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Session 2000-01
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Judgments - International Power Plc v. Healy and Others, Formerly National Power v. Feldon and Others and National Grid Company Plc v. Mayes and Others


Lord Slynn of Hadley Lord Steyn Lord Hoffmann Lord Clyde Lord Scott of Foscote




ON 4 APRIL 2001

[2001] UKHL 20


My Lords,

    1. For the reasons given in the speeches of my noble and learned friends Lord Hoffmann and Lord Scott of Foscote, the text of which I have had the advantage of reading, I too would allow the appeals.


My Lords,

    2. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Scott of Foscote. For the reasons they give, I would also allow the appeals.


My Lords,

The Electricity Supply Pension Scheme

    3. These appeals concern the validity of arrangements which two companies in the electricity industry made in 1992 and 1995 to deal with actuarial surpluses which had arisen in a pension scheme established for the benefit of their employees. The scheme is called the Electricity Supply Pension Scheme and was established in 1983 when the industry was in public ownership. It replaced two schemes which had been established at the time of nationalisation in 1947 and, as we shall see, perpetuated certain ancestral features. After privatisation in 1990 the scheme was substantially amended to become, in effect, separate schemes for a number of "groups" corresponding to the various companies (and their subsidiaries) which had succeeded to the assets and liabilities of the former state-owned corporations. Each operated by reference to the same instrument and with unitised holdings in a single trust fund, but with its own employers and members. The amended scheme contains many provisions designed to ensure that the assets and liabilities of each group are kept separate and that so far as possible they operate independently.

    4. The scheme is funded, contributory and fixed benefit. Benefits are defined by the rules and not related (as in the case of a money purchase scheme) to the value of the fund. On the contrary, it is ultimately the responsibility of the employer to ensure that the fund has enough money to pay the benefits. Members contribute 6% of pensionable salary to a trust fund upon which their benefits are secured. The employers, under various heads, contribute the rest. The provisions for the employers' contributions are, by modern standards, unusual, because they do not simply contribute whatever may be from time to time considered necessary to keep the scheme fully funded. Instead, they contribute various sums which are in theory fixed without reference to the state of the fund. At periodic intervals a valuation is made by the scheme actuary and arrangements are made to deal with any deficiency or surplus which may be disclosed. I say that in theory the employers' periodic contributions have no reference to the state of the fund but the scheme provides for voluntary contributions and in practice the actuary advises the employers as to the amount of voluntary contributions needed to avoid a deficiency at the next valuation. As we shall see, the actuary may also advise on measures to reduce a prospective surplus.

    Dealing with a surplus

    5. These appeals concern the provisions for periodic valuation followed by arrangements to deal with deficiency or surplus. Clause 14(1) requires a triennial valuation in a form which enables the assets and liabilities of each group to be considered separately. Valuations were made under this clause as at 31 March 1992 and 31 March 1995. In 1992 the actuary certified a surplus of £258m in respect of the group of which National Power Plc ("National Power", now called International Power Plc) was the principal employer and £62.3m in respect of the group of which National Grid Plc ("National Grid") was the principal employer. In 1995 he certified a surplus of £73.7m in the National Power group.

    6. Clause 14(5) provides that if the actuary certifies that (on the assumptions there stated) there is a surplus in the fund, the principal employer of the group "shall make arrangements, certified by the Actuary as reasonable, to deal with the surplus". The clause requires that notice of the arrangements be given to persons performing various functions under the scheme, but the only express restriction on the arrangements which can be made is that they must be certified by the actuary as reasonable. The issue in these appeals is whether the arrangements made by National Power and National Grid were within the powers conferred upon them by the scheme.

    7. There are only two ways of dealing with an actuarial surplus. You can pay more money out of the scheme or you can reduce the amount of money coming in. Both National Power and National Grid decided to use part of the surpluses by paying out more money in the form of increased benefits for members and their dependants. They also decided to reduce the amounts which the employers paid in. There is no dispute about the payments for the benefit of members, which absorbed about a third of the surpluses. As the employers paid a standard contribution of twice that of the members (besides various additional payments) the result was that the part of the surpluses used to improve benefits was roughly in proportion to what the members had paid in. But some of the National Grid members objected to it using any part of the 1992 surplus to reduce the employers' payments into the fund.

    The Ombudsman's decision

    8. The members complained to Dr Julian Farrand, the Pensions Ombudsman. He upheld the complaints on two grounds. First, he said that in exercising any powers under the scheme, the employers had an implied obligation to act in good faith. This obligation exists by virtue of the relationship of employer and employee and requires that the employer should not exercise his powers for a collateral purpose or in a way which would destroy or seriously damage the relationship of trust and confidence with his employees: see Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589. The Ombudsman considered that National Grid had been in breach of this obligation by using a substantial part of the surplus in its own interest.

    9. Secondly, the Ombudsman noted that the way National Grid proposed to reduce its contributions was by treating certain accrued liabilities to the fund as discharged. I shall have to describe the nature of these liabilities in more detail later, but for the moment it is enough to say that they were not merely contributions which might become payable at some future date, depending (for example) on whether the employer was still in business, how many people were employed and what they were earning. They were actual debts payable to the fund, incurred to fund extra benefits for specific employees who had been made redundant. The Ombudsman then drew attention to the clause dealing with amendment of the scheme. By clauses 41(1) and (4), the employer had a wide power of amendment. But clause 41(2)(b) prohibited an amendment "making any of the moneys of the Scheme payable to any of the Employers". The Ombudsman said that the release of an accrued debt from the employer to the scheme amounted to paying him an equivalent in money. If such an amendment was prohibited, the draftsman must have assumed that no power to make such payments existed within the scheme. Clause 14(5) could not therefore be construed as conferring such a power.

    The High Court decision

    10. National Grid appealed against the Ombudsman's decision to the High Court. National Power, which had made similar arrangements in respect of the 1992 and 1995 surpluses, took the opportunity to issue a summons seeking a declaration that its own arrangements were valid. Both proceedings came before Robert Walker J.

    11. The judge held that the Ombudsman had interpreted the implied duty of good faith too strictly. The employer was not a trustee. He was entitled to act in his own interests provided that he had regard to the reasonable expectations of the members. The arrangements satisfied that requirement. On this point the members now accept that the judge was right.

    12. The Ombudsman's other ground remains central to the dispute. Robert Walker J. said that the employer's duty under clause 14(5) to make arrangements to deal with the surplus conferred a power in the broadest terms to do whatever he thought appropriate. It was not restricted by other provisions of the scheme, such as the limits on the power of amendment. It could include the repayment of money to himself. The judge therefore did not need to decide whether the discharge of an accrued liability amounted to a payment to the employer. On either view, the arrangements were valid.

    The Court of Appeal decision

    13. The members appealed to the Court of Appeal (Nourse, Schiemann and Brooke LJ). They differed from both the Ombudsman and the judge. They said that clause 14(5) conferred no power upon the employer to discharge his debts to the fund. The only way in which this could be done was by an amendment of the scheme. As there had been no amendment, the arrangements were invalid and the appeal was allowed. But, contrary to the views of the Ombudsman and the judge, the Court of Appeal were not inclined to think that the discharge of a debt was a payment to the employer within the meaning of clause 41(2)(b). It followed that the employers would be able to give effect to their arrangements by an amendment, which under clause 41 could be retrospective.

    The deeds of amendment

    14. The employers acted upon this suggestion and executed suitable deeds of amendment. Your Lordships have given leave, by consent of all the parties, for the question of their validity to be raised for the first time in this House.

    Does a release of a debt count as payment?

    15. My Lords, I think that the main question in these appeals is whether the arrangements to treat accrued liabilities of the employers as discharged out of surplus funds amount to a payment to the employers out of the moneys of the scheme. Once that question has been decided, the other arguments fall into place.

    16. The question is one of construction, to be answered according to familiar principles. The pension scheme background is of course very important. On the other hand, some of the matters put forward as relevant by Mr Inglis-Jones on behalf of the National Grid members seemed to me of marginal significance. For example, he said that the main purpose of the scheme was to provide pensions for the employees. That I would certainly accept. But then he said that it would be inconsistent with such a purpose to make payments or the equivalent of payments to the employer. In relation to a surplus, this does not seem to me to follow. A surplus is (by definition) money in excess of what is needed to effect the main purpose of the scheme. Next, Mr Inglis-Jones said that it must be borne in mind that part of the surplus was funded by contributions from the employees. Indeed, the whole of the funding may be said to be either their contributions or payment for their services. No doubt considerations of this kind have influenced the implication of an implied term of good faith, but they cannot displace the fact that the scheme confers the power to make arrangements upon the employer and no one else. In some schemes the power is more evenly distributed but in this one it is not. Mr Inglis-Jones's submissions would lead to the conclusion that the employer cannot act in his own interests, but the implied term does not go so far. Once it is accepted that he can act in his own interests, and that the extent to which he is doing so in this case cannot be criticised, I do not see the relevance of the way in which the surplus was funded.

    17. Mr Inglis-Jones then said that while it might be reasonable for the employer to suspend his future contributions, the release of accrued liabilities, or actual payment of money to himself, would imperil the security of the fund. An actuarial surplus, he said, was notional and evanescent, here today and (with the slightest change in assumptions) gone tomorrow. That argument, as it seems to me, is really an argument against doing anything about a surplus at all. From the point of view of the adequacy of the fund, there is no difference between paying money to the employer and paying it in the form of (for example) extra benefits to classes of employees. Both result in there being less money in the fund. Clause 14(5) in my view does not require the employer to be sceptical about the actuarial certificate. Caution is a matter for the actuary in certifying the surplus and certifying the arrangements as reasonable. The employer's duty is simply to make them.

    The tax background

    18. In my opinion the most relevant background is the fiscal origin of clause 41(2)(b). Everyone agrees that it was taken over from the 1947 predecessor schemes and that it was inserted into those schemes to obtain Inland Revenue approval under section 32 of the Finance Act 1921. Mr Inglis-Jones told your Lordships that in his experience, dating back to before the regime was changed in 1970, the Revenue would not approve a scheme under the 1921 Act and its successor (section 379 of the Income Tax Act 1952) unless such a provision was included. It has been said on more than one occasion that many provisions in pension schemes and insurance contracts have to be construed against their fiscal backgrounds: see Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, 1610 and In re Landau (A Bankrupt) [1998] Ch. 223, 233. So I think it is important to consider why the Revenue insisted on provisions like clause 41(2)(b).

    19. Schemes approved under the provisions of the 1921 Act and its successor enjoyed great fiscal privileges. Money paid into the scheme by both employer and employees was deductible for income tax. Income from the investments of the scheme was exempt from tax. To prevent members from obtaining tax exemption twice over, the Revenue insisted that in principle they should take their benefits in the form of taxable annuities. In these circumstances, it is hardly surprising that capital payments out of the fund to the employer were anathema to the Revenue. They did not want the employer to be able to resort to a tax sheltered fund, either temporarily or permanently, for the purposes of his business.

    20. This fiscal purpose explains why the clause uses the words "making any of the moneys of the Scheme payable to any of the Employers". They are not the most natural way of describing the release of a debt owed by the employer to the scheme (compare In re Bank of Credit and Commerce International SA (No. 8) [1998] AC 214, 228-229.) The release of a debt is not a payment, although it does have the same economic effect, in the sense that it reduces the assets of the fund and increases those of the employer. Of course if it appears that the purpose of the provision is to prevent such an economic effect, i.e. to prevent any reduction in the assets of the fund for the benefit of the employer, then it may be reasonable to give the words a sufficiently wide meaning. The fiscal background shows however that the purpose was different. It was to prevent the employer from resorting to assets which had enjoyed the fiscal privileges accorded to the scheme. But debts from the employer to the fund which have not yet fallen due for payment have enjoyed no fiscal privileges. They are not deductible for tax until they have been paid and, at any rate until they have become payable, they cannot have earned any tax free income for the scheme.

    21. This background suggests that the words "making any of the moneys of the Scheme payable to any of the Employers" were not loose language intended to be applied to any transaction which, although not ordinarily so described, had the same economic effect. They were carefully chosen to exclude the release of debts owed by the employer. It is true that such debts, in common with most assets of the fund, are choses in action. Money (for example, deposits with a bank) usually consists of choses in action. But deposits with a bank represent money which has been paid into the tax sheltered scheme. Money owed by the employer has not.

    22. Confirmation of this construction may be found in clause 15 of one of the old schemes (the British Electricity Authority and Area Boards Superannuation Scheme), which corresponds to clause 14 of the 1983 scheme. It also provided for periodic valuations and the certification by the actuary of a deficiency or surplus. If there was a deficiency, the principal employer (which was then the British Electricity Authority) had to make arrangements by which it and the other employers contributed to the fund -

    "an annual deficiency contribution of such amount, and calculated to make good the deficiency over a period not exceeding 40 years from the date of the valuation, as the Authority may determine".

    23. A deficiency contribution was therefore an accrued debt owed to the fund and payable by annual instalments. If, however, there was a surplus at the next valuation, the authority had to make arrangements to dispose of it. Clause 15(4) of the old scheme, by contrast to the general terms of clause 14(5) of the present scheme, was specific about the arrangements which had to be made. In the first place, "the amount or the oustanding term of any existing annual deficiency contribution shall be reduced" up to the capital value of the available surplus. The debt was to be cancelled. This does not suggest that the Revenue or anyone else thought that the cancellation of a contribution debt amounted making the moneys of the fund payable to the employer.

    24. The language of clause 41(2)(b) was taken over by the 1983 scheme at a time when a new approval regime had been introduced by the Finance Act 1970 and the Revenue did not insist upon so absolute a prohibition on payments to the employer as it had before. But this certainly does not suggest that the language of clause 41(2)(b) was intended to have a wider meaning. I think it meant the same as it did before.

    25. I therefore agree with the tentative view of the Court of Appeal that the release of an accrued debt owed by the employer is not a payment to the employer out of the moneys of the fund. This is contrary to the opinion of Vinelott J in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1994] ICR 537, a decision which was very properly followed by the Ombudsman. It does not however appear from the report of that case that counsel drew the attention of the judge to the fiscal background. Instead, the judge was presented with an "ingeniously constructed balance sheet" designed to prove that the release of an accrued obligation did not have the same economic effect as a payment of money. Not surprisingly, he rejected the submission.

    26. This conclusion means that whether the Ombudsman was right in thinking that a prohibition on payments to the employer was a fundamental principle of the scheme or whether the Court of Appeal was right in thinking that the arrangements could be effected only by amendment, the employers had, one way or another, power to do what they did. The arrangements did not infringe any express or implied restriction on the powers of the employer. The only question is the formalities which should have been adopted. The judge's view was that the employers did not need to do more than give directions to the trustees. The Court of Appeal's view was that they should have executed a deed of amendment. This omission they have since remedied by the retrospective deeds executed since the hearing in the Court of Appeal.

    27. The members say, however, that they have a second string to their bow. They submit that the Court of Appeal was right in saying that an amendment was needed. And although it is accepted that an amendment could have been made at the time of the valuations, they say that it is now too late. It was prohibited by section 37 of the Pensions Act 1995, which came into force in April 1997:

    "37(1) This section applies to a trust scheme if -

    (a) apart from this section, power is conferred on any person (including the employer) to make payments to the employer out of funds which are held for the purposes of the scheme,

    (b) the scheme is one to which Schedule 22 to the Taxes Act 1988 (reduction of pension fund surpluses in certain exempt approved schemes) applies, and

    (c) the scheme is not being wound up.

    (2) Where the power referred to in subsection (1)(a) is conferred by the scheme on a person other than the trustees, it cannot be exercised by that person but may be exercised instead by the trustees; and any restriction imposed by the scheme on the exercise of the power shall, so far as capable of doing so, apply to its exercise by the trustees."

    28. There follow a number of statutory restrictions on the exercise of such a power by the trustees.

    29. The respondents submit that the new amendments would purport to confer upon the principal employer a power to "make payments to the employer out of funds which are held for the purposes of the scheme" and, the other conditions being satisfied, bring the scheme within section 37. The consequence is that by virtue of section 37(2), the power is exercisable only by the trustees and subject to the statutory conditions.

    30. It will be observed that section 37(1) uses the words "power…to make payments to the employer out of funds which are held for the purposes of the scheme". It uses the concept of a payment out of the funds of the scheme which is similar to that used by clause 41(2)(b) and which I have suggested was not intended to include the release of an accrued debt. The members say that the words should be given a wider meaning in section 37. Clause 41(2)(b) may have to be interpreted against a fiscal background but section 37 has nothing to do with tax. It is for the protection of the members. Therefore the concept of paying the employer out of funds which are held for the purposes of the scheme should be given a wide meaning to preserve the assets of the fund, including debts owed by the employer.

    31. I quite accept that section 37 does not have the exclusively fiscal background of clause 41(2)(b). Nevertheless, the language seems to me to show clearly that Parliament adopted the fiscal concept of payment to an employer out of the funds of the scheme. It substantially reproduces the language of section 601(1) of the Income and Corporation Taxes Act 1988, which imposes a 40% charge to tax "where a payment is made to an employer out of funds which are or have been held for the purposes of a scheme which is or has at any time been an exempt approved scheme." That section is plainly not intended to tax the employer on money which has never come into the scheme.

    32. One may ask why this more restricted concept should have been used in a statute designed for the protection of the members of the scheme. The answer, as it seems to me, is a recognition that, in a funded scheme, there are bound to be adjustments in the rate of funding. It is to be expected that the level of contributions by the employer may be increased or reduced from time to time. And although Mr Inglis-Jones sought to persuade your Lordships that the distinction between accrued and contingent liabilities was of great importance in pension law, I think that at least for this purpose it makes little commercial sense. It involves saying that, in the context of reducing a surplus, the employer cannot be released from debts which are accrued but not yet payable but can be released from paying contributions which are contingently due but (while the scheme is a going concern) virtually certain to become payable. No businessman, in estimating his ability to meet future liabilities, would make such a distinction. In my opinion the effect of section 37 is to protect only those funds which have actually been paid into the scheme. This strikes a sensible commercial balance between flexibility of funding and the interests of the members.

    33. Mr Inglis-Jones also relied upon section 40 of the 1995 Act, which treats debts due and payable by the employer to the fund as if they were loans to the employer for the purposes of regulations which prohibit such investments. This, he says, shows that debts from the employer are treated as assets of the fund. But I do not think that this casts much light upon the construction of section 37, which uses the concept of "payments" out of the funds rather than a reduction of its assets. In any case, we are not concerned with debts which were due and payable. The liabilities discharged out of surplus were debts due but not yet payable.

    34. My Lords, these conclusions are (subject to two subsidiary arguments to which I shall have to return) sufficient to dispose of the appeal. If an amendment was needed, it has been effected. The 1992 and 1995 arrangements have been validated. But the question of whether an amendment was needed is of great practical importance to the trustees administering the scheme. After future valuations, they will need to know whether they can, as they have in the past, act upon the instructions of the employer or whether they must insist upon an amendment. I would suggest that your Lordships should decide the question.

    Was an amendment necessary?

    35. I agree with the judge that the language of clause 14(5) is apt to confer upon the employer the power to make the arrangements which he considers necessary to deal with a surplus. The word "shall" in my opinion connotes not only a duty but also the power to discharge that duty. I do not think that it requires the employer to scratch around among the other provisions of the scheme to find specific powers. But I would not go so far as the judge in saying (as he did in paragraph 83) that the employer's powers were not intended to be restricted "either specifically by clause 41(2)(b) or by what the employer could do under other clauses of the scheme, or generally by the context and purpose of the scheme." I find it difficult to believe that the general words of clause 14(5) were intended to give the employer power, without amendment, to do something which would contradict the express provisions of the scheme.

    36. It may also be that, as the Ombudsman thought, the power is subject to implied limitations deducible from the context and purpose of the scheme. He said that there was an implied prohibition against paying the employer money from the fund. He derived this implication from clause 41(2)(b), which he said would make no sense if clause 14(5) conferred a wide power for the employer to pay himself out of surplus. The suggestion that clause 41(2)(b) was intended only to prevent payments otherwise than out of surplus was implausible. I think that there is considerable force in this argument, at any rate if one tries to construe the scheme as a consistent whole.

    37. Of course the fact that the scheme cannot be amended to allow something to be done does not necessarily mean that a limited power to do that thing does not already exist within the scheme: see Re Vauxhall Motor Pension Fund [1989] 1 PLR 31, 53. But such a prohibition is rather odd if the scheme already contains a very wide power. The trouble is that this scheme may not be altogether consistent. In the old predecessor schemes, there was no inconsistency because the equivalent of clause 14(5) restricted the powers of the employer to dealing with surplus in certain specified ways: cancelling liability to pay deficiency contributions, retaining it in the fund or reducing the employers' standard contributions. There was nothing anywhere in the old scheme which could be construed as a power to pay money to the employers. The new scheme created the difficulty by removing all the restrictions on what the employer could do about disposing of the surplus but leaving the prohibition on any amendment which would allow payments to the employer. My Lords, I do not intend to try to solve this puzzle because on the construction which I have given to making payments to the employer out of the fund, it does not arise.

    38. The real question, as it seems to me, is whether the arrangements which the employers made to relieve themselves of liabilities contradicted the express provisions of the scheme. For this purpose it is necessary to explain in more detail what they were.

    The employers' contributions

    39. The contribution liabilities of the employer are set out in clause 13(1). I quote the relevant paragraphs:

    "13(1) The Employers shall contribute to the Fund:

    (a) a monthly sum equal to twice the contributions for the time being paid by all Members respectively employed by them…and;

    (e) in respect of any Member who retires under Rule 16 or person who ceases to be a Member on leaving service consequent on reorganisation or redundancy before age 50 such amount as determined by the Principal Employer on the advice of the Actuary; and

    (f) any sums payable in accordance with paragraph (3) of Rule 44 or sub-paragraph (2)(b) of Rule 45; and

    (g) such further contributions as may from time to time be payable pursuant to the provisions of Clause 14(4) or may otherwise be determined by each Principal Employer for itself and its Participating Subsidiaries;

    Provided That the contributions (whether due and payable or prospectively payable) by an Employer under sub-paragraphs (a) to (f) of this paragraph shall be reduced or suspended (whether with retrospective effect or otherwise) to the extent of:

    (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

    (ii) any surplus certified by the Actuary pursuant to paragraph (2) of Rule 45 in such a manner as shall have been agreed between the Co-ordinator and the Employer having regard to the advice of the Actuary unless the Co-ordinator otherwise determines."