(back to preceding text)

    40. Of these various heads, (a) is self-explanatory. I have omitted (b), (c) and (d), which played no part in the argument. But (e), (f) and (g) are so dense with cross-references to the rules that each requires some further explanation. The significance of the proviso I shall leave until later.

    41. Clause 13(1)(e) refers to amounts to be determined in respect of members who retire under rule 16 or cease to be members on account of reorganisation or redundancy before age 50. Ordinarily, a member is not entitled to start drawing his pension until he reaches pensionable age. There are all kinds of exceptions and qualifications (such as retirement on grounds of ill-health under rule 15) but that is the general rule. Rule 16(1) entitles an employer to request that the group trustees start paying a pension to a member who, after ten years service, retires on or after the age of 55. Rule 16(2) provides for similar treatment for a member who is compulsorily retired on or after the age of 50 and rule 17(1A)(c) provides that a person who ceases to be a contributor before the age of 50 consequent on reorganisation or redundancy shall be treated as having retired when he reaches the age of 50.

    42. These provisions for the acceleration of benefits under the scheme naturally involve additional cost and the rules provides for a determination of the amount required to fund the extra benefits and for the allocation of that cost to the appropriate employer. The determination, as we have seen, is a matter for the principal employer of the group under clause 13(1)(e). The allocation, in the case of benefits under rules 16 and 17, is effected by rules 16(3) and 17(4), both of which provide that any additional cost, as determined by the principal employer, "shall be borne by the Employer who last employed the Member." Payments due from employers under clause 13(1)(e) have been called "deficiency payments" and I shall use that expression, although it must not be confused with the contributions required to make good a valuation deficiency under clause 14(4).

    43. Clause 13(1)(f), so far as it refers to rule 44(3), deals with the cost of another form of increased benefit. (The other reference, to rule 45(2)(b), is not presently relevant). Rule 44(1), which was added by amendment in 1988, gives an employer a very wide power to direct the trustees to pay additional benefits, up to Inland Revenue limits, to "Voluntary Pensioners", a term which has meant in practice employees willing to accept early retirement and their dependants. Rule 44(3) gives the trustees power, acting on the advice of the actuary, to determine the amount to be contributed by the employer to secure the additional benefits. By rule 44(4) the employer may, subject to the approval of the trustees, pay by instalments the equivalent in value of the amount determined. These payments have been called "supplementary payments".

    44. Rules 16, 17 and 44 played an important part in the programme of voluntary redundancies introduced by National Grid, National Power and other successor companies after privatisation. National Power, for example, succeeded in reducing the numbers of its employees from 16,273 in 1991 to 5,139 in 1995. A significant inducement to employees to accept redundancy or early retirement was the offer of accelerated or enhanced benefits under rules 16, 17 or 44. The result was to create substantial liabilities to make deficiency and supplementary payments.

    45. Finally, I come to clause 13(1)(g), which is relatively straightforward. It comprises payments due under clause 14(4) to correct an earlier valuation deficiency (which do not feature in this case) and voluntary contributions made by employers on the advice of the actuary by way of addition to the standard payments due under clause 13(1)(a).

    46. I can now explain the arrangements in more detail. National Grid decided to use £18.6m (or about 30%) of the 1992 surplus to improve benefits for members. It increased the lump sum death in service benefit to four times salary and made a 10% improvement in the future accrual rate for spouses' pensions. It gave effect to these improvements by making amendments to the scheme.

    47. The remaining £43.7m of the surplus was used, first, to reduce a 2.6% voluntary contribution under clause 13(1)(g) to 0.1% and, secondly, to fund deficiency payments under clause 13(1)(e). The first application, which was costed at £9.5m, is uncontroversial. The validity of the second is in dispute.

    48. At some time during 1992 the board was advised by the actuary that although the triennial valuation as at 31 March 1992 was not yet finalised, a substantial surplus would be shown. The actuary advised the board to stop making deficiency payments in respect of early retirements occurring after 1 December 1992. He considered that the company would be able to appropriate part of the expected surplus to such payments. The decision to stop paying was confirmed by the board on 25 February 1993. At that stage the valuation as at 31 March 1992 had still not been signed off but the actuaries were predicting that it would show, as it did when it was finalised a week later, a surplus of £62.3m. The actuary certified that the proposed arrangements were reasonable. The way in which they were implemented was that National Grid determined its contributions under clause 13(1)(e) at nil and instead notionally debited the allocated surplus with the amounts which would otherwise have been determined until the money ran out in March 1995. Thereafter National Grid resumed payments into the scheme.

    49. National Power decided to apply £86m of the £258m surplus certified in respect of the 1992 valuation to improving benefits for members. These included a 50% contribution holiday for three years to 31 March 1996, and increases in death in service benefits, children's allowances and spouses pensions. All of these were effected by amendments to the scheme. In addition, they directed the trustees to pay a 10% increase in lump sum benefits to deferred pensioners on retirement. This was not made the subject of an amendment on the ground that it involved a single non-recurrent payment.

    50. National Power applied the remainder of the 1992 surplus to extinguishing its liabilities for deficiency and supplementary payments. In 1993 it was paying these, in respect of employees who had already left, by monthly instalments. In the case of the deficiency payments, where the amount payable was a matter for its own determination, it had on the advice of the actuary been determining since April 1991 that the amount should be paid by instalments rather than a lump sum in respect of each employee. In the case of the supplementary payments, where the amount was determined by the trustees, it had agreed instalment payments with the trustees pursuant to rule 44(4).

    51. National Power's arrangements were made by the board on 1 April 1993. They decided to cease payment of deficiency and supplementary payments in respect of members who had already left service and to carry forward a notional fund of £39m to meet deficiency and supplementary payments in respect of employees who left afterwards. The actuary certified these arrangements as reasonable. They were implemented by direction to the trustees without any amendment of the scheme. The sum appropriated to such payments was exhausted by March 1994 and National Power then resumed making payments into the scheme.

    52. The arrangements in respect of the 1995 valuation were broadly similar. This time the surplus was £73.7m. The board decided to apply about £25m to the improvement of benefits for members. These included a continuation of the 50% contribution holiday for another three years and an increase in the children's allowances. These were incorporated into the scheme by amendments. The board also, without amendment, directed a 5% increase in lump sum benefits for deferred pensioners on retirement. The rest of the surplus was appropriated, as before, to funding monthly instalments of deficiency and supplementary payments in respect of employees who had already left and carrying forward sums to fund such payments in respect of employees who retired afterwards. In addition, National Power reduced its own standard contributions to 10.5% for the three years from 1 April 1996 to 31 March 1999. All this was done by notification to the trustees without an amendment of the scheme. Again the actuary certified the arrangements as reasonable.

53. The question therefore is whether, consistently with the provisions of the scheme, the employers were entitled to direct the trustees that they should treat their liabilities for deficiency and supplementary payments as discharged out of surplus funds. The members say that this contradicted the scheme. Clauses 13(1)(e) and (f) required the payments to be made and the effect of the arrangements was that the payments were not made. The employers say that the payments were made; not, it is true, out of new money but out of surplus which the rules placed at the employers' disposal, by analogy with the case of a trust fund over which the employers had a power of appointment. On this construction, there has been no contradiction of the rules. Both constructions are conceptually possible. The correct choice depends upon the language of the scheme and the practical consequences of choosing one construction rather than the other.

54. The Court of Appeal, in coming to their decision that an amendment was needed, were impressed by the proviso to clause 13(1), which I quoted earlier. It provides for a suspension of contributions payable by the employer under paragraphs (a) to (f) "whether due and payable or prospectively payable", to the extent of any overpayments the employer may have made under rule 44(3). The Court of Appeal said that this express provision for the extinguishment of accrued liabilities showed that the employer could not have such a power by virtue of clause 14(5).

55. This is an argument of the expressio unius variety. I think that such arguments are often perilous, especially when applied to a patchwork document like the pension scheme. The fact that a specific provision is made in one place may throw very little light on whether general words in another place include the power to do something similar. The proviso deals with the correction of specific overpayments, whether the fund is in surplus or not. It does not help one to decide whether the employer can appropriate a surplus to the discharge of what would otherwise have been his accrued obligations. In any case, the proviso was introduced by amendment in 1988 and cannot have changed the meaning of clause 14(5), which has been in the scheme since its inception. I should add that neither counsel for the members supported the reasoning of the Court of Appeal on this point.

56. If any help can be derived from the terms of clause 14(5), I think it may rather be found in the provision that the arrangements must be certified by the actuary as reasonable. By contrast, the power of amendment does not have to be certified as reasonable. Subject to the clause 41(2) prohibitions, the employer can just go ahead and do it, whether the scheme is in surplus or not. This does suggest that clause 14(5) confers a separate power, subject to its own conditions.

57. More important than these linguistic points, as it seems to me, are the practical consequences of insisting that the arrangements should be made by amendment. The operation of the pension scheme should not be encumbered by unnecessary technicalities. On the other hand, if the amendment procedure provides some important safeguards for the members or the trustees, that might be a good reason to construe the scheme as requiring the employer to adopt it.

58. For this purpose it is necessary to examine the power of amendment in more detail. Clause 41 provides:

"(1) Any provision of the Scheme (including this Clause) may be amended (whether by alteration, deletion or addition and whether prospectively or retrospectively) in accordance with and subject to the following provisions of this Clause; Provided That no amendment shall be made which would affect its Approval or prevent such further amendment of the Scheme as may be required to maintain its Approval and Status.

(2) Any amendment to the Scheme shall be void to the extent to which it would otherwise have the effect of:

(a) altering the main purpose of the Scheme from that of providing Benefits for Members on Retirement;

(b) save as authorised or required by enactment from time to time, making any of the moneys of the Scheme payable to any of the Employers;

(c) reducing any Benefit payable to a Member or payable or prospectively payable to a Beneficiary."

    59. There follow a number of other restrictions on the amending power designed to protect the vested rights of various classes of members or other beneficiaries.

    60. Clause 41(3) and (4) provide respectively for two kinds of amendment. The first, under clause 41(3), is an amendment of the whole scheme by all the principal employers acting together. This power is not subject to consent or approval by anyone. The only requirement is that it has to be done by deed and, under subsection (8), notified to each subsidiary employer, the scheme trustee and the group trustees. The second kind of amendment, under clause 41(4), is by a principal employer to amend the scheme solely in relation to its own group. This is subject to a clearance procedure to make sure that the amendment will not have any impact upon the rights and liabilities of other groups or the approved status of the scheme as a whole. The amending deed must be notified to the scheme secretary (appointed by the co-ordinator, a company which represents all the principal employers) and does not take effect until the secretary has given a clearance notice (if he considers that the amendment is within the powers of the clause and will not prejudice the scheme) or, if he is of the contrary view, a dispute procedure has resolved the matter in favour of the amendment. The dispute procedure is between the amending employer and the co-ordinator, representing the other principal employers. The members and trustees are not involved. As between employer and members, therefore, an amendment (whether under rule 41(3) or (4)) is entirely a matter for the employer, subject to the restrictions in clause 41(2). The notification and dispute machinery in clause 41(4) is only for the protection of the other groups.

    61. It follows that, so far as the members are concerned, it does not in the least matter whether an application of surplus by an employer which falls outside the prohibitions in clause 41(2) is made by amendment or not. The argument that an amendment was needed only had substance when combined with the argument that such an amendment would have been prohibited by clause 41(2)(b). Deprived of that support, as the Court of Appeal thought it was, it becomes for the members a matter of pure technicality. That is demonstrated by the fact that the employers have been able to validate the arrangements simply by the execution of a deed of amendment.

62. The other persons interested in whether the amendment procedure is used are the trustees. They administer the fund and need clear directions on how to do so. This is essentially a practical question. If the arrangements are to endure for any length of time, an amendment is the most convenient and accessible way of recording them. That is why most of the improvements in benefits for members were embodied in amendments. On the other hand, single payments credited to a particular class of pensioners were not made the subject of an amendment. Counsel for the trustees told us that they saw no administrative difficulties in acting upon directions to make such payments. Likewise, there were no problems about the directions to debit surplus with the deficiency and supplementary payments which would otherwise have been payable by the employers.

63. The high technicality of the argument for the members on this point is shown by the fact that Mr Inglis-Jones, with his great experience of the way pension funds are administered, said that it would be perfectly acceptable for the employers to use surplus to create a reserve out of which to pay their future contributions. No amendment would be necessary. But he said that it was quite wrong to use surplus to discharge accrued liabilities. In my view, this distinction is unjustified. No doubt in the wake of the decision of Vinelott J in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1994] ICR 537 the distinction was very important, because the discharge of an accrued liability was treated as a payment out of the fund to the employer. But once that construction is abandoned, as I have suggested it should be, the distinction ceases to matter. For the reasons I have already given, it makes no business sense and therefore should not form the basis of what can be no more than an empty technical rule. In my view, therefore, it was a matter of pragmatic choice for the employers as to whether the arrangements made under clause 14(5) were embodied in scheme amendments or not.

64. That leaves two subsidiary arguments. The first was advanced by Mr Steinfeld for the National Power members in relation to the cancellation of the monthly instalments of accrued deficiency payments. He said that National Power was not entitled to decide unilaterally to pay these sums by instalments. A lump sum should have been paid in respect each redundant employee on his retirement. Therefore, if National Power had acted properly, the money would have been safely inside the scheme and protected from repayment, either by an implied restriction on the powers of clause 14(5) or by section 37 of the 1995 Act. To allow the instalments to be cancelled would be to allow National Power to take advantage of its failure to pay the money when it fell due.

65. Several answers to this submission were canvassed in argument but in my opinion the shortest is that I cannot see why National Power was not entitled, on the advice of the actuary, to determine that it would pay deficiency payments by instalments. Rule 13(1)(e) says that it shall pay "such amount as determined by the Principal Employer on the advice of the Actuary". Clause 47(e) provides that a singular word shall include the plural and there seems no contrary context in this case. The determination is made on actuarial considerations and from an actuarial point of view, any lump sum can be translated into an appropriate stream of periodic payments. Mr Steinfeld relied upon rule 16(3), which provides that the "additional cost" of the rule 16 benefits should be borne by the employer who last employed the member. "Cost", he said, means the whole cost, not a series of instalments. But rule 16(3) is concerned with the allocation of liability, not the determination of the amount. The "cost" is whatever amount or amounts may be determined by the principal employer under clause 13(1)(e).

66. The judge thought that the employer could not decide to pay deficiency payments by instalments. There was no express power to do so, by contrast with the express reference to making supplementary payments by instalments which is found in rule 44(4). The Court of Appeal (at para. 22) agreed that rule 44(4) was a "decisive counter-indication" which ruled out a power under 13(1)(e) to pay by instalments.

67. This is another expressio unius argument and in my view just as shaky as the last one. Like rule 44, clause 13(1)(f) was introduced by amendment in 1988, when clause 13(1)(e) was already in the scheme. So rule 44(4) can at most show what its draftsman may have thought clause 13(1)(e) meant. It cannot have changed its meaning from what it was before. Secondly, the situations contemplated by the two provisions are quite different. Under rule 44, it is trustees who determine the amount which the employer must contribute. If this is to be translated into what rule 44(4) calls "an amount equivalent in value, by way of instalments", then naturally the trustees must agree that it really is an equivalent in value. Under clause 13(1)(e), however, it is the employer who determines, on the advice of the actuary, what is actuarially necessary to provide for the additional cost of the rule 16 and 17 benefits. There is no reason why the need for such additional funding should not be expressed as instalments rather than a lump sum. So in my view National Power was entitled to make a determination to pay by instalments and there is no wrong of which it was seeking to take advantage.

68. The last point concerns the machinery adopted by National Grid to apply surplus to the discharge of its obligations under clause 13(1)(e). As I have explained, they determined their contribution at nil and at the same time directed the trustees to debit the amount necessary to fund the benefits against the available surplus until such time as it was exhausted. The members say that the rules do not permit a nil determination. Clause 13(1)(e) requires the actual cost of the benefits to be determined.

69. As a general proposition, this must be true. In the absence of an actual or forecast surplus against which an equivalent amount could properly be debited, it would not be right to determine the contribution at anything other than a genuine actuarial estimate of the cost of the increased benefits. I am sure that no actuary would give any other advice. But when the additional cost is debited against available surplus, the "nil determination" is no more than a book-keeping technicality. National Grid could just as well have "determined" its liability at the actuary's estimate of the cost of the benefits and then, instead of paying that amount, directed the trustees to treat it as discharged out of available surplus. The result would have been precisely the same and I do not think that the form of book-keeping should affect the validity of what National Grid did.

70. Finally it is said that, on the advice of the actuary, National Grid began this practice, as I have described, before a surplus had been officially certified. The actuary considered that it was pointless to pay money into the scheme to swell what was bound to be a surplus. I think that just as there was power to determine that deficiency payments should be paid at a series of future dates by instalments, so there was power to determine that they should be paid out of future surplus. Whether this was a sensible and prudent thing to do was a matter for the advice of the actuary. But I see no objection in principle to the steps which the actuary advised in this case.

71. I would therefore allow the appeal and declare that all the arrangements made by National Power and National Grid were valid.

LORD CLYDE

My Lords,

    72. I am in full agreement with the speech which has been delivered by my noble and learned friend Lord Hoffmann. On a proper construction of clause 41(2)(b) the release of a debt due by an employer is not the "making any of the moneys of the Scheme payable to any of the Employers". Nor does such a release fall within the wording of the corresponding language of section 37(1)(a) of the Pensions Act 1995. So far as the construction of clause 14(5) is concerned despite the apparently unrestricted language I agree that it should be construed as requiring that the arrangements should be made in accordance with the whole scheme, so that if a particular arrangement involves an alteration to the provisions of the scheme an amendment will be required, but if it does not, then it may be made without amendment. The question then is which, if any, of the particular elements of the arrangement innovate upon the scheme and in that regard I agree with the views expressed by my noble and learned friends Lord Hoffmann and Lord Scott of Foscote. I also agree that on a proper construction of clause 13(1)(e) payment by instalments in accordance with the actuary's advice are permissible. The matter of the nil determination in the National Grid case seems to me to be one of form rather than substance and subject to the actuary's advice the course taken is not objectionable

    73. I agree that the appeals should be allowed.

LORD SCOTT OF FOSCOTE

My Lords,

    74. I have had the advantage of reading a draft of the opinion of my noble and learned friend, Lord Hoffmann. I am in respectful agreement both with his reasoning and his conclusions but, in view of the importance of this case to those concerned with the administration of pension schemes, I propose to set out, in brief, my reasons for agreeing that the appeals in these two cases should be allowed.

    75. The first, and main, issue is one of construction of clause 14(5) of the Electricity Supply Pension Scheme. Clause 14(5) says that the relevant employer "shall make arrangements... to deal with such surplus..."

    76. There was considerable debate in the courts below and before your Lordships as to whether clause 14(5) merely imposed a duty or whether it conferred also a power to implement the arrangements that the employer desired to make. The provision confers power to "make arrangements". To that extent it is certainly a power-conferring provision. But it does not follow that it confers power upon the employer to amend the scheme. Clause 41 contains an express power to amend the scheme. The provisions of the scheme must be construed as a whole and, so construed, clause 14(5) cannot, in my opinion, be regarded as conferring on the employer a power of amendment free from the safeguards to which the clause 41 power of amendment is subject.

    77. In my opinion, to the extent that "arrangements" made by the employer under clause 14(5) are inconsistent with one or other of the provisions or rules of the scheme, the implementation of those arrangements requires the amendment of the scheme pursuant to clause 41.

    78. Accordingly:

(i) Arrangements made under clause 14(5) which involve altering the contribution obligations of either the employer or the employees under clause 13(1)(a) require, in my opinion, an amendment of the scheme.

(ii) An increase of the benefits payable under the rules, whether the increase takes the form of a lump sum one-off payment or any other form, requires, in my opinion, amendment of the scheme.

(iii) But the appropriation of surplus to meet accrued obligations of the employer under clause 13(1)(e) or (f) does not, in my opinion, require any amendment of the scheme. It was argued in relation to clause 13(1)(e) that the appropriation of surplus to meet an employer's obligation to make additional contributions to meet the extra cost to the fund of early retirements would be inconsistent with the terms of rule 16(3). If so, it would, consistently, with the principle I have expressed, require an amendment. In my opinion, however, the purpose of rule 16(3) was to identify which employer would have to bear the cost of an employee's early retirement. If there were adequate surplus in the fund, and a direction certified by the actuary as reasonable had been made under clause 14(5) for surplus to be appropriated to meet the cost of early retirement, no more would be needed. There would be no inconsistency between the clause 14(5) direction and the other provisions of the scheme. However, there is, in my opinion, no reason why a clause 41 amendment of the scheme should not release, or confirm the release, of an accrued but still unpaid liability in respect of contributions. I agree with Lord Hoffmann that the clause 41(2)(b) limitation on the power of amendment does not bar an amendment which releases an employer's accrued liability to pay contributions that have not yet been paid. I, too, regard British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1994] 1 ICR 537 as having been wrongly decided on this point.

(iv) Arrangements made by the employer under clause 14(5) could take the form of a direction to the fund trustees, first, to set aside the surplus, or part of it, as a reserve fund, and, second, to appropriate the reserve fund in or towards payment of future contributions falling due under clause 13(1)(a). Directions of this character would not, in my opinion, require any amendment of the scheme unless the result were to reduce the current monthly contribution obligation of the employer to less than twice that of the members. If that were the result, an amendment of clause 13(1)(a) would be required.

(v) Arrangements made under clause 14(5) cannot take the form of a payment out of the pension fund to the employer. Absent an amendment to the scheme, the trustees could not justify making such a payment. And an amendment authorising such a payment would be barred by clause 41(2)(b).

(vi) The 5% increase in lump sum benefits on retirement provided by National Power as part of the arrangements for dealing with the 1995 surplus ought to have been included among the benefits confirmed by National Power's deed of amendment of 11 May 1999. But since no one objects to the payment of this extra benefit, the omission perhaps does not matter.