|Judgments - International Power Plc v. Healy and Others, Formerly National Power v. Feldon and Others and National Grid Company Plc v. Mayes and Others
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.
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.
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
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.
(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  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.