is true that it uses the words “with an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period” to qualify the figure which should be taken when comparing Retail Price Indices. But the words “replaced” and “re-based” are not themselves qualified. An index would be “re-based” by the authority publishing it, but an index might in this context be “replaced” either by the trustees or the authority responsible for it. The use of the two alternatives does not obviously imply that they are both to occur as a result of the actions of the same entity.
Mr Andrew Simmonds QC, leading counsel for the members, argued that, because the word “replaced” must mean “replaced by the authority responsible for it” in the second sentence, it must mean the same in the first sentence. I do not agree for the reasons I have already given, and because the second sentence, whilst not being completely disregarded, must be given less weight when something has clearly gone wrong with the drafting. On any analysis, the second sentence has no real place in the Rules and should be, if anywhere, in the Appendix.
In these circumstances, the proper meaning of the first sentence of the Rule 53 definition has, in my judgment to be informed by the factual matrix, proper context and business common sense.
The first thing to consider is, of course, the Appendix itself even if, for the reasons I have given, the use of the terms “RPI” and “replacement” in the Appendix will not be conclusive as to the meaning of the terms “Retail Prices Index” and “replacement” in the main body of the Rules. It is, however, relatively clear in my view that “in line with RPI” in the Appendix is defined in a way that contemplates that any replacement of the “General Index of Retail Prices published by the Department of Employment” would be one published by the Department of Employment and not another different index adopted by the Trustees. That is because of the use of the capital “I” for “Index” and the word “that” in the bracketed words “or a replacement of that Index not prejudicing Approval” (emphasis added), and the use of the capital “I” for “Index” in the words “if the Index has been replaced or re-based during the period” (emphasis added). There is no indication in the definition of “in line with RPI” to suggest that the RPI of which it speaks can be changed by the Trustees. That is, however, hardly surprising since the Appendix is defining the existing Revenue Limits, not seeking to define what pension increases the Rules might provide for. There is no reason in principle (as Mr Simmonds ultimately accepted) why the summary of Revenue Limits in the Appendix should not refer to RPI and any replacement provided for it by the Department of Employment, whilst the Rules refer to Retail Prices Index and any replacement index adopted by the Trustees. If that were the case, it would, of course, cease to be so clear that the pension increases would not breach Revenue Limits. But Rule 32 provides that they must not breach Revenue Limits, so the Trustees would not be able to increase pensions in such a way that they did so.
The first element of factual matrix that I regard as indicative is the fact that the definition of “INDEX” in the 1978 Rules was in a form that made very clear that only the official Retail Prices Index or a substitution for the Retail Prices Index published by the authority responsible for it could be employed. The new definition was not just a matter of drafting style (though that was quite different). The Rule 53 definition introduced two new aspects entirely missing from the 1978 definition. First, it introduced the concept of any replacement being “adopted by the Trustees”, which plainly gave the Trustees some new discretion, and secondly, it provided that whatever was adopted must not prejudice “Approval”. It is true that the term “Approval” is only defined in the Appendix and not in the Rules, but Mr Simmonds fairly accepted that not much could be drawn from that apparent drafting anomaly. It seems to me that it may properly be said that the introduction of these two new aspects of the definition point towards a substantive change having been intended. It would be surprising, but I accept not impossible, for the draftsman to have introduced these elements whilst intending to achieve the same result as was clearly the meaning of the 1978 definition.
The terms of IR12 are also, as I have said, admissible context. The version of IR12 at the relevant time made it clear that pension increases could be made by reference to RPI or “by any other suitable index agreed for the particular scheme by the Superannuation Funds Office”.
Mr Simmonds accepted that there were at the time two forms of Revenue approval. The first was mandatory approval where the terms of the scheme satisfied statutory requirements later reflected in the Income and Corporation Taxes Act 1988 (which Mr Rowley told us few schemes actually achieved). The second form was discretionary approval, which required the draftsman to show that the terms of the scheme satisfied the provisions of IR12. This is reflected in the Foreword to IR12 itself. In these circumstances, it seems to me that there was substance in Mr Rowley’s submission that the draftsman might have been expected to have been trying to satisfy the provisions of IR12. Even though Mr Simmonds was right to say that the provision of IR12 concerning appropriate indices introduced a flexibility that the draftsman had no obligation to adopt, I think the existence of that approach in IR12 points towards the likelihood that a draftsman trying to satisfy the provisions of IR12 would want to reproduce it in the rules he was drafting. This is supported by the fact that it seems likely that a similar kind of definition having the effect contended for by the employer was included in the Encyclopaedia of Forms and Precedents, at least by 1999. We were asked to infer that it was there by 1991, but that has not been confirmed.
The next element of relevant factual matrix is the Pension Schemes Office Manual, which contains guidance prepared for the staff of the Inland Revenue in considering the approval of pension schemes. Although the copy we have been shown was published in December 1995, we were asked to infer that a similar manual would have been available to Inland Revenue staff at the time the Rules were drafted. In relation to the indices to be used to increase pensions, the manual says that “[t]he general principle to be followed is that increases should protect the real value of the pension’s purchasing power”. It explained that the most commonly used index for calculating cost of living increases was RPI, and that if any other index was proposed, the practitioner should be asked why it was considered more appropriate than RPI, and the answer should be referred to the Section Manager for a decision. It was common ground that the purpose of the Rule 53 definition was accurately summarised by the judge in paragraph 78 of his judgment as follows:-
“The Rules provide for increases to pensions in payment and in deferment: the purpose of such a provision is to protect the members to some extent at least from the effects of price inflation. The definition of “Retail Prices Index” is there to provide a measure by which those increases are to be awarded. A power to switch the index, if such a power exists, ought properly to be exercised only to ensure that the index in use best reflects the policy of providing protection from inflation.”
Both sides pointed to the competing consequences produced by the different constructions of the Rule 53 definition. Mr Simmonds said that it was inconsistent and inappropriate to give such a power to the Trustees alone, when all other powers of amendment were vested by Rule 46 in the employer and required the consent of the Trustees. Mr Rowley, on the other hand, pointed to the inconvenient inflexibility of having no power to change the appropriate index absent the abolition or formal replacement of RPI, particularly when Rule 46 could not be used to change to a less generous index even in the absence of section 67 of the Pensions Act 1995, because of the first proviso to that Rule. The employer submitted also that business common sense pointed clearly towards the Trustees having a discretionary power to change the index in case it ceased properly to reflect the level of inflation that the pension increases were intended to protect members of the Scheme against.
Both parties accepted that the construction exercise should be undertaken as at the time that the Rules were agreed, which was actually some time after 1988 in April 1991. It would not be appropriate to consider economic factors that arose only after that time. In particular, I accept Mr Simmonds’ criticisms of the submissions Mr Rowley made about how CPI has become the more appropriate index and it would be uncommercial if the Trustees were unable to change to it. It is quite clear that CPI was not in existence in 1988 or 1991 and that RPI was the main accepted index at these times.
Against this background, it is necessary to apply the principles the judges stated and those helpfully summarised in Arden LJ’s judgment in British Airways supra to determine which of the two possible meanings of the Rule 53 definition is the correct one.
Ultimately, I have taken the clear view that the judge was wrong in the conclusion he reached and that the correct construction of the Rule 53 definition is that Retail Prices Index as used in the Rules means “The General Index of Retail Prices published by the Department of Employment or any replacement [index of prices which is] adopted by the Trustees without prejudicing Approval”. As regards the language of the first sentence of the Rule 53 definition itself, I regard it as equally consistent with either of the two possibilities that I have adumbrated. For the reasons, I have given I do not gain much assistance from either the second sentence or the Appendix, though I accept that they point marginally towards the judge’s construction.
I do, however, find the context that I have already summarised as indicating clearly that the draftsman would have been likely to have wanted to provide a meaningful discretion to the Trustees to choose another index other than RPI. Other such indices were known about and available at the time. IR12 contemplated a choice between RPI and other indices, as did the Pension Schemes Office Manual. Moreover, the introduction of a discretion in the Trustees and of the need for the exercise of that discretion not to prejudice Revenue approval points to an intentional change in the effect of the definition from that contained in the 1978 Rules. On the judge’s construction, there was no substantive change, because the previous Rules would have allowed the index to be changed if RPI were replaced by another index, and that is the only situation in which the judge envisaged that the Trustees could exercise their discretion. It is, I think, far-fetched to think that the drafting changes were made just in case RPI was replaced by more than one index. That was hardly a likely possibility.
It is, in my judgment, far more likely that the draftsman using his own drafting style was seeking to follow the suggestion made in IR12 to the effect that the Trustees might wish to choose a replacement index other than RPI and to submit it for approval to the Pension Schemes Office. I do not think that the fact that this construction would create a potential difference between the possible increases in pensions under the Rules and the Revenue Limits summarised in the Appendix is a good reason why the power to switch to another more appropriate index would not have been included. If there were a problematic conflict, it could always be remedied by the use of the amendment power in Rule 46.
Both sides accept that a resort to business common sense is available on the basis of an accepted ambiguity in the Rule 53 definition (see Lord Clarke’s well-known dictum in Rainy Sky SA v. Kookmin Bank [2011] 1 WLR 2900 at paragraph 21 cited by the judge at paragraph 10). There is obvious value in flexibility for the Scheme if the Trustees could choose a more appropriate index reflecting inflation to protect members’ pensions. As Millett J said in Re Courage Pension Schemes [1987] 1 WLR 495 at page 505G in relation to powers of amendment: “[i]t is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life”. I accept, therefore, that there would have been business common sense, even in 1988, in including a discretionary power in the Trustees (even without an employer’s veto) to change the index in case it ceased properly to reflect the level of inflation. I do not, however, think that the resort to business common sense would by itself be sufficient. Rather I think it is one factor which, when taken alongside the words used and the contextual matters I have mentioned, leads to the clear conclusion that the Rule 53 definition must be taken to have been intended to give the Trustees a discretion to choose another index to replace RPI.
I would therefore hold that the Rule 53 definition should be construed as meaning the “General Index of Retail Prices published by the Department of Employment or any replacement [index of prices which is] adopted by the Trustees without prejudicing Approval”. I have had the opportunity of seeing the judgments of Lewison and McFarlane LJJ in draft, and the appeal on this point will, therefore be dismissed by a majority.
On the section 67 cross-appeal, I am in complete agreement with Lewison LJ. In these circumstances, I would dismiss the members’ cross-appeal.