National Grid Plc v Mayes & Ors [1999] EWCA Civ 761 (10 February 1999)

2. These appeals against the judgments of Mr Justice Robert Walker which were delivered on 10th June and 30th July 1997 raise points of interest and difficulty in relation to the treatment of an actuarial surplus in an occupational pension scheme known as the Electricity Supply Pension Scheme (“the scheme”). In the first group of appeals Mr Inglis-Jones QC and Mr Topham appear for Mr Laws and Mr Mayes, who were the respondents before the judge in appeals brought by the National Grid Company plc and the National Grid Group Trustees against determinations made by the Pensions Ombudsman on 7th February 1997. On the other appeal Mr Steinfeld QC and Mr Stephens appear for Mr Machin, who was the respondent to an Originating Summons issued by National Power plc, to which their group trustees were also respondents, seeking the ruling of the court on similar issues to those which arise in the National Grid litigation. Mr Crampin QC and Mr Furness appear for National Grid and Mr Warren QC and Mr Christopher Nugee QC for National Power. In addition to the two employers, the National Grid Trustees appear by Mr Ham QC and Mr Newman to resist the appeals by Mr Laws and Mr Mayes, although charges of maladministration are no longer being pursued against them. Solicitors for the National Power Group Trustees informed the court that while their clients supported the judgment they did not intend to appear on Mr Machin’s appeal. The Pensions Ombudsman has taken no part in the first group of appeals.

3. The underlying facts are set out in the admirably clear judgment in the court below. All the parties who appeared before us agreed that they were fairly and accurately stated there (although there were incorrect references in paragraphs 45 and 46 to Section 147, not 146, of the Pension Schemes Act 1993, and Mr Warren drew our attention to matters in paragraphs 32 and 33 that he would wish to rephrase). Although it will be necessary to revisit the terms of the scheme in the course of this judgment, it is certainly unnecessary to repeat here all the detailed facts set out in paragraphs 1 - 52 of the judge’s judgment, as they are numbered in the report of the case in [1997] PLR 167. These paragraphs should be treated as incorporated in this judgment and read with it accordingly. On that footing we are able to deal with the matter more briefly than the judge.

5. The judge went on to mention a third issue, relating to the nature of the certification which the actuaries were required to give pursuant to Clause 14(5) of the scheme, on which he expressed some personal views in paragraphs 93-95 of his judgment. These were not supported by counsel appearing for any of the parties, and since none of the parties wished to resurrect this issue on the appeal we need say no more about it. We have set out the terms of Clause 14(5) in paragraph 32 of this judgment, and the terms of Clause 41(2) in paragraph 35, and we need not anticipate them here. At the risk of over-simplification, the central question is whether in the event of an actuarial surplus the employers are empowered to forgive themselves liabilities that have already accrued due from them to the trustees, in the absence of any express power in the scheme, and in the presence of an express prohibition against any amendment of the scheme which might permit them to take out of it any of its monies.

6. The judge observed that the arguments he had heard from six leading counsel, although identifying separate issues for consideration, inevitably spilled into each other. In particular, he said, the more the exercise of the Clause 14(5) power was constrained by unwritten safeguards such as the duty of good faith or the need for general endorsement by the actuary, the readier the court would be to give wide language its natural meaning. He structured the rest of his judgment by starting with two sections in which he considered the judgment of Vinelott J in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1995] 1 All ER 912 and also made some general observations on the principles a court should adopt in construing a pension scheme. He went on to carry out separate analyses of the scope of Clause 14(5) and of the employers’ duty of good faith to employees in the context of pension schemes and included a section in which he expressed his views, quite briefly, on some other submissions which had been put to him, especially by Mr Warren as his fall-back position. He then summarised his conclusion on each part of the case, and made some general observations by way of a postscript to his judgment.

7. In the National Grid case the Ombudsman had held that Clause 14(5) gave rise to an obligation of good faith approaching a fiduciary duty which called for an exercise of discretion by a principal employer in the best interests of the scheme without preferring his other interests. He had also held that the arrangements referred to in that clause must relate to dealings otherwise authorised by powers conferred by the clauses or rules of the scheme, and he could find no power elsewhere in the scheme which permitted the employers to do what they had done. In particular, any unrestricted construction would be quite inconsistent with the express provision in Clause 41(2)(b) which would otherwise be virtually otiose. He therefore made the directions adverse to National Grid which the judge set out in paragraph 48 of his judgment.

8. The judge held that the Ombudsman had misconstrued the terms of the scheme, especially as to the scope of Clause 14(5) and its interrelation with the power of amendment in Clause 41. He had also erred in law either by extending the Imperial Tobacco duty of good faith (for which see Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 583) beyond its proper limit, or by superimposing on it some element of fiduciary duty. He had also been wrong in concluding that the National Grid group trustees had misused surplus at the instance of National Grid. In those circumstances he allowed all four appeals and set aside all the Ombudsman’s directions.

9. The core of the judge’s reasoning is contained in paragraphs 75-84 of his judgment, and we will return to analyse the reasoning which led him to his conclusion when we consider the different parts of the scheme in the course of this judgment. In essence, he considered that the Ombudsman had attached too much weight to Clause 41(2)(b), which was a survival from what was, or was believed to be, a strict Inland Revenue requirement for the purposes of “old code” approval. In the circumstances the judge felt he was entitled to give effect to what he regarded as the natural meaning of what he called the wide language of Clause 14(5), particularly when he bore in mind that the employers’ exercise of the power contained in that clause was constrained by unwritten safeguards such as the implied duty of good faith.

10. In the National Power case, the judge considered that the arrangements the company had made for dealing with surplus in both 1993 and 1996 were valid and effective, for the same reasons he had given on the National Grid appeals. He therefore made a declaration to that effect, coupled with a declaration that in the determination of deficiency payments under Clause 13(1)(e) the employer could take account of any pre-funding that had taken place, whether consciously in respect of deficiency payments or not, and whether under Clause 13(1)(g) or otherwise. In other words, the judge said, the employer was not bound to determine to make deficiency payments under Clause 13(1)(e) unless and except so far as they were actually needed.

11. Before turning to the issues we have to decide on these appeals it is in our judgment instructive to start by considering the relevant provisions of the scheme itself. The reason why this course is desirable is that while we had the benefit of arguments of great interest and complexity from counsel who have very great experience of modern pension schemes and modern theories about the proper treatment of an actuarial surplus, in the final resort our decision in this case must turn on the provisions of this particular scheme. In many ways it is an unusual scheme. As the judge says in paragraph 2 of his judgment, it originated in two earlier contributory schemes, established by the Electricity Council in 1949 for staff and employees in the public sector electricity supply industry. These were brought together in a single scheme in 1983, and this scheme was significantly amended at the time the industry was privatised in 1990.

12. Although we were asked to look at the earlier scheme, we have derived no assistance from it on these appeals. In 1990, when 17 different private companies replaced the former public sector employers (the Central Electricity Generating Board, the Area Electricity Boards and the Electricity Council), the unity of the former scheme was retained, with all the advantages that this offered for the diversification of investments in a much larger fund, while the new private companies (which are identified in the scheme by the expressions “principal employers” and “participating subsidiaries”) and their individual group trustees enjoy a fair measure of autonomy in relation to their particular group’s pension affairs. It was common ground between counsel that the scheme permits the employers to take more decisions unilaterally than is usual in modern pension schemes. Mr Steinfeld described it as a very one-sided and atypical scheme, and Mr Ham agreed. He said that the trustees’ role was much smaller than in most pension schemes today. This feature of the scheme can, no doubt, be explained by reference to its historical origins with a strong Treasury involvement in a public sector scheme, as Mr Warren suggested.

13. The scheme itself, in its present form, is in seven parts. The rules of the scheme are annexed to it. In Part I, entitled “the Scope of the Scheme”, all that needs to be noted is that the scheme, which came into operation on 1st April 1983, was established under irrevocable trusts (Clause 1), and that it is a contributory scheme providing benefits for and in respect of members and former members, in accordance with its terms from time to time (Clause 2(1)). It was common ground that the purpose of Clause 2(2), which provides that the group assets in respect of each group are to be applied solely for the discharge of the group liabilities in respect of such group, is to prevent cross-subsidy between groups. Clause 46 explains what is meant by “groups”, “principal employers”, and so on in the context of the new private companies that took over the business of the public sector entities which used to run the electricity supply industry prior to 31st March 1990. We do not, with respect to the Respondents’ counsel, consider that the language of Clause 2(2), with its reference to the receipt of benefits arising out of surplus, assists in the resolution of these appeals one way or another.

14. The provisions of Part II, entitled “the Fund”, featured little in the argument before us. Clause 4(1) provides that the fund, established for the purposes of the scheme as from 1st April 1983, was to be constituted by the monies and assets received and held by or on behalf of the scheme trustee, and the monies and assets received and held by or on behalf of the group trustees for the purposes of the scheme, and the money and assets for the time being representing the same, including the four categories of receipts expressly mentioned in that clause. Clauses 9 - 12 contain typical provisions for the keeping of accounts and the preparation and auditing of an annual statement of accounts. Clauses 4(3) and 9 have the effect of providing that for these purposes there is to be included all monies accrued due but not yet received. Nothing turns on the provisions of Part IV (“Management of the Scheme”) or Part V (“General Meetings of Members”).

15. Attention has been largely focused on Part III (“Contributions by the Employers”), which consists of two clauses. Of these, Clause 13 is also entitled “Contributions by the Employers” and Clause 14 “Actuarial valuation of the Scheme”. Clause 13(1) begins with the words “The Employers shall contribute to the fund ...” and sub-paragraphs (a), (e), (f) and (g) are all important. They read:

17. Clause 13(1)(a) payments have been generally described as “standard contributions”, and those mentioned in (e), (f) and the second part of (g) respectively as “deficiency payments”, “supplementary payments” and “additional voluntary contributions”. Since the scheme never in fact showed an actuarial deficiency (the contingency provided for in Clause 14(4)), the first part of Clause 13(1)(g) can be ignored for the purposes of these appeals.

18. Clause 13(1)(f) was inserted into the scheme by amendment in two stages. Paradoxically the second part, including its reference to Rule 45, was introduced first, when that rule was added to the scheme’s rules with effect from 1st July 1988. Rule 44, although prepared at the same time, was not in fact incorporated into the scheme, along with the cross-reference to it in Clause 13(1)(f), until March 1990, when further substantial amendments introduced at the time of the privatisation of the industry also took effect.

19. In order to understand the meaning of Clause 13(1)(e) it is necessary to consider certain aspects of Part IV of the Rules, which is concerned with benefits. The main effect of Rule 14 is to provide that every member of the scheme is to be paid on retirement at or after normal pension age an annual pension calculated as a proportion of his pensionable salary multiplied by the number of years of contributing service (subject to a maximum cap), and also a lump sum calculated on similar lines. Rule 16 provides for retirement within certain periods before the normal pension age. Rule 16(1) provides that Rule 14 benefits may be paid, if the employer employing the member so requests, to any member with an appropriate length of contributing service who retires on or after the age of 55. Rule 16(2) goes further, and provides for the payment of Rule 14 benefits to a member who is retired compulsorily by the employer employing him on or after attaining the age of 50, if such retirement is consequent on reorganisation or redundancy or, in the discretion of that employer, if it is for any other cause. Rule 16(3) provides:

20. The natural meaning to be attributed to this provision is that if, say, a subsidiary company in the National Power group wishes to offer a package which includes pension benefits to an employee who falls into any of the categories mentioned in Rule 16(1) and (2), it will inform the principal employer in the group, who will take the advice of the actuary. The actuary will then make a simple actuarial calculation of the additional cost to the scheme of the benefit sought to be paid, and the principal employer will determine this to be the amount to be paid into the scheme by the subsidiary in question for the purposes of Rule 16(3) and Clause 13(1)(e). Similar arrangements will be made if an employee within the group ceases to be a member of the scheme on leaving service consequent on reorganisation or redundancy before the age of 50 (Clause 13(1)(e)). We can see no warrant for the suggestion made by the Respondents that instead of this being a simple one-off calculation by the actuary on each occasion, the actuary should take into account the results of the last triennial valuation or wait until the next triennial valuation and make an additional calculation as to whether the scheme needs the extra money. This additional complication is not suggested by the language of these provisions. What is to be determined, on the advice of the actuary, is the additional cost incurred by the relevant employer in question in the contingency that has now arisen. If the relevant employer has made voluntary payments for the specific purpose of prepaying, inter alia, an anticipated liability for future deficiency payments, then of course those funds can be earmarked to meet this liability now that it has accrued.

21. We turn now to Clause 13(1)(f). Nothing turns on the details of the provisions of Rule 45, which was introduced in order to provide for the assimilation of pre-vesting schemes and the need for action if the actuary certified that the transferred assets of any such scheme were not sufficient to meet, or exceeded, the transferred liabilities. Rule 44 has a greater significance in the context of this case. It is concerned with the assimilation of supplementary pensions. The details, once again, do not matter, but if an employer gives its group trustees a direction pursuant to Rule 44(1) that a person is to become a voluntary pensioner from a date specified in the direction, it also has to certify to them the amount of the relevant pension or other benefits that are payable as a result of the direction. In these circumstances, Rules 44(3) and (4) provide, so far as is material:

22. The significance of these provisions is that they show that when the draftsman made provision, by amendment to the scheme, for these arrangements for voluntary pensioners, he considered that it was necessary to make an express provision to the effect that if an employer wished to pay the sum determined by the group trustees by instalments it should be obliged to give them an undertaking to pay them an amount equivalent in value to a lump sum payment in a manner they should approve. In these circumstances the trustees would control the length of time over which the instalments would be payable, and the employers could not determine this unilaterally. This seems to be a decisive counter-indication to the possibility, advanced by the Respondents but rejected by the judge, that in the absence of any such provision an employer is at liberty to determine unilaterally, without the express agreement or approval of the group trustees, that the amount payable as a deficiency payment under Clause 13(1)(e) may be payable by instalments. We would therefore reject National Power’s contention that it was entitled to make a determination in this manner and dismiss its cross-appeal on this point.

(i) any overpayment made by an Employer pursuant to the proviso to paragraph (3) of Rule 44 as compared with the amount subsequently determined by the Group Trustees thereunder in such a manner as shall be agreed between the Group Trustees and the Employer having regard to the advice of the Actuary unless the Group Trustees otherwise determine; and

24. It is to be noticed that in each of these cases the relevant corrective mechanism allowed for the reduction or suspension of liabilities which were payable or prospectively payable, provided that agreement was reached to this effect between the employer and, in one case, the scheme’s co-ordinator and, in the other, the group trustees. There is no provision here whereby the employer is entitled unilaterally to require the forgiveness of debts that have already accrued due from it, let alone the repayment of monies within the scheme. This consideration provides powerful support for the Appellants’ contention that nobody, until the events that are in issue on these appeals, ever considered that the scheme gave the employer any such unilateral power.

25. It follows, in our judgment, that the general effect of Clause 13(1)(a) to (f), with the proviso, is to provide that the employers’ obligations to make contributions to the fund, with which the clause is concerned, should be honoured. They should not be whittled away by unilateral decisions on their part. If the need arises for any of the employers’ unpaid liabilities under Clause 13(1)(a) to (f) to be reduced or suspended, as was perceived might be necessary in connection with the working out of the Rule 44 and Rule 45 arrangements, then express provision has to be made to that effect, as is clear from the terms of the proviso.

26. It is not necessary to say very much about the facility for paying additional voluntary contributions which is made available to a principal employer (for itself and its participating subsidiaries) under Clause 13(1)(g). The scheme makes no provision for an actuarial future service valuation, but as a matter of practice, as the judge described in paragraph 22 of his judgment, the actuary regularly made such a valuation at the same time as he made a past service valuation, and the scope for making additional voluntary contributions enabled the employer to make prudent forward provision for the needs identified by the future service valuation, or to earmark such contributions for anticipated future deficiency payments. Since these contributions are voluntary, there is no question of the employer being under any liability to make future contributions. It could simply decide to stop paying. Mr Crampin drew our attention to the potential tax advantages which may accrue to an employer when he decides to pay such a contribution in one year rather than the next.

27. The foregoing analysis shows that the additional contributions provided for in Clause 13(1)(e), (f) and (g) fall into three different categories, so far as we need to consider them for the purposes of these appeals. (e) provides for a one-off liability to pay in a lump sum an amount determined by the principal employer on the advice of the actuary to cover the cost, actuarially determined, of the additional burden on the fund. The first part of (f) provides similarly for the cost of an additional burden on the fund, but on this occasion the relevant determination is to be made by the group trustees, not the principal employer, on the advice of the actuary, and the relevant employer is to be at liberty to reach agreement with the group trustees to pay its liability by instalments. The second part of (g) provides simply for additional voluntary contributions, to be determined by each principal employer for itself and its participating subsidiaries as and when it thinks fit. These are not provided to meet any burden to the cost of the scheme which is expressly identified in the scheme or its rules.

28. Clause 13(2), to which Mr Inglis-Jones attached importance, provides, among other things, for the time when contributions due from employers are to be paid to the group trustees, namely “as soon as practicable after the end of the month to which such contributions relate ... and, in any event, no later than the last day of the following month”. Subject to the retention of sums required by them to make payments under the scheme, the group trustees are obliged to procure the payment of such contributions to the scheme trustee on or before the last day of the following month, the relevance of this being that it is the scheme trustee who manages the fund’s investments. It follows that once the amount of a deficiency payment has been determined by a principal employer under Clause 13(1)(e), it is payable by the relevant employer to the group trustees within the time prescribed by Clause 13(2). Agreed instalment payments of sums payable under Rule 44(3) and (4), on the other hand, would be payable in accordance with the agreed time-table.

29. We now come to the other clause contained in Part III, Clause 14, which is concerned with regular actuarial valuations of the scheme. Actuarial valuations are described by the judge at paragraphs 19 - 23 of his judgment. They have been a routine feature of pension schemes for many years, but this clause is rather less sophisticated in certain respects than the provisions of other contemporary schemes with which counsel were familiar. Clause 14(1) makes it obligatory for the scheme’s co-ordinator to instruct the actuary to prepare an actuarial valuation of the fund and of the liabilities of the scheme as a whole, in the manner prescribed in that clause, at intervals of not more than three and a half years, and for the purposes of what we will call the triennial valuation the actuary is left free to use such actuarial assumptions as he thinks appropriate. The valuation must be prepared in a form which will enable the group assets and group liabilities in respect of each group to be considered separately, and once the valuation has been delivered, pursuant to Clause 14(2), to the principal employers and the group trustees of any group, the group trustees are entitled to give the principal employer in respect of their group any recommendations they may wish to make in regard to it, in so far as it relates to the group assets and group liabilities in respect of their group. Mr Ham told us that this procedure was fully followed in the National Grid case.

30. Clause 14(3) makes special provision enabling any principal employer to instruct the actuary at any time to prepare a valuation limited to the group assets and group liabilities in respect of its particular group. A valuation of this kind is to be prepared, in contrast to the triennial valuation, “on such appropriate bases and assumptions as may be agreed between such Principal Employer and the Actuary”. No such valuation was in fact commissioned during the relevant period by either of the principal employers with whom we are concerned in these appeals.

31. Clause 14(4) and (5) provide for the possibility of an actuarial deficiency or surplus being detected by the actuary on any such valuation. Clause 14(4) provides that if “a deficiency in respect of the Benefits (whether in payment or prospectively or contingently payable) accrued to the effective date of such valuation (making no allowance for projected increases in salaries) is disclosed as between the Group Assets and the Group Liabilities in respect of any Group”, then the relevant principal employer is obliged to make arrangements of the type described in that sub-clause for eliminating the deficiency. These arrangements are to ensure the provision of “additional contributions of an amount and within a timetable as shall make good such deficiency”, and we see no reason why they should not contain provisions that such additional contributions shall cease to be payable if at the time of a subsequent actuarial valuation the former deficiency no longer appears.

"(5) Where in any valuation prepared pursuant to paragraph (1) or (3) the Actuary certifies that a surplus in respect of the Benefits (whether in payment or prospectively or contingently payable) accrued to the effective date of such valuation (making allowance for projected increases in salaries of Contributors in accordance with the relevant assumptions utilised in such valuation) is disclosed as between the Group Assets and the Group Liabilities in respect of any Group, the Principal Employer of such Group shall make arrangements, certified by the Actuary as reasonable, to deal with such surplus and shall give notice of such arrangements to the Scheme Trustee and the relevant Group Trustees and the Co-ordinator; Provided That if no such arrangements are made as aforesaid and any tax exemption or relief in respect of the Scheme is lost in whole or in part pursuant to the provisions of Section 603 of an Schedule 22 of the Taxes Act 1988 then, subject to paragraph (6), the amount of any tax payable or not recoverable by the Scheme pursuant to such loss of tax exemption or relief shall be added to and treated as part of the Group Liabilities in respect of such Group."

33. This provision requires the principal employer to “make arrangements ... to deal with such surplus”. Broadly stated the question to be determined on the appeals is this: How free a hand does each principal employer have when making these arrangements? In particular, is it at liberty to ignore another provision of the scheme which appears to deny it the power to make an arrangement it wishes to make? If it is not, then it is necessary to examine with some care the terms of that other provision in order to be satisfied that it does contain the embargo Mr Inglis-Jones and Mr Steinfeld contend for. In order to answer these questions it will be necessary in due course to consider in some detail the nature of the various interests in the surplus of a pension scheme.

34. The provision on which Mr Inglis-Jones and Mr Steinfeld rely is clause 41(2)(b). Clause 41 itself, which appears in Part VI of the scheme (entitled “Miscellaneous and General”), is concerned with amendments to the scheme. Clause 41(3) deals with the amendments which may be made by all the principal employers acting together, and Clause 41(4) permits any principal employer to amend any provision of the scheme in so far as the amendment does not impact on any other group participating in the scheme. Both these provisions, however, are made subject to sub-clauses (1) and (2) of Clause 41.

35. Clause 41(1), which provides that the scheme may be amended, contains the proviso that “no amendment shall be made which would affect [the scheme’s] Approval or prevent such further amendment of the Scheme as may be required to maintain its Approval and Status”. This is, of course, a reference to Inland Revenue approval. The first part of Clause 41(2) is in these terms:

37. A provision similar to Clause 41(2)(b) was also included in the predecessor schemes, set up in 1949, it having been essential, until the enactment of the Finance Act 1970, to include a provision of this kind if a pension scheme was to receive Inland Revenue approval. Since, however, a similar embargo was expressly carried forward into the new 1983 scheme and the clause was extensively amended in 1990, we are unable to follow the judge in holding that it is legitimate to downgrade its significance when considering what a principal employer may do when making arrangements pursuant to Clause 14(5) to deal with an actuarial surplus, unless there are powerful arguments constraining us to do so, which we do not think that there are. The effect of the prohibition, of course, is a different matter.

38. Clause 41(4) contains elaborate notice provisions that have to be observed whenever a scheme amendment is proposed. We were unimpressed by the argument that a comparison between these complicated notice procedures and the very simple notice procedure prescribed by Clause 14(5) should lead us to conclude that it was intended that the principal employers should have unilateral powers under Clause 14(5) to decide what to do (even if this meant forgiving themselves their accrued debts), whether or not the scheme already gave them such powers. If they needed a scheme amendment in order to achieve their wishes, and such an amendment was not barred by the terms of Clause 41(2), then the “arrangements to deal with such surplus” within the meaning of Clause 14(5) could include proposed amendments to the scheme to enable them to achieve their wishes. Provided that the deed effecting the amendments is expressed to have retrospective effect, the delay in preparing and executing the necessary amendments will not prejudice anybody (see Clause 41(4)(a)), and any doubts about the continuance of Inland Revenue approval for the scheme would be resolved during the working out of the Clause 41(4) procedures.

39. The scheme also contains in Clause 43 detailed provisions, on which it is unnecessary to dwell, as to the disposition of the assets of the scheme on its discontinuance. The combined effect of Clause 43(2), (3) and (4) is to place priority on the payment of benefits, including, if there still remains a surplus to be distributed, the increased benefits described in (4)(a) to (c), before the balance of what may remain of the group assets may be paid to the principal employer and its participating subsidiaries, subject to Inland Revenue approval. It is interesting to note in this context that although Clause 42B(4) gives a principal employer the power to amend the scheme following the giving of what is classed as a closed group notice, amendments must not be inconsistent with the provisions of Clause 43(4) in the event of a surplus being disclosed in the actuarial valuation carried out pursuant to Clause 42B(3).

41. First, as Warner J correctly observed in Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, 1610, the court’s approach to the construction of documents relating to a pension scheme should be practical and purposive, rather than detached and literal. Although there are no special rules of construction applicable to such a scheme, its provisions should wherever possible be construed to give reasonable and practical effect to the scheme.

42. Next, although an employer is not to be treated as a fiduciary when he exercises powers vested in him by the provisions of a pension scheme, it needs to be remembered that he owes an implied obligation of good faith to his employees. This means that he must not, without reasonable and proper cause, conduct himself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. It is now well settled that this obligation of an employer applies as much to the exercise of his rights and powers under a pension scheme as it does to the other rights and powers of an employer ( Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 583), and none of the very experienced counsel retained in the present appeal encouraged us to adopt any different approach. To that extent Mr Inglis-Jones did not support part of the reasoning of the Ombudsman.

43. It is also well settled that although the members of a pension scheme have no rights in the surplus revealed by an actuarial valuation (see, for instance, In re Courage Group’s Pension Schemes [1987] 1 WLR 495, 515F), they have a reasonable expectation that any dealings with that surplus, whether by the employers or by the trustees of the scheme acting within the powers vested in them by the scheme, will pay a fair regard to their interests, since the express purpose of the scheme is to provide benefits for their retirement.

44. In Thrells Ltd v Lomas [1993] 1 WLR 456 Sir Donald Nicholls VC stood in the shoes of a company’s liquidator for the purposes of determining how the surplus in its pension fund (of which the company was the sole trustee) should be distributed. Two of the points he made when determining how he should exercise his discretion were expressed in these terms at pp 468F-469A:

But, thirdly, it is necessary also to have in mind that this scheme itself provided for the trustee to have power to increase benefits. That power ranks ahead of the provision that any remaining balance of the scheme funds should be paid to the company. When a scheme so provides, members have a reasonable expectation that if the scheme funds permit, namely, if there is a surplus after providing for the estimated liabilities, or in a winding up, for the actual liabilities, the trustee will exercise that power to the extent that is fair and equitable in all the circumstances, having particular regard to the purpose for which the power was conferred. The power is an integral part of the scheme. It assumes the existence of a surplus."

45. We do not accept Mr Warren’s submission that so careful a judge as Sir Donald Nicholls VC committed an infelicity of expression when he made the first of these observations. We observe that the law of the European Union treats the benefits emerging from the trusts of a pension scheme as deferred pay within the meaning of the word “pay” in Article 119 of the EC Treaty ( Barber v Guardian Royal Exchange Assurance Group [1991] QB 344, 399, paragraph 12). We think that the former Vice-Chancellor’s approach was a very sound one when he was considering submissions similar to those we received from the Respondents’ counsel in the context of the task he had to undertake in that case.

46. In the context of an ongoing scheme Knox J referred in LRT Pension Fund Trustee Co Ltd v Hatt [1993] PLR 227 at p 265 to “the expectations that members might quite legitimately harbour that discretions will be exercised in their favour ... No doubt the larger the surplus the livelier the expectation but in the great majority of pension funds it remains an expectation rather than a right”. See also Stannard v Fisons Pension Trust Ltd [1991] PLR 225, per Staughton LJ at pp 234-5. The language used by Knox J on page 268 of his judgment in the LRT case must not be elevated into a general proposition that members of a contributory pension scheme have interests in the application of surplus equivalent to rights of property. They do not.

47. As we have already observed, the present scheme contains rather more unilateral powers vested in the employers (as opposed to powers exercised by the employers and the trustees acting in concert) than is now customary. In those circumstances it appears to us to be particularly important that care should be taken when interpreting the employers’ wide powers to ensure that they do not go further than is permitted to them by the wording of the scheme, and the basic principles to which we have referred.

48. Mr Steinfeld and Mr Inglis-Jones said that there were a number of ways in which the employers could make lawful arrangements to eliminate an actuarial surplus, including some in which they would be the sole beneficiaries. They could, for instance, decide to suspend or reduce future contributions, including voluntary contributions. They could increase past-service benefits. It was also suggested, we think less realistically, that they could increase salaries (which would indirectly result in increased benefits for existing members, since pensions are calculated as a proportion of salaries). They could propose that the trustees should create a reserve against future Clause 13(1)(g) requirements or increased future-service benefits. Some of these arrangements would involve, as happened in this case, the employers in making express amendments to the scheme of a type permitted by Clause 41. What they could not do, however, submitted Mr Inglis-Jones and Mr Steinfeld, was to decide unilaterally to cancel liabilities of their own which were already due and payable to the group trustees under Clause 13(1)(e) or (f). That is what they have decided to do here. It was said that they had no power under the scheme to do so, and that they could not amend the scheme so as to permit them to do so because of the embargo on such an amendment created by Clause 41(2)(b). There was a fall-back argument relating to the need to obtain Inland Revenue approval if the employers’ proposal was otherwise permissible.

49. Mr Crampin and Mr Warren, supported by Mr Ham, argued vigorously for the approach favoured by the judge. We hope that we will not be thought to be doing them a discourtesy if we do not lengthen this judgment by summarising the admirable and forceful arguments we received in both oral and written form: we also had the benefit of a transcript of their oral submissions which we were able to study when considering the terms of this reserved judgment. In the purple passage with which he commenced his written submissions Mr Warren submitted that it would be a grotesque result, wholly divorced from commercial reality, if his clients were obliged to contribute to a pension fund hundreds of millions of pounds which were not needed to fund the benefits to which the members were entitled. We would agree with the general tenor of this submission, but if his clients wish to avoid such a result they and their advisers must be careful to travel by a route which is permitted by the terms of their company’s pension scheme and not by one which is not.

50. The essence of the Respondents’ submissions was that the word “arrangements” in Clause 14(5) was not a technical term. It was a word of wide and imprecise meaning which was amply sufficient to include what the employers actually did - namely the correction of past overfunding by a decision not to pay into the scheme contributions that had been shown not to be needed. The words “deal with” were also said to be wide and general. We have referred obliquely to many of the Respondents’ other arguments during the part of this judgment in which we considered the terms of the relevant provisions of the scheme and the rules, and we see nothing to be gained by restating those arguments here.

51. Mr Crampin placed considerable emphasis on the fact that at the same time as he conducted a Clause 14(1) past service valuation the Actuary also conducted a future service valuation in accordance with good modern actuarial practice. This enabled the principal employers to obtain a more sophisticated understanding of the present and potential future needs of the scheme, although they were not bound to make any voluntary additional contributions the actuary might recommend in connection with his future service valuation. These arguments were helpful in illuminating the concern the judge expressed in the observations with which he concluded his judgment, when he said that any general exclusion of employers from surplus would tend to make employers very reluctant to contribute to their pension schemes more than the bare minimum that they could get away with.

52. The judge, who has immense experience in these matters, was of course correct to voice such a concern, but the scheme which we have to interpret in this appeal has a number of unusual aspects, as we mentioned in paragraphs 11 and 12 of this judgment. We therefore need to exercise caution before applying modern thinking about the proper approach to the treatment of surplus in a modern pension scheme to the interpretation of a scheme which has a number of features, all favourable to the employer, which do not appear in the best modern schemes.

53. Mr Crampin also argued that with the fixed contributions provided for by Clause 13 there was a need for a balancing mechanism, such as is provided in Clause 14(4) and (5), to ensure that the scheme is not underfunded or overfunded. He urged us, therefore, to give the language of Clause 14(5) the flexibility which the judge was willing to accord it.

54. Mr Warren submitted that we could not go far wrong when interpreting the scheme if we were to treat the pension fund simply as the security for the employers’ pension promise. If both a past service valuation and a future service valuation revealed that there was more money in the scheme than was needed to provide this security, then we should interpret Clause 14(5) in such a way as to permit the employers unilaterally to forgive themselves accrued liabilities which they had not yet paid into the scheme. Mr Steinfeld and Mr Inglis-Jones understandably replied that such an approach would run contrary to the general tenor of decided cases over the last 15 years, which show that it is too simplistic to treat an actuarial surplus as being at an employer’s disposal. We are bound to say that we did not derive much assistance from Mr Warren’s argument on this point. The solution to the present problem lies within the terms of the scheme itself, and not within a world populated by competing philosophies as to the true nature and ownership of an actuarial surplus.

55. Mr Warren also argued that as his clients had never complied with their duty under Rule 16(3) to determine the additional cost attributable to certain payments it had decided to make under Rule 16, they had no legal liability in this regard. We did not have the evidential material on which to express any concluded views on this unattractive argument, which Mr Steinfeld countered with a claim that Mr Warren’s clients would have been in breach of contract in this regard.

56. After full and careful reflection, and approaching the matter in accordance with the general principles to which we have referred, we have come to the conclusion that the employers were not entitled to forgive themselves unilaterally their existing accrued liabilities in the absence of any amendment to the scheme and without the agreement of the group trustees to whom those liabilities had accrued due. There is nothing outside Clause 14(5) to suggest that they have such a power and Clause 14(5) does not purport to accord to them any such power. We have already noticed in paragraph 24 of this judgment that it was considered necessary to make an express amendment to the scheme to enable employers’ accrued liabilities to be reduced or suspended if a surplus appeared when the assets and liabilities of a pre-vesting scheme were transferred to the scheme, or if an over-payment (based on an estimate) was made in relation to a Rule 44 liability. On these grounds Messrs Laws, Mayes and Machin are entitled to succeed on these appeals.

57. We would add, however, that the appearance (by amendment) of the proviso to Clause 13(1) suggests that it was accepted in those pre-vesting days that such an amendment did not breach the embargo in Clause 41(2)(b). Indeed, it is noticeable, in relation to an overpayment under Rule 44(4), that the method adopted for cancelling the overpayment pro tanto was not to permit a payment of the excess to the employers (which would breach Clause 41(2)(b), on one view of the matter) but to permit the employer to come to an agreement with the group trustees for reducing or suspending contributions already due and payable (or prospectively payable) but not yet paid. In other words, since such contributions had not yet been paid into the scheme (although the employers’ accrued liability to pay them would appear as an asset of the scheme in the scheme’s accounts) they were not yet “moneys of the Scheme” within the meaning of Clause 41(2)(b).

58. Such an approach to the interpretation of that clause would accord with the principle, which was not questioned in Lord Hoffmann’s recent speech in re BCCI (No 8) [1998] AC 214, 226-7, that the release of a debt does not involve the transfer of funds from the debtor to the creditor: it simply brings about the end of the debt. By this analysis, in the present case the group trustees, as the employers’ creditors, were never in possession of “monies in the Scheme” which would be paid out if the debt was released.

59. Mr Warren, who appeared as junior counsel for the employers in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1995] 1 All ER 912, was anxious that we should expressly hold that that case, in which his then clients did not appeal the judgment of Vinelott J, was wrongly decided. We are not willing to do so. The language of all these pension schemes is different, and we see no value in lengthening this judgment in order to consider a decision by a judge at first instance relating to the terms of a different scheme. There are certainly grounds on which that decision can be distinguished.

60. We have decided these appeals on the basis that neither Clause 14(5) itself nor any other provision of the scheme as it stands gives the employers a unilateral power to forgive themselves their liabilities to pay contributions which are already due and payable to the group trustees. Without having to decide the point, we can see nothing in Clause 41(2)(b) which would have prevented them from proposing and implementing an amendment to the scheme (pursuant to their powers under Clause 41(4)(a)) so as to have enabled them to take that course, if they had thought it politic to do so, with or without the agreement of the group trustees. The procedure prescribed by Clause 41(4)(b)-(f) would have enabled any doubts about the effect of the proposed amendment on the scheme’s approved status to be resolved through the machinery there set out. The employers did not, however, take that course.

61. There is also no need for us to express any opinion on the Appellants’ alternative arguments, founded on allegations of a breach of contract by the employers. If and in so far as there is an unresolved dispute of fact between the parties to the National Power appeal, there is not the evidence before us (or before the judge) that would enable a court to resolve that dispute.

62. As we have said, the judge made some observations in his judgment about the enhanced role he believed the actuary should play when giving his certificate pursuant to Clause 14(5). We have already explained that those observations, which were not supported by any of the parties, formed no part of his decision, and nobody sought to resurrect them on the hearing of this appeal. For those reasons we did not have to consider them. Nor is there any need to comment on the policy considerations to which the judge referred in the final paragraph of his judgment. So long as Clause 13(1)(g) contributions are earmarked for the purposes for which they were intended (which may be globally for future service benefits or anticipated future deficiency payments) no problems will be put in the way of employers making additional voluntary contributions to a pension scheme like the one under consideration in the present case.

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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> National Grid Plc v Mayes & Ors [1999] EWCA Civ 761 (10 February 1999) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1999/761.html Cite as: [1999] Pens LR 37, [1999] OPLR 95, [2000] ICR 174, [1999] EWCA Civ 761, [1999] PLR 37

England and Wales Court of Appeal (Civil Division) Decisions