Aon Trust Corporation Ltd v KPMG (A Firm) & Ors [2005] EWCA Civ 1004

Case No A3/2004/2083

Case No A3/2004/2177

Case No A3/2004/2179

[2005] EWCA Civ 1004

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT CHANCERY DIVISION

The Rt Hon the Vice-Chancellor

HC04 C 00274

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date Thursday, 28 July 2005

Before

LORD JUSTICE MUMMERY

LORD JUSTICE CHADWICK

LORD JUSTICE JONATHAN PARKER

Between

AON TRUST CORPORATION LTDClaimant

KPMG (a firm) & OrsDefendants

(Transcript of the Handed Down Judgment of

Smith Bernal Wordwave Limited, 190 Fleet Street

London EC4A 2AG

Tel No: 020 7421 4040, Fax No: 020 7831 8838

Official Shorthand Writers to the Court)

Mr Christopher Nugee QC and Mr Jonathan Evans (instructed by Messrs DLA Piper Rudnick Gray Cary UK LLP) for AON TRUST

Mr Jonathan Sumption QC and Mr Paul Newman (instructed by Messrs Linklaters) for KPMG

Mr Robert Ham QC and Mr Michael Tennet (instructed by Messrs Pinsent Masons) for Ms Ruth James

Mr Brian Green QC and Ms Emily Campbell (instructed by Messrs Macfarlanes) for Mr Julian Walker

Judgment

[1]The claimant in these proceedings, Aon Trust Corporation Ltd (“the Trustee”), is the sole trustee of an occupational pension scheme known as the KPMG Staff Pension Fund (“the Scheme”). As its name implies, the Scheme provides benefits for employees of KPMG, the well-known firm of accountants, and its associated organisations. In these proceedings, the Trustee seeks the determination by the court of five questions arising in the administration of the Scheme, consequent upon the fact that the Scheme is currently in substantial deficit.

[2]The proceedings were heard by the Vice-Chancellor on 14, 15 and 16 July 2004. Before the Vice-Chancellor it was agreed by the parties that the fifth question should be stood over until answers had been given to the earlier questions. By his order dated 29 July 2004 the Vice-Chancellor made declarations in answer to the first three questions. In the light of his answer to the third question, the fourth question did not arise.

[3]In relation to each of the Vice-Chancellor’s declarations one or more of the defendants (whose identities and interests are explained below) sought permission to appeal. The Vice-Chancellor granted permission to appeal in relation to the third question, but refused permission to appeal in relation to the first and second questions. Applications for permission to appeal on the first and second questions were then made to this court. Those applications were listed to be heard together with the appeal on the third question, with a direction that in the event of permission being granted, the substantive appeal on the earlier questions should follow. In the event, we considered it appropriate to hear full argument on the earlier questions. Having done so, I would for my part grant permission to appeal on those questions.

[4]On that basis, each of the first three questions is a live question on this appeal. The fourth question will also become a live question in the event that the appeal on the third question succeeds. B. The parties

[5]The Trustee is a professional trustee company. It has been sole trustee of the Scheme since 23 December 2002. It appears by Mr Christopher Nugee QC and Mr Jonathan Evans (both of whom appeared before the Vice-Chancellor).

[6]The first defendant, KPMG, is the principal employer in the Scheme. Although at one time the majority of members of the Scheme were employed by KPMG, following a series of reorganisations all the members of the Scheme who are currently in pensionable employment are employed by KPMG (UK) Ltd, which is a participating employer in the Scheme. KPMG appears by Mr Jonathan Sumption QC and Mr Paul Newman (neither of whom appeared before the Vice-Chancellor).

[7]The second defendant, Ms Ruth James, is currently in receipt of pension under the Scheme: that is to say, she is a pensioner member of the Scheme. She has been appointed to represent all other pensioner members of the Scheme and those who have or might have similar interests. She appears by Mr Robert Ham QC and Mr Michael Tennet (neither of whom appeared before the Vice-Chancellor).

[8]The third defendant, Mr Julian Walker, is a member of the Scheme who is currently in pensionable employment: that is to say, he is an active member of the Scheme. He has been appointed to represent all other active members of the Scheme and any other members of the Scheme not represented by the second defendant. He appears by Mr Brian Green QC and Ms Emily Campbell (both of whom appeared before the Vice-Chancellor). C. The general nature of the Scheme

[9]The Scheme is a contracted-in occupational pension scheme, approved by the Inland Revenue. It was established by a Trust Deed dated 20 June 1949, the terms of which have subsequently been revised. The third (and latest) Deed of Revision is dated 24 April 1996 (I will call it “3DR”). 3DR has in turn been varied by five Deeds of Variation, the latest of which is dated 2 January 2001.

[10]With effect from 31 March 2000 the Scheme was varied so as to constitute two funds, a Pre-2000 Fund and a Post-2000 Fund. The Pre-2000 Fund thereupon became a closed fund. Since the questions for decision relate only to the Pre-2000 Fund, references hereafter to the Scheme are references to the Scheme as it applies to the Pre-2000 Fund.

[11]The Scheme provides for contributions to be made by active members and participating employers. These contributions secure for members of the Scheme an annual pension on retirement the amount of which is determined by a formula involving the application of multipliers figures contained in tables which form part of the Scheme. Application of the multipliers figures contained in the tables determines the amount of annual pension payable at the member’s ‘Normal Pension Date’ in respect of each £1 of contribution paid during specified periods. The multipliers figures are in turn based upon actuarial estimates of such factors as investment returns, price inflation and mortality. Thus the amount of a member’s annual pension depends not only upon the contributions made by him and his employer towards that pension, but also upon the actuarial estimates which lie behind the multilpiers figures contained in the tables.

[12]Since the calculation of the amount of the annual pension is based partly on such estimates, periodic actuarial valuations are necessary in order to test the Scheme’s performance against actual experience, with a view to achieving, so far as possible, an equilibrium between the Scheme’s assets and its liabilities. To that end, the Scheme gives the Trustee powers to adjust the level of benefit which it provides (i.e. to adjust the Scheme’s liabilities) upwards or downwards as may be required from time to time, according to whether the periodic actuarial valuation reveals a surplus or a deficit of assets against liabilities. The Trustee also has power, where the actuarial valuation reveals a surplus, to decrease the level of funding by reducing contributions. These powers, which are central to the arguments which have been addressed to us on this appeal, are contained in clauses 8.4 and 8.5 respectively in Schedule 1 to 3DR, to which further reference is made below. D. The history of the Scheme

[13]In the past, the Scheme enjoyed an actuarial surplus. That led to the trustee for the time being declaring bonuses pursuant to clause 8.4 (or its equivalent in earlier deeds).

[14]The bonuses were expressed in terms of a percentage of a member’s total pension accrued to date. That percentage figure was added to the base figure, together with the additional pension accruing in the current year. As an example of this treatment, the evidence refers to the annual record card of a Mr Woolf. In his case, a bonus of 5 per cent was declared in 1976: i.e. 5 per cent of his accrued pension as at the end of 1975. which was £869.077. 5 per cent of £869.077 is £43.453. The latter sum, together with the additional pension attributable to the current year (£360.238), was then added to the base figure of £869.077, giving a new total accrued pension as at the end of 1976 of £1,272.768.

[15]In 1984 members’ manual records were replaced by computerised records. Since the early 1990s a member’s electronic record has shown(1) a fund value which is effectively accumulated contributions, interest and bonuses, and

(2) the amount of the accrued pension to date, with bonuses added to that figure (as in the case of Mr Woolf).

[16]However, the days of surplus came to an end in 1999. An actuarial valuation as at 31 March 1999 revealed a deficit of some £600,000. In the light of that valuation, no bonuses were declared in 1999, 2000 or 2001.

[17]As at 31 March 2002 the Scheme had 1,835 active members, 4,426 deferred members and 550 pensioner members. An actuarial valuation as at that date revealed a deficit of between £65M and £71M.

[18]In consequence, the Trustee is presently faced with the possibility that, unless KPMG is obliged to make good the current deficit, and/or the Trustee has power to reduce pensions in payment, the Trustee will be faced with a situation in which, if it continues to pay pensions in full as they fall due, the Scheme will run out of money. In effect, the Trustee will have operated what has been dubbed a ‘reverse tontine’, in which the older members receive their benefits in full whilst younger members suffer reductions in benefit, with the youngest taking no benefit at all. In these circumstances the Trustee understandably wishes to know what obligation (if any) KPMG has to fund the current deficit, and whether the Trustee has power to reduce pensions already in payment. The Trustee recognises that if it has such a power it may have little alternative but to exercise that power in order to maintain the solvency of the Scheme, albeit it views the prospect of reducing pensions already in payment with very considerable unease (to put it no higher). Other possible courses might be to wind up the Scheme, or to invite the Pensions Regulator to do so.

PART 2: THE QUESTIONSBEFORE THE COURT

[19]Questions 1 and 2 in the claim form are designed to clarify the nature and extent of the power to reduce benefits conferred by clause 8.5.

[20]Question 1 asks (by subparagraph (i)) whether the Trustee has power under clause 8.5 to reduce pensions already in payment, and (by subparagraph (ii)) whether it has power under clause 8.5 to make different reductions to the benefits of different members (and those claiming in respect of them). These are pure questions of construction of clause 8.5, read in the context of the Scheme as a whole. Before the Vice-Chancellor the parties agreed that if the answer to question 1(i) was in the affirmative, then so too was the answer to question 1(ii); and in his judgment the Vice-Chancellor confirmed that the answer to question 1(ii) was in the affirmative. In the circumstances, no separate argument has been addressed to us on question 1(ii).

[21]Question 2 asks whether the exercise of the power in clause 8.5 is subject to the restrictions imposed by section 67 of the Pensions Act 1995 (“PA 1995”). The relevant restrictions under that section are the requirement for members’ consent, alternatively for certification by an actuary that the proposed exercise of the power would not adversely affect any member of the Scheme (without his consent).

[22]Question 3 is the central question on this appeal. It asks whether the Scheme is a ‘money purchase scheme’ within the meaning of the Pension Schemes Act 1993 (“PSA 1993”) and PA 1995. The relevance of this question is that, as is common ground, unless the Scheme is ‘a money purchase scheme’ PA 1995 section 56 will apply to the Scheme and will impose a ‘minimum funding requirement’ which will have the effect of requiring KPMG to make good the Scheme’s current deficit, and PA 1995 section 75 will have a similar effect on a winding up of the Scheme.

[23]There is an overlap between questions 2 and 3, in that the effect of PA 1995 section 67 (if it applies to the power in clause 8.5) may itself have a bearing on whether or not the Scheme is a ‘money purchase scheme’ within the meaning of PA 1995 sections 56 and 75.

[24]Question 4 arises only if the Scheme is a ‘money purchase scheme’. It asks whether, if that be so, KPMG will nevertheless be subject to a funding obligation on a winding up of the Scheme.

[25]At the hearing below, the Trustee invited the Vice-Chancellor to determine a number of additional questions arising in the administration of the Scheme, but in the event the Vice-Chancellor declined to do so. Before us, the Trustee has renewed that invitation, albeit to a very much more limited extent. I will return to this aspect in Part 7 of this judgment.

PART 3: MONEY PURCHASE SCHEMES IN GENERAL

[26]We were helpfully referred in argument to passages from the report of the Pension Law Review Committee (Chairman: Professor Roy Goode) (CM2342) entitled ‘Pension Law Reform’ (better known as the Goode Committee Report), which was published in 1993 following the Maxwell debacle. The general observations which follow in this Part of the judgment are based upon my understanding of those passages.

[27]An employer setting up an occupational pension scheme must decide at the outset what benefits the scheme is to provide, and how those benefits are to be funded. He may, for example, decide that the level of benefit is to be earnings-related: i.e. that it is to be set by reference to the member’s earnings. Such a scheme is commonly called a ‘defined benefit scheme’.

[28]Typical examples of defined benefit schemes are final salary schemes (where the pension represents a specific percentage of the member’s salary as at the date of his leaving pensionable employment) and average salary schemes (where the base figure on which the pension is calculated is the member’s average salary over the whole period of his employment).

[29]Since (by definition) the cost of providing future benefits under a defined benefit scheme cannot be accurately predicted, such schemes usually contain a provision obliging the employer to make good any deficit (that is to say, any shortfall of assets as against liabilities). Such a provision is commonly called a ‘balance of cost obligation’. Similarly, a defined benefit scheme may provide for the reduction or suspension of contributions (i.e. a contributions holiday) where the scheme is currently in surplus.

[30]Thus, in a typical defined benefit scheme any mismatch from time to time between assets and liabilities is cured by adjusting the assets to match the liabilities: i.e. by increasing or, as the case may be, decreasing the level of funding as appropriate in the light of the most recent actuarial valuation. In such a scheme, the level of benefit dictates the level of contribution.

[31]Alternatively, an employer setting up an occupational pension scheme may decide to define the level of benefits by reference solely to the contributions made in respect of the member concerned, so that the benefit represents no more and no less than the product of the contributions. Such a scheme is commonly called a money purchase scheme (I will come to the statutory definition of that term later).

[32]Thus in a typical money purchase scheme there can, by definition, be no mismatch between assets and liabilities, Hence there is no need (indeed, no scope) for a ‘balance of cost’ obligation on the employer, since the level of contribution dictates the level of benefit and no ‘balance of cost’ can arise.

PART 4: THE RELEVANT LEGISLATION

[33]As already noted, question 1(i) raises a pure question of construction of clause 8.5 of the Scheme, which falls to resolved without reference to statute. The only questions which require a consideration of the relevant legislation are questions 2 and 3 (in any event) and question 4 (if it arises).

[34]The statutory provisions of direct relevance to questions 2 and 3 are sections 56, 67 and 75 in PA 1995 Part 1.

[35]PA 1995 Part 1 applies to occupational pension schemes. It is common ground that the Scheme is an ‘occupational pension scheme’ as that expression is defined in PSA 1993 section 1 (a definition which is imported into PA 1995 by ibid. section 124(5)), that is to say it is a scheme: “… which is comprised in one or more instruments … and which has … effect in relation to one or more descriptions or categories of employments so as to provide benefits, in the form of pensions or otherwise, payable on termination of service, or on death or retirement, to or in respect of earners with qualifying service in an employment of any such description or category”.

[36]PA 1995 section 56 subjects certain occupational pension schemes to a ‘minimum funding requirement’ as defined in subsection 56(1), that is to say: “… a requirement … that the value of the assets of the scheme is not less than the amount of the liabilities of the scheme”.

[37]Section 56(2) provides that the section does not apply to ‘a money purchase scheme’ (subparagraph (a)) or to certain other types of scheme (subparagraph (b)).

[38](It should be noted that under the Pensions Act 2004 the minimum funding requirement is to be replaced, with effect from a date to be appointed, by a scheme-specific funding requirement which proceeds on the same basis as PA 1995 section 56 in that it does not apply to a ‘money purchase scheme’ and provisions for reducing liabilities by reference to assets are to be ignored.)

[39]It is common ground that section 56 applies to the Scheme unless it is a ‘money purchase scheme’. Accordingly, question 3 asks whether the Scheme is a ‘money purchase scheme’: in effect, whether the Scheme is subject to the ‘minimum funding requirement’.

[40]PA 1995 contains no definition of the expression ‘money purchase scheme’, but PA 1995 section 124(5) imports the definition contained in PSA 1993 section 181(1), viz: “a pension scheme under which all the benefits that may be provided are money purchase benefits”.

[41]The expression ‘money purchase benefits’ is in turn defined in PSA 1993 section 181(1) as meaning, in relation to a member of an occupational pension scheme or the widow or widower of a member of such a scheme: “… benefits the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of the member and which are not average salary benefits”.

[42]Thus, a scheme is not a ‘money purchase scheme’ if any of the benefits for which it provides is an ‘average salary benefit’.

[43]There is no all-purpose statutory definition of the expression ‘average salary benefit’ in either PSA 1993 or PA 1995, but PSA 1993 section 84 (basis of revaluation of benefits by the final salary method) contains, in subsection (4), a definition of that expression where it is used in that section. For that purpose the expression ‘average salary benefit’ is there defined as meaning: “… benefit the rate or amount of which is calculated by reference to the average salary of a member over the period of service on which the benefit is based”.

[44]Before the Vice-Chancellor it was common ground that, absent any other statutory definition of the expression ‘average salary benefit’, the definition of that expression in PSA 1993 section 84(4) is applicable for present purposes. The contrary has not been argued on this appeal.

[45]Returning to PA 1995 section 56, section 56(4) provides that in calculating the value of any liabilities for the purposes of section 56: “… a provision of the scheme which limits the amount of its liabilities by reference to the amount of its assets is to be disregarded”.

[46]It is thus implicit in section 56 that the inclusion of a provision which purports to limit the amount of the scheme’s liabilities by reference to the value of its assets (so as automatically to extinguish any deficit revealed on valuation) will not in itself render the scheme a ‘money purchase scheme’.

[47]I turn next to PA 1995 section 67. Section 67(1) provides that the section applies to ‘any power conferred on any person by an occupational pension scheme … to modify the scheme’. Question 2 asks whether the power in clause 8.5 of the Scheme is a power to ‘modify’ the Scheme within the meaning of section 67(1) since, if it is, the restrictions contained in the following provisions of section 67 will apply to its exercise.

[48]There is no definition of the word ‘modify’ in either PSA 1993 or PA 1995. However,PSA 1993 section 181(1) defines the word ‘modifications’ as including ‘additions, omissions and amendments’; and that definition is imported into PA 1995 by ibid. section 124(5).

[49]PA 1995 section 67(2) provides as follows (so far as material): “The power cannot be exercised on any occasion in a manner which would or might affect any entitlement [or] accrued right … of any member of the scheme acquired before the power is exercised unless the requirements under subsection (3) are satisfied”.

[50]PA 1995 section 124(2) provides that for the purposes of PA 1995 Part 1 (which includes section 67):

“(a) the accrued rights of a member of an occupational pension scheme at any time are the rights which have accrued to or in respect of him at that time to future benefits under the scheme, and (b) at any time when the pensionable service of a member of an occupational pension scheme is continuing, his accrued rights are to be determined as if he had opted, immediately before that time, to terminate that service; and references to accrued pension or accrued benefits are to be interpreted accordingly.”

Neither PSA 1993 nor PA 1995 contains any definition of ‘entitlement’. and references to accrued pension or accrued benefits are to be interpreted accordingly.”

[51]As noted earlier, the relevant requirements under section 67(3) are for members’ consent, alternatively for certification by an actuary that the proposed exercise of the power would not adversely affect any member of the scheme (without his consent).

[52]Finally in the context of PA 1995 section 67, I note PA 1995 section 117, which is headed ‘Overriding requirements’ and whichprovides as follows (so far as material):

“(1) Where any provision mentioned in subsection (2) conflicts with the provisions of an occupational pension scheme – (a) the provision mentioned in subsection (2), to the extent that it conflicts, overrides the provisions of the scheme, and (b) the scheme has effect with such modifications as may be required in consequence of paragraph (a). (2) The provisions referred to in subsection (1) are those of – (a) this Part [i.e. PA 1995 Part 1], ….” (a) the provision mentioned in subsection (2), to the extent that it conflicts, overrides the provisions of the scheme, and (b) the scheme has effect with such modifications as may be required in consequence of paragraph (a). (a) this Part [i.e. PA 1995 Part 1], ….”

[53]PA 1995 section 75(1) provides that if any time during the winding up of such a scheme (the employer not having been placed in insolvent liquidation or, if an individual, become bankrupt) the value of the assets is less than the amount of the liabilities of the scheme at such time:

“… an amount equal to the difference shall be treated as a debt due from the employer to the trustees of managers of the scheme”

. Section 75(6) is in identical terms to section 56(4) quoted in paragraph 45 above.

[54]As already noted, question 4 only arises if the answer to question 3 is that the Scheme isa money purchase scheme. The question is whether, notwithstanding that fact, the Scheme (on its true construction) imposes a funding obligation on KPMG corresponding to the obligation which is imposed on an employer by PA 1995 section 75on a winding up of non-money purchase scheme.

PART 5: THE DETAILED PROVISIONS OF THE SCHEME

[55]References hereafter to the text of 3DR (including its schedules) are references to the consolidated text; that is to say, to the original text as varied by subsequent Deeds of Variation.

[56]The revised terms of the Scheme are set out in 3DR Schedules 1 and 2. Schedule 1 contains the substantive clauses. Schedule 2 contains the general rules of the Scheme (“the Rules”). Appended to the Rules are the actuarial tables referred to earlier.

[57]Clause 1 of 3DR Schedule 1 contains definitions. ‘Member’ is defined as (so far as material): “an individual who has been admitted to membership of the Scheme … and who remains entitled (whether prospectively or actually) to any benefit from the Scheme”.

[58]‘Salary’ is defined as meaning, in relation to a member: “(a) at any time when the Member is not participating in a profit-related pay scheme constituted by his Employer, the annual rate of his basic salary or wages from his Employer as determined by the Principal Employer; or (b) at any time when the Member is participating in a profit-related pay scheme constituted by his Employer, the annual rate of his notional salary or wages from his Employer being the total of his basic salary or wages from his Employer as determined by the Principal Employer and his planned profit-related pay; and such other element or elements (if any) of his remuneration from his Employer as his Employer may from time to time determine to be pensionable and notify as such to the Principal Employer and the Trustees”.

[59]Clause 2 contains the trusts of the Scheme. Clause 2.3 defines the main purpose of the Scheme as being the provision of pensions on retirement for or in respect of employees of the ‘Principal Employer’ (i.e. KPMG) and the ‘Participating Employers’ (i.e, currently, KPMG (UK) Ltd). Clauses 3 to 7 inclusive deal with essentially administrative matters, and I need not refer to them.

[60]I will set out clause 8 in full. It provides as follows:

“Actuary 8.1 The Trustees shall have power, in consultation with the Principal Employer, to appoint an Actuary to be the Actuary to the Scheme on such terms as they shall think fit. The Trustees shall have power, in consultation with the Principal Employer, to remove the Actuary from office for any reason whatsoever. Actuarial valuations 8.2 The Trustees’ duty to obtain actuarial valuations of the Scheme’s assets in relation to its liabilities is limited to the duty imposed on them by Regulation 8 of the [Occupational Pension Scheme (Disclosure of Information) Regulations 1986]. 8.3 In addition, the Trustees shall have power, with the consent of the Principal Employer to obtain an actuarial valuation or an interim review prepared by the Actuary or such other Actuary, as at such date, on such basis, and for such purpose as the Trustees shall think fit. Surplus revealed by actuarial valuation 8.4 If an actuarial valuation or interim review of the [Pre-2000] Fund shows a surplus the Trustees may, with the consent of the Principal Employer and after taking the Actuary’s advice and after making any such amendments to the Trust Deed and/or the Rules as may be necessary, decrease the contributions of any Member and/or increase (by declaration of bonuses or interim bonuses or otherwise) the benefits or future benefits of any Member or other person entitled to receive any benefit from the [Pre-2000] Fund. Deficiency revealed by actuarial valuation 8.5 If an actuarial valuation of the [Pre-2000] Fund reveals a deficiency in the [Pre-2000] Fund’s resources, the Trustees may with the consent of the Principal Employer make such adjustments and amendments to the benefits secured or thereafter accruing for or in respect of the Members as are necessary in the opinion of the Trustees after taking the Actuary’s advice to secure the continued solvency of the [Pre-2000] Fund. Actuarial advice and determination 8.6 Where any amount is required by any of the provisions of the Trust Deed or the Rules to be determined by the Trustees with the advice of the Actuary, or to be determined by the Actuary, tables from time to time supplied to the Trustee by the Actuary may be used for this purpose.”

Actuarial valuations Surplus revealed by actuarial valuation Deficiency revealed by actuarial valuation

Actuarial advice and determination

[61]I need not refer to clause 9, which contains a number of administrative powers exercisable by the Trustee. Clause 10 deals with augmentation. It provides as follows:

“Request from Employer to Trustees 10.1 Any Employer may request the Trustees to grant additional or new benefits under the Scheme for or in respect of any of its employees or former employees whether or not the employee or former employee is or is not already a Member. Estimate of cost of benefits 10.2 Before granting any benefits to which an Employer’s request pursuant to sub-Clause 10.1 relates, the Trustees shall obtain an estimate of the increase in the value of the liabilities of the Scheme which will result from doing so together with advice as to the funding of such increase. Grant of additional and new benefits 10.3 The Trustees shall grant any benefits to which a request made pursuant to sub-Clause 10.1 relates, subject to the following conditions: 10.3.1 the benefits do not exceed Revenue Limits; 10.3.2 the Employer which makes the request makes such additional contributions to the General Fund, or enters into such other arrangements (if any) with the Trustees, as the Trustees may require in order to fund the increase in the value of the liabilities of the Scheme resulting from the grant of the benefits.”

Estimate of cost of benefits

Grant of additional and new benefits

[62]In the context of the expression “accrued right” in PA 1995 section 67(2) (see paragraph 49 above) our attention was drawn in the course of argument to similar expressions in clause 13 (power to buy out benefits) and clause 14 (power to transfer benefits to another scheme), as follows:• clause

13.1 contains a power for the Trustees to buy out benefits “accrued under the Scheme to and in respect of any Member”;

• clause

13.2 provides that in exercising that power the trustee may secure benefits which are “the same as those accrued to or in respect of the Member under the Scheme”;

• clause 13.8 refers to “the benefits accrued to and in respect of [a Member] under the Scheme”;

• clause 13.11.1 refer to the benefits which have accrued to or in respect of [the Member] under the Scheme”;

• clause 13.12 refers to “the benefits accrued” to any person on the death of a member of the Scheme;

• clause 14.1 refers to “the benefits accrued under the Scheme”;

• clauses 14.6.1 and 14.15 contain similar references (as does Rule 17.9, referred to below); and

• clause 14.8, which is concerned with transfer payments, provides as follows (so far as material):

“… the amount of any transfer payment to be made pursuant to this Clause shall be the amount which the Trustees determine to be equal to the value of the Member’s interest in the Fund at the time of transfer, being not less than the cash equivalent … of the benefits accrued to and in respect of the Member under the Scheme.”

[63]Clause 17 is concerned with participating employers. Clause 17.11.3 provides that a Participating Employer:

“… shall cease to have any obligation to pay any contributions to the Scheme after the date when its participation terminates except contributions due but unpaid at the date of termination and any sum payable by it pursuant to [PSA 1993 section 144: the forerunner of PA 1995 section 75].”

[64]Clause 18.1 contains a power of amendment in the following terms:

“The Trustees shall have power with the consent of the Principal Employer at any time or times to alter, amend, add to and/or cancel all or any of the provisions of the Trust Deed or Rules provided that nothing shall be done which would: (a) cause the main purpose of the Scheme to cease to be that stated in sub-Clause 2.3 or (b) cause the payment or transfer of the Fund or any part of it to the Principal Employer or any Participating Employer.” (a) cause the main purpose of the Scheme to cease to be that stated in sub-Clause 2.3 or (b) cause the payment or transfer of the Fund or any part of it to the Principal Employer or any Participating Employer.”

[65]Clauses 19 and 20 contain provisions which are relied on by the pensioner member and the active member in support of their contention (in the context of question 4) that even if the Scheme is a ‘money purchase scheme’, KPMG is nevertheless under an obligation, imposed by the Scheme itself on its true construction, to make good any deficiency on a winding up of the Scheme. The relevant clauses are clause 19.4.3 and clause 20.12.

[66]Clause 19 deals with termination. Clause 19.4 sets out certain consequences of termination, including (at 19.4.3):

“the Employers shall cease to have any obligation to pay any contributions to the Scheme except contributions due but unpaid at the date of termination and any sum payable by them pursuant to [PSA 1993 section 144: the predecessor of PA 1995 section 75].”

[67]Clause 20 deals with winding up. Clause 20.12 (which is headed ‘Power to secure liabilities on an interim basis’) provides as follows (so far as material):

“If for any reason the Trustees experience delay in realising the assets of the Scheme (including the discharge of any debt due to them from any of the Employers under [PSA 1993 section 144: the predecessor of PA 1995 section 75]) or in determining the Scheme’s liabilities in respect of pensions and other benefits, they shall have power to apply such part of the assets of the Scheme as they shall think fit in securing any or all of such liabilities as they are able to determine ….”

[68]I turn next to the Rules. Section II of the Rules (comprising rules 5 and 6) deals with contributions. Rule 5 deals with members’ contributions. It provides for compulsory contributions equal to a specified percentage of a member’s salary (but with a power for the member in certain circumstances to elect to pay an increased percentage). Rule 6 deals with employer’s contributions. In essence, it obliges the employer to pay contributions equal to a specified percentage of a member’s salary, such percentage varying according to the age of the member and according to whether he has elected to pay increased contributions.

[69]Section III of the Rules (comprising rules 7 to 9) deals with the calculation of a member’s pension. Rule 7 governs the calculation of a pension commencing at Normal Retirement Date. It provides as follows (so far as material):

“Member’s entitlement to pension from Normal Retirement Date 7.1 A Member whose pensionable service terminates as a result of his retirement from Service on his Normal Pension Date shall be entitled to a pension from the Scheme which shall commence to be payable with effect from the day following his Normal Pension Date for the remainder of his lifetime and calculated in accordance with this Rule. Annual amount of Member’s pension 7.2 The annual amount of a Member’s pension under sub-Rule 7.1 shall be calculated as follows: (1) by taking the total amount of the contributions paid by him and his Employer into the General Fund during or in respect of each Contribution Period up to and including the Contribution Period ending 31 March 2000 and multiplying it by the appropriate factor determined from the Tables in Appendix A in accordance with sub-Rule 7.3 in order to give the amount of pension derived from each Contribution Period; (2) by increasing the amounts determined in accordance with paragraph (1) of this sub-Rule by bonuses declared pursuant to sub-Clause 8.4 … and/or by reducing them by any adjustments made pursuant to sub-Clause 8.5; and (3) by aggregating the amounts of pension determined in accordance with paragraphs (1) and (2) of this sub-Rule. …. Sources of additional pension 7.5 A Member’s pension on retiring at Normal Pension Date may exceed the pension determined in accordance with the preceding sub-Rules of this Rule by virtue of: (1) any additional voluntary contributions paid [by the Member] and not taken into account … in calculating the benefits payable to or in respect of him from the General Fund; (2) any rights and benefits granted upon the acceptance or a transfer payment in respect of him …; and (3) any augmentation of his benefits in accordance with Clause 10 or the corresponding provisions of the Scheme previously in force. Other provisions applicable to Member’s pension 7.6 The Member’s pension payable under this Rule: (1) shall be reduced in accordance with Rules 10 and 11 if the Member exercises either or both of his options under them; …”

Annual amount of Member’s pension (1) by taking the total amount of the contributions paid by him and his Employer into the General Fund during or in respect of each Contribution Period up to and including the Contribution Period ending 31 March 2000 and multiplying it by the appropriate factor determined from the Tables in Appendix A in accordance with sub-Rule 7.3 in order to give the amount of pension derived from each Contribution Period; (2) by increasing the amounts determined in accordance with paragraph (1) of this sub-Rule by bonuses declared pursuant to sub-Clause 8.4 … and/or by reducing them by any adjustments made pursuant to sub-Clause 8.5; and (3) by aggregating the amounts of pension determined in accordance with paragraphs (1) and (2) of this sub-Rule. Sources of additional pension (1) any additional voluntary contributions paid [by the Member] and not taken into account … in calculating the benefits payable to or in respect of him from the General Fund; (2) any rights and benefits granted upon the acceptance or a transfer payment in respect of him …; and (3) any augmentation of his benefits in accordance with Clause 10 or the corresponding provisions of the Scheme previously in force. (1) shall be reduced in accordance with Rules 10 and 11 if the Member exercises either or both of his options under them; …”

Sources of additional pension

[70]Rule 8 governs the calculation of pensions commencing before Normal Pension Date. It provides as follows (so far as material): “Circumstances in which Member’s pension may commence early 8.1 A Member may elect that his pension shall commence from a date before Normal Pension Date if the following conditions are satisfied: (1)(a) having attained the age of 50 he retires from Service …; or (b) he retires from Service before attaining age 50 … as a result of incapacity …; and (2) if the pension is to commence before the Member’s 60th birthday, his Employer and the Trustees consent to the commencement of his pension from that date. …. Annual amount of early retirement pension 8.3 Subject to sub-Rule 8.4, the annual amount of a Member’s pension under sub-Rule 8.1 shall be determined by taking the pension to which he would be entitled in accordance with Rule 7 on retiring at Normal Pension Date and adjusting it by such amount as the Trustees having taken the advice from the Actuary consider appropriate …” (b) he retires from Service before attaining age 50 … as a result of incapacity …; and

Annual amount of early retirement pension

[71]Rule 9 governs the calculation of pensions commencing on a date after Normal Pension Date. Rule9.1 enables a member who continues in pensionable employment after his Normal Pension Date to postpone the commencement of his pension. Rule

9.2 provides that where a member has exercised that power: “… the annual amount of his pension shall be equal to the pension which would have been payable to the Member under Rule 7 if the Member had retired on the Member’s Normal Pension Date increased by such proportion as the Trustees having taken advice from the Actuary consider appropriate having regard to the Member’s age at the date when the pension starts to be paid”.

[72]Rule 10 contains provisions as to commutation. Rule 10.4 provides as follows (so far as material):

“A Member who continues to be employed by any of the Employers after his Normal Pension Date may not receive a lump sum by way of commutation pursuant to this Rule until he commences to receive his pension from the Scheme unless he is a Class B Member or a Class C Member …, in which case he may make an election [to commute part of his pension for a lump sum] at any time from his Normal Pension Date to the date when his late retirement pension commences to be paid.”

[73]Rule 17 governs the entitlement of early leavers to preserved benefits under the Scheme. Rule 17.9 provides that, as an alternative to retaining his entitlement to such benefits, an early leaver may request the trustee to exercise its power under clause 13 or 14 to buy out “the benefits accrued to or in respect of himunder the Scheme” or to transfer them to another scheme.

[74]Rule 19 governs payment of pensions. Rule19.1 provides that, subject to Rules

19.2 and 19.3, all pensions are to be paid in arrears by monthly instalments. Rule 19.2 confers power on the trustee to alter the date on which and/or intervals at which pensions are paid. Rule

19.3 deals with accrual of pension, as follows (so far as material):

“A Member’s pension shall accrue at an equal daily rate from the day following the day of the Member’s retirement to the day of his death (both dates inclusive). A spouse’s or Dependant’s pension shall accrue at an equal daily rate from the day after the death of the Member ... to the day of the spouse’s or Dependant’s own death (both dates inclusive) ….”

[75]Rule 20 governs increases in pension. It provides as follows (so far as material): “20.1 [In so far] as any pension payable from the Pre-2000 Fund is attributable to contributions paid to the Scheme after 31 March 1997 … its annual rate shall be increased with effect from 1 January in each year by the lesser of:(i) the percentage annual increase in the RPI …; and

(ii) 5 per cent. …. 20.4 [In so far] as any pension payable from the Pre-2000 Fund is attributable: (a) to contributions paid to the Scheme before or on 31 March 1997; or (b) to contributions paid to the Scheme after 31 March 1997 in respect of employment before or on that date; no increase in its annual rate is guaranteed, but increases may be payable as a result of the declaration of bonuses pursuant to sub-Clause 8.4.” (i) the percentage annual increase in the RPI …; and (ii) 5 per cent. (a) to contributions paid to the Scheme before or on 31 March 1997; or (b) to contributions paid to the Scheme after 31 March 1997 in respect of employment before or on that date;

[76]Rule 21 concerns the maintenance by the trustee of a Special Account. Rule21.1 requires the trustee to maintain such an account, together with sub-accounts relating to each employer in the Scheme, to which the amounts specified in Rule

21.2 are to be credited. Rule 21.2 list various situations in which money is retained within the Scheme. Rule 21.4 provides as follows:

“The Trustees shall at the direction of the Principal Employer apply the whole or any part of the balance standing to the credit of the Special Account in or towards the payment pro rata of the Employer’s future contributions or in payment of additional benefits to any Member or Members or for any other purpose of the Trust Deed and these Rules (including the payment of new or increased benefits under clause 10).”

[77]Appended to the Rules are the actuarial tables mentioned earlier. There are nine of them, each relating to different contribution periods. Table 1 relates to contributions made in respect of periods prior to 30 September 1954, table 2 to contributions made in respect of periods between 1 October 1954 and 30 September 1964, and so on. Each table is described in its heading as “showing the amount of pension secured by a contribution of £1 during the year at the end of which the Member attained the next birthday shown”.

PART 6: THE VICE-CHANCELLOR’S JUDGMENT

[78]The Vice-Chancellor answered question 1(i) in the affirmative. That is to say, he held that clause 8.5 empowers the Trustee to reduce pensions already in payment. He gave his reasons in paragraph 25 of his judgment, as follows:

“Clause 8 deals with actuarial valuations and their consequences. Such a valuation is bound to take account of liabilities in respect of pensions in payment as well as in prospect. The terms of clause 8.5, when read with the definition of member, reflect this requirement. The definition of member and the reference to benefits secured each embrace pensions in payment. Rule 7.2(2) expressly contemplates a reduction in accordance with clause 8.5 before retirement but does not exclude the consequence of a reduction thereafter. Whether or not the further provisions in relation to increases to be found in clause 10.4 and rule 20.4 are necessary, I do not consider that the absence of a corresponding provision in respect of clause 8.5 leads to any conclusion different from that which the clear language of both clause 8.5 and rule 7.2(2) require.”

[79]The Vice-Chancellor also answered question 1(ii) in the affirmative. Having noted (in paragraph 18 of his judgment) that there was no dispute as to the answer to question 1(ii), he nevertheless addressed the question, saying this (in paragraph 26):

“As I have already indicated, no party was concerned to argue for a negative answer to question 1(ii). Having considered the matter for myself, I think they were right not to do so. If the power exists at all, there are no words to indicate that it must be exercised in the same way for all members. Nor, given the fiduciary duty of the Trustee, is there any reason to imply any such limitation.”

[80]The Vice-Chancellor also answered question 2 in the affirmative, holding that the power in clause 8.5 is a power to ‘modify’ the Scheme within the meaning of PA 1995 section 67, since an exercise of the power would amount to an ‘omission’ for the purposes of the definition of ‘modifications’ in PSA section 181.

[81]As to the meaning of the definition of ‘modifications’, the Vice-Chancellor said this (in paragraph 31 of his judgment):

“Thus an ‘addition’ or ‘omission’ not amounting to or requiring an amendment will be a modification. It follows that an adjustment requiring such an addition or omission comes within the section. This demonstrates that a modification does not require any change to the relevant documents.”

[82]The Vice-Chancellor continued (in paragraphs 32 and 33 of his judgment):

“32. Then does the exercise of the power conferred by clause 8.5 necessitate such an addition or omission? In my view it does. The argument of Counsel for the Active Member appears to me to attribute to the word "scheme" a sense corresponding to the document in which it is recorded but excluding the rights conferred by it. It may be that an exercise of the power contained in clause 8.5 can be implemented without any alteration to the constituting documents of the scheme. In this sense an adjustment not involving an amendment can be made by deducting from the pension otherwise due the amount of the reduction. But to conclude from that consideration that the section does not apply appears to me to ignore the clear intention behind it. 33. The purpose of the section is to protect, amongst other things, entitlements. A pension in payment is an entitlement under the scheme, Barclays Bank plc v Holmes [2000] PLR 339 para 129, albeit subject to reduction in the event of the exercise of the power conferred by clause 8.5. The entitlement is a part of the scheme. In my view to reduce the entitlement is, to that extent, to modify the scheme by the equivalent of an omission. The fact that the reduction or omission from that part of the scheme is effected by the use of another part of the scheme, that is clause 8.5, does not seem to me to be material. For these reasons I will answer question 2 in the affirmative. ”

[83]In answer to question 3, the Vice-Chancellor held that the Scheme is not a ‘money purchase scheme’. After referring to the relevant statutory provisions, and after summarising the arguments which had been addressed to him, the Vice-Chancellor continued (in paragraphs 40 to 45 of his judgment): “40. I shall start by considering the derivation of the expression 'money purchase benefits' and the contexts in which it has been used. The earliest use to which my attention was drawn is in Schedule 1A to the Social Security Act 1985 which was inserted into the Social Security Act 1975 with effect from 1st January 1986. Such a benefit was defined as "any benefit the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of him". The schedule deals with the revaluation of pensions of early leavers, that is persons whose pensionable service terminates before normal pension age. Different methods of revaluation were to be applied to differently calculated pensions. Paragraph 3 dealt with pensions calculated by reference to the member's average salary, paragraph 4 to pensions calculated by reference to the member's length of service and paragraph 5 to pensions calculated by reference to a payment or payments made by the member or by any other person in respect of him. In the case of paragraph 5 "the investment yield and any bonuses arising from" such payments were to be applied in providing such benefit as would have been provided under the scheme.41. These provisions with amendments were re-enacted in ss. 84 and Schedule 3 to the 1993 Act. Schedule 3 provides for four methods of revaluation, final salary method, average salary method, flat rate method and money purchase method. The last mentioned method is applicable to money purchase benefits arising under an occupational pension scheme, see ss.84 (3). The method is to apply the investment yield and any bonuses arising from payments made by or on behalf of a member towards providing any pension or other retirement benefit which would have been payable under the scheme.

42. I accept the submission of counsel for KPMG that the evident object of these provisions is to try to ensure that an early leaver should ultimately obtain a benefit equating as nearly as possible with what he would have got had he remained an active member of the scheme. Equally it demonstrates quite clearly that it is envisaged that a money purchase benefit arises from and is correlative to a fund, actual or notional, and its investment yield constituted by the contributions paid by the member and his employer.

43. The second context in which the expression 'money purchase benefit' had been used is that of "contracting out". The Social Security Act 1986 made provision by s.6 and Schedule 2 for schemes providing money purchase benefits to contract out of the State Earnings Related Pension Scheme ("SERPS"). The definition of such benefits was "benefits the rate or amount of which is calculated by reference to a payment or payments made by a member of the scheme or by any other person in respect of a member other than average salary benefits". These provisions were re-enacted in ss.7 to 39 of the 1993 Act.

44. The purpose of singling out money purchase benefits was to ensure that if the scheme was to be allowed to contract out, a member with only money purchase benefits must have special money purchase contracted-out rights rather than a salary-related guaranteed minimum pension. Thus the distinction recognised that a money purchase benefit had no guaranteed or defined benefit for it depended on the investment yield obtained or attributable to the fund derived actually or notionally from the contributions made by the member and his employer.

45. The third context on which counsel for KPMG relied is s.144 of the 1993 Act. This was concerned with cases of a deficiency of assets on the winding up of the scheme or of the employer. It has been re-enacted with amendments in s.75 of the 1995 Act. The effect was to deem the deficiency to be a debt due from the employer to the trustees. The relevance for present purposes is that the schemes to which the provision applied excluded money purchase schemes as defined in s.181 of the 1993 Act. ” "any benefit the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of him". "benefits the rate or amount of which is calculated by reference to a payment or payments made by a member of the scheme or by any other person in respect of a member other than average salary benefits".

[84]After discussing the effect of PSA 1993 section 144 (re-enacted in PA 1995 section 75), and after referring to the report of the Goode Committee, the Vice-Chancellor referred to various other provisions of PA 1995. He continued (in paragraph 52 of his judgment):

“52. This excursus into the various contexts in which the definitions or concepts of money purchase benefits or schemes appear does show the characteristics such benefits or schemes are expected to have. First, a money purchase benefit cannot be a defined benefit because the investment yield from the underlying fund whether actual or notional cannot be precisely predicted. Second, a money purchase scheme is fully funded in the sense that liability for the benefits is in all normal circumstances exactly matched by available assets. Such schemes or benefits are to be contrasted with salary related schemes. They provide a benefit defined by reference to the salary of the member whether average or final. The liability for such benefit is unlikely to be exactly matched by available assets.”

[85]The Vice-Chancellor then turned to Rule 7.2, concluding (in paragraph 54 of his judgment) that the definition of ‘average salary benefits’ in PSA 1993 section 84, and in particular the phrase ‘calculated by reference to’: “… points to the yardstick or measure by which the benefit is to be ascertained or defined in the context of an occupational pension scheme”.

[86]The Vice-Chancellor continued:

“In a conventional money purchase scheme that will be the payments, actual or notional, into the fund for the ultimate benefit is defined only by what the fund will purchase at retirement. By contrast in a final salary scheme the benefit is ascertained or defined by reference to the final salary whether or not the liability for it has been matched by the contributions.”

[87]In paragraph 55 of his judgment the Vice-Chancellor concluded that the reason for the exclusion of ‘average salary benefits’ from the definition of ‘money purchase benefits’ in PSA 1993 section 181 was that whilst in an average earnings related scheme it was necessary to have resort to both earnings and contributions in ascertaining or defining the resulting benefit, that benefit was ultimately defined by reference to average earnings, not contributions, and as such was not to be regarded as a ‘money purchase benefit’. He continued (in paragraph 56 of his judgment):

“56. I conclude that this element of the pension benefit is calculated by reference to the average salary of a member over the period of service on which the benefit is based. The requirement for an annual calculation and a percentage contribution based on the earnings in that year gives rise to a measure or yardstick based on average salary. The application each year of a different factor to the contribution provides for weighting that average. The resulting benefit is ultimately calculated by reference to average earnings not payments. As such it cannot be a money purchase benefit. It follows that for this reason alone the scheme is not a money purchase scheme.”

[88]The Vice-Chancellor then turned to the calculation required by Rule 7.2(2) where bonuses have been declared, saying this (in paragraph 57):

“57. The other element of the pension benefit which enters into the calculation required by Rule 7(2) is any bonus declared in accordance with clause 8.4. This benefit is both contingent and discretionary. It is contingent on there being a surplus revealed by the actuarial valuation, the consent of the Principal Employer and favourable advice to the trustees from the actuary. Even then the right of the member depends on the exercise by the trustees of the discretion given to them by clause 8.4. Such a benefit need not be calculated by reference to payments made by or in respect of the member at all. For example an increase in benefit of 5% in the year to which my example (paragraph 14 above) relates is an increase to the amount of the prospective benefit. No doubt in deciding how large an increase to award the trustees would consider the size of the surplus but that would not give rise to the calculation of the benefit by reference to the surplus. Further, the proportion of the surplus attributable to the bonus credited to a member would not necessarily have arisen from that member's contributions. An example given by Counsel for the Pensioner Member illustrates this. Take two members of the same age who each retired at 65 with a pension of £4,000 per annum. Their contribution record may be very different, one may have served at a relatively modest level but for longer than the other, yet both will receive the same bonus.”

[89]For those reasons the Vice-Chancellor concluded (in paragraph 58 of his judgment) that the bonus element in the pension benefit was not a ‘money purchase benefit’ either. It followed that the Scheme is not a ‘money purchase scheme’.

[90]In the light of that conclusion, question 4 did not arise.

PART 7: THE TRUSTEE’S ADDITIONAL QUESTIONS

[91]The Vice-Chancellor’s decision that the Scheme is not a ‘money purchase scheme’ was based on his conclusion that neither the standard pension benefits nor bonuses awardable under clause 8.4 are ‘money purchase benefits’. In the light of that conclusion, it was not necessary for the Vice-Chancellor to consider the nature of other benefits for which the Scheme provides, as Mr Nugee had invited him to do. Similarly, although he concluded (in paragraph 56 of his judgment) that standard pension benefit is an ‘average salary benefit’, it was not necessary for the Vice-Chancellor to consider whether bonuses awardable under clause 8.4 also fell within the meaning of that expression.

[92]Mr Nugee, rightly recognising the inherent undesirability of inviting an appellate court to decide questions which, in normal circumstances, would fall to be decided at first instance, has not renewed before us the wide-ranging invitation which he extended to the Vice-Chancellor to decide, in relation to each of the various benefits for which the Scheme provides, not merely whether or not such benefit is a ‘money purchase benefit’, but, if it is not, whether it is an ‘average salary benefit’ or some other kind of benefit. He has, however, invited us to address that question in relation to standard pension benefits and bonuses awardable under clause 8.4.

[93]The reason why Mr Nugee seeks an answer to this additional question, should it arise, is that there are (as I understand it) differing requirements for revaluation depending upon the category into which the benefit falls (i.e. whether it is a ‘money purchase benefit’, an ‘average salary benefit’ or some other kind of benefit). He tells us that for the purposes of revaluation the Trustee’s predecessors as trustee treated both standard pension benefits and bonuses as ‘money purchase benefits’. However, if in either case the court concludes that the benefit in question is not a ‘money purchase benefit’, the Trustee will wish to know for the purpose of revaluation whether or not such benefit is an ‘average salary benefit’.

[94]In the particular, and somewhat unusual, circumstances of the instant case, I consider that it is appropriate that we should accede to Mr Nugee’s invitation and address that additional question, should it arise. PART 8: THE ARGUMENTS ON THIS APPEAL A. The arguments for KPMG

PART 8: THE ARGUMENTS ON THIS APPEAL

[95]KPMG is the appellant in relation to questions 2 and 3 and the respondent in relation to question 1(i). Mr Sumption addressed questions 2 and 3 in his opening, but addressed question 1(i) in the course of his reply (having heard the submissions of Mr Green and Mr Ham on that question).

[96]Central to Mr Sumption’s submissions on questions 2 and 3 is the proposition that the powers in clauses 8.4 and 8.5 are powers of adjustment which are integral to the process of calculating the amount of a member’s pension entitlement prescribed by rule 7.2. He submits that the application of the tables at the first stage of the calculation process produces only a “provisional” figure, and that the calculation process prescribed by rule 7.2 is not complete until the powers of adjustment in clauses 8.4 and 8.5 have been engaged. It follows, he submits, that there can no entitlement to thefigure produced simply by applying the tables, without regard to clauses 8.4 and 8.5.

[97]Basing himself on that proposition, he submits(a) that the powers of adjustment in clauses 8.4 and 8.5 are not powers ‘to modify the scheme’ within the meaning of PA 1995 section 67(1) since they are themselves an integral part of the calculation process (question 2); and

(b) (which, if I have understood the argument correctly, is really the other side of the same coin) that the Scheme is a ‘money purchase scheme’ for the purposes of PA 1995 sections 56 and 75 since the Scheme itself provides (by clauses 8.4 and 8.5) that its liabilities must match its assets (question 3).

[98]He stresses that prior to the coming into force of sections 56 and 75, the Scheme was operated in practice as a money purchase scheme. He submits that it cannot have been Parliament’s intention in enacting PA 1995 sections 56 and 75 to transform a money purchase scheme into a defined benefit scheme by creating rights or obligations for which the scheme does not provide: rather, Parliament’s intention must have been to ensure that the existing rights of members were properly and regularly funded. He submits that if the effect of section 67 is to render the power of adjustment in clause 8.5 unenforceable without consent, the absence of any ‘balance of cost’ obligation on the employer will mean that the Scheme no longer contains any provision for assets to match liabilities.

[99]Mr Sumption submits that the Scheme should not be construed on the footing that the draftsman was content to leave it to statute to fill what he describes as “the funding gap” (Day 1, p.49 lines 14-17). He advances three reasons for that: first, that the statutory provisions themselves are not comprehensive; second, that the inference must be that the draftsman intended the Scheme to operate autonomously; and third, the fact that the Scheme contains no ‘balance of cost’ obligation.

[100]Turning specifically to PA 1995 section 67 (i.e. to question 2), Mr Sumption submits that clause 8.5 is not caught by the section for two reasons, each of which derives from his basic proposition referred to above. His first reason is that the power in clause 8.5 is not a ‘power to modify’ the Scheme. His second is that the exercise of the power in clause 8.5 is not capable of affecting any ‘entitlement [or] accrued right’ of a member.

[101]As to his first reason, he submits that in exercising its power in clause 8.5 the Trustee is not modifying the Scheme: rather, the Trustee is giving effect to it in accordance with its unaltered terms. He submits that section 67 is not concerned with the modification of provisions which, like clauses 8.4 and 8.5, are already an integral part of the scheme. He points out that the exercise of the power in clause 8.5 does not change the terms of the Scheme. (He does, however, accept that an exercise of the power of amendment in clause 18 would be a modification of the Scheme: Day 1 p.63 lines 14-16.)

[102]He submits that if section 67 renders clause 8.5 unenforceable without consent, the effect of the section would be to modify the Scheme by creating an entitlement which did not previously exist under the Scheme, viz. an entitlement to a pension calculated without reference to clause 8.5, which would in turn mean that benefits could be payable at a level which would exceed the funding of the Scheme.

[103]As to his second reason, he submits once again that there is no entitlement under the Scheme to a pension calculated without reference to the powers of adjustment in clauses 8.4 and 8.5. He points out that the process prescribed by rule 7 expressly includes the clause 8.5 adjustment. He submits that it follows an exercise of the clause 8.5 power does not effect any change in a member’s right to his pension, since his only right is a right to a pension in the amount which results from the complete calculation process, including any adjustment under clause 8.4 or clause 8.5.

[104]As to the Vice-Chancellor’s conclusion (in paragraph 32 of his judgment: see paragraph 82 above) that the effect of an exercise of the clause 8.5 power would be to create an ‘omission’ within the meaning of the definition of ‘modifications’ in PSA 1993 section 181(1), Mr Sumption repeats his submission that the exercise of the clause 8.5 power is simply a part of the calculation process prescribed by the Scheme.

[105]As to the Vice-Chancellor’s conclusion (in paragraph 33 of his judgment: see paragraph 82 above) that a pension in payment is an entitlement under the Scheme, Mr Sumption repeats his submission that it cannot be an entitlement if the provision for calculating the pension amount incorporates the power of adjustment contained in clause 8.5. He draws a parallel in this respect with rule 20, which provides for an upwards revaluation. That too, he submits, is merely the operation of the existing Scheme in the light of a particular contingency. He draws a distinction between a modification of the terms of the Scheme and a change in the economic circumstances in which the Scheme operates.

[106]As to question 3, Mr Sumption submits that there is a fundamental difference between a scheme which provides for defined benefits in an amount which represents an entitlement, coupled with a discretion to reduce that entitlement, and a scheme which provides for no entitlement to anything more than what the fund will buy. He submits that the Scheme falls within the latter category, since under the Scheme there is no entitlement to a pension calculated without reference to clauses 8.4 and 8.5.

[107]He submits that all the benefits provided by the Scheme are ‘money purchase benefits’ within the statutory definition (see paragraph 41 above) since(1) they are benefits the amount or rate of which is calculated by reference to contributions, and

(2) they are not excluded from that definition as being ‘average salary benefits’.

[108]He submits that the pension is a ‘money purchase benefit’ since it is calculated by reference to contributions, clause 8.5 being an integral part of that calculation process.

[109]He further submits that if (contrary to his earlier submission) an exercise of the power in clause 8.5 to reduce benefits amounts to a modification of the Scheme, then the same must be true of an exercise of the clause 8.4 power to increase benefits (although it is not his case that an exercise of the clause 8.4 power would attract section 67). He submits that the only difference between the two is that members’ consent is more likely to be forthcoming to an increase in benefit than to a reduction.

[110]Mr Sumption submits that a further reason why an increase in benefit is a modification of the Scheme is that increasing the benefit for one member may adversely affect other members. He submits that if section 67 restricts the exercise of the clause 8.5 power to make downwards adjustments, whilst the clause 8.4 power to make upward adjustments remains intact, then the effect of section 67 has been to make a very radical alteration of the Scheme for which section 67 was not intended and which is inconsistent with the basic nature of a money purchase scheme. He submits that the purpose of section 67 was not to substitute a different method of calculating benefits so that a process which depended on adjustments both ways becomes a process which allows for adjustments one way only; and that section 67 cannot be used so as to substitute a different method of making the original pension calculation from the one for which the Scheme itself provides.

[111]Mr Sumption submits that the Vice-Chancellor was in error (in paragraphs 53 to 57 of his judgment) in treating the pension benefit as comprising essentially two distinct benefits, viz. the standard pension and any bonuses awarded under clause 8.4. Mr Sumption submits that there is one composite benefit under rule 7.2. In any event, he submits, the Vice-Chancellor was in error in categorising the standard pension benefit as an ‘average salary benefit’ because it is based on annual salary. In the first place, he repeats his submission that the calculation based on salary is only an intermediate stage in a calculation process which includes the powers of adjustment in clauses 8.4 and 8.5. In the second place, he submits that, even if the figure produced by the application of the tables were the final figure, rather than merely a provisional figure, it would not constitute an ‘average salary benefit’ since the calculation required by the tables is a calculation based on the aggregate amount of a member’s contributions over his entire working life, with different factors being applied to those contributions in different periods. The whole object of the tables, he submits, is to relate contributions (plus investment return) to the benefits subsequently obtained: i.e. a classic characteristic of a money purchase scheme. In the third place, Mr Sumption takes issue with the Vice-Chancellor’s reasoning that, because contributions are based on a given percentage of salary, a pension based on those contributions can properly be regarded as indirectly based on salary. The right question to ask, he submits, is whether the benefits are calculated by reference to the contributions. In the case of the Scheme, he submits, they clearly are. He submits that the Scheme is a money purchase scheme because the formula designed to produce a pension represents what the invested contributions will buy.

[112]As to Parliament’s intention in excluding ‘average salary benefits’ from the definition of ‘money purchase benefits’ (see paragraph 41 above), Mr Sumption referred us to a passage in Hansard recording what Mr John Major MP (then Minister of State at the Department of Health and Social Security) said on 19 May 1986 when moving an amendment to the Social Security Bill in the House of Commons. The amendment was designed to alter the definition of ‘money purchase benefits’ wherever that expression occurred in the Pensions Act 1975 so as to ensure that it did not include ‘average salary benefit’. Mr Major is recorded as saying this:

“A few schemes provide what are known as ‘unrevalued average salary benefits’, where members pay a percentage of their earnings as a contribution, and the benefits are then calculated as a straightforward multiple of those contributions. These are not ‘money purchase benefits’ in the sense we intend in the new pension arrangements provided by this Bill, because they are fixed in value and there is no element of investment return. In effect, they are salary-related benefits.”

[113]Mr Sumption submits that in the above passage, Mr Major rightly identified the mischief which led to the exclusion of ‘average salary benefits’ from the definition of ‘money purchase benefits’. He submits that in referring to a “straightforward multiple” Mr Major meant a multiplication process which took no account of investment returns.

[114]Turning to bonuses, Mr Sumption submits that the Vice-Chancellor erred in treating bonuses as a distinct benefit when, on the true construction of the Scheme, a bonus is no more than an adjustment to the provisional figure produced by applying the tables.

[115]Mr Sumption accepts that, given that valuations will only be made at intervals, it is unlikely that there will ever be an exact mathematical equilibrium between assets and liabilities. But he submits that that does not mean that the pension is not ‘calculated by reference to’ contributions within the meaning of the definition of ‘money purchase benefits’ in PSA 1993 section 181(1) (see paragraph 41 above). He submits that the function of the calculation formula prescribed by rule 7.2 is to relate the pension as closely as is practicable to the value of the fund which represents the contributions and to the member’s notional pro rata share of that fund. There is, he submits, nothing in the rule 7.2 formula which entitles a member to a defined benefit irrespective of the invested value of the contributions.

[116]Mr Sumption then turned to a number of other benefits provided by the Scheme (including ill-health and early retirement benefits under rule 8, augmentation under rule 10 and benefits paid out of the special account under rule 21.4), submitting that, on analysis, those benefits are also ‘money purchase benefits’.

[117]As to question 4, Mr Sumption submits at the outset that the court should not assume that if the Scheme is not a ‘money purchase scheme’, so that the statutory minimum funding requirement applies, there would necessarily be a deficiency to be met by the employer pursuant to that requirement.

[118]Turning to 3DR clause 19.4.3, he submits that that clause does not operate so as to import the statutory obligation imposed by PA 1995 section 75. Indeed, he submits, clause 19.4.3 makes no assumption as to whether any sum is payable under the section. He submits that in this part of 3DR the draftsman was not applying his mind at all to the question whether the Scheme is or is not a ‘money purchase scheme’: he was simply dealing with what would happen if it were held to be such a scheme. In support of these submissions Mr Sumption cited a short passage from the speech of Lord Hoffmann in National Grid Co plc v. Mayes & Ors

[2001] 1 WLR 864

at 878 in which Lord Hoffmann (in paragraphs 54 to 56 of his speech) stressed the perils inherent in linguistic arguments of the ‘expressio unius’ variety in the context of “a patchwork document like the pension scheme”.

[119]Mr Sumption submits that the same points can be made in relation to 3DR clause 20.12, in that the draftsman is there referring to the possible application of a provision which would only apply to the Scheme if it is not a ‘money purchase scheme’, but without making any assumption as to whether the Scheme is or is not such a scheme.

[120]As to question 1(i) (which, as noted earlier, he addressed in the course of his reply on questions 2 and 3), Mr Sumption supports the Vice-Chancellor’s conclusion that the clause 8.5 power extends to reducing pensions which are already in payment. He submits, first, that there is nothing in rule 7.2 which suggests that the clause 8.5 power is restricted to reducing pensions which have not as yet become payable. He makes the same point in relation to clause 8.5 itself. He submits that pensions under the Scheme are secured by the contributions made in respect of them, taking into account investment return. He also relies on the definition of ‘Member’ (see paragraph 57 above), submitting that the words ‘(whether prospectively or actually)’ can only relate to a member who might either be about to obtain a pension or who is already in receipt of one. He submits that there is no commercial logic in the suggested restriction on the clause 8.5 power.

[121]In response to Mr Ham’s reliance (see paragraph 144 below) on the corresponding power in the Deed of Revision which immediately preceded 3DR (I will call it “2DR”), viz. 2DR clause 17.2, and on the differing definition of ‘Member’ in 2DR (which only extended to active members), Mr Sumption submits that benefits under the Scheme accrue and are secured by reference to a member’s pensionable employment, notwithstanding that the pension is payable after he has ceased pensionable employment. Mr Sumption submits that what falls to be adjusted under clause 17.2 is a benefit which, whenever payable, accrued or was secured during the period while the recipient was in pensionable employment. B. The arguments for the active member

[122]Mr Green addressed us orally on questions 2 and 3. In relation to question 4 he relied on his written skeleton argument. He did not address us (either orally or in writing) on question 1(i), being content to leave it to KPMG to take the active role in seeking to uphold the Vice-Chancellor’s answer to this question.

[123]Mr Green submits that the Vice-Chancellor was right to treat the rule 7.2 calculation as comprising two elements: scale benefits (i.e. the standard pension) and bonuses. The Vice-Chancellor was also right, he submits, to conclude that the scale benefits are ‘average salary benefits’. As to bonuses, Mr Green points out that bonuses are referable to the level of benefits previously provided in respect of any given member immediately before a bonus is declared, and not to the member’s contributions. Accordingly, he submits, bonuses are not ‘money purchase benefits’ either.

[124]Mr Green further submits that the effect of PA 1995 section 67(2) is to prevent the Trustee from exercising the power in clause 8.5, the availability of which power is a crucial plank in Mr Sumption’s argument on question 3. Accordingly, he submits, unless we are persuaded that the Vice-Chancellor’s answer to question 2 was wrong, KPMG must lose on question 3. (This submission illustrates the overlap between questions 2 and 3 to which I referred in paragraph 23 above.)

[125]Mr Green points out that, applying section 124(2), the ‘accrued right’ which is protected by section 67 is a future right. As to the reference to ‘entitlement’ in section 67(2), Mr Green submits, relying on Barclays Bank v. Holmes, that that is a reference to pensions in payment. He submits that accrued rights and entitlements thus go hand in hand, both under section 67(2) and under rule 7.2. At any point in time, he submits, a member can ask the Trustee what are his accrued benefits under the Scheme, and the Trustee, having made the calculation required by rule 7.2, will be in a position to tell him what pension he currently stands to receive at Normal Retirement Date. He contrasts such accrued rights and entitlements with what he describes as a “money purchase pot” which may be available to provide a benefit for the member at Normal Retirement Date, the size of which will be affected by the financial conditions then existing.

[126]Mr Green submits that (leaving aside the effect of section 67) the Trustee is not obliged to exercise the clause 8.5 power whenever there is a deficiency, any more than it is obliged to exercise the clause 8.4 power whenever there is a surplus. Hence, he submits, there is no duty on the Trustee to operate these powers so as to achieve, so far as possible, perfect equilibrium as between assets and liabilities.

[127]Mr Green also relies on the inevitable time-lag between the point of time at which a deficiency arises and any exercise of the clause 8.5 power following a periodic revaluation which reveals that the existence of the deficiency. He submits (leaving section 67(2) aside) that this time-lag is in itself fatal to the contention that the Scheme is a ‘money purchase scheme’, since during the time-lag benefits will continue to be paid and to accrue on their pre-defined and pre-set terms.

[128]Turning to the definition of ‘money purchase benefits’ in PSA 1993 (incorporated into PA 1995 by ibid. section 124(5): see paragraph 41 above), Mr Green makes four points. First, he submits that it is clear that the focus of the definition is member-specific. Secondly, he relies on the references to ‘the member’ in the singular as a further indication that in order to constitute ‘money purchase benefits’ the benefits in question must be the product of contributions made by or in respect of ‘the member’ (in the singular) as opposed to the members as a body. Third, he submits that the expression ‘calculated by reference to’ describes a process whereby the sum standing to the credit of a member’s account is applied in the purchase of benefits: in other words, the benefit is directly related to contributions and to no other factor. Fourth, he submits that the expression ‘average salary benefits’ means benefits which are based the entirety of a member’s pensionable service, in contrast to benefits which are based on a member’s final salary. He describes the Scheme as a weighted average salary scheme since in calculating the scale benefits a different multiplier is applied to the salary-based contribution for each year of pensionable employment.

[129]Mr Green points out that neither clause 8.4 itself, nor the clause 10 power of augmentation, nor the rule 21 special account machinery requires that any new or additional benefit should be a ‘money purchase benefit’.

[130]As to the legislative policy behind the exclusion of money purchase schemes from the operation of PA 1995 section 56, Mr Green submits that money purchase schemes were expressly excluded simply because in such schemes, by definition, no deficiency can arise.

[131]Mr Green points out that although the Scheme has been in deficit since 1999, benefits have not as yet been reduced, and pensions which have fallen into payment have been met in full. He submits that that demonstrates that the Scheme is not a ‘money purchase scheme’ since such schemes (as he put it) “do not provide you with benefits, they provide you with a pot” (Day 2, page 169 line 25).

[132]Reverting to clauses 8.4 and 8.5, Mr Green submits that these clauses cannot sensibly be read as mere timing provisions designed to enable the Trustee to maintain an equilibrium as between assets and liabilities. As to clause 8.4, he points out that it confers a mere power, the exercise of which requires KPMG’s consent. There is, he points out, no obligation on the Trustee to exercise the power, and in any event KPMG could veto any exercise of it. Thus, the Trustee could, if it saw fit, decline to declare a bonus on the ground that it was desirable to maintain a surplus in the Scheme as a reserve against future contingencies (including contingencies having nothing whatever to do with investment returns); moreover, KPMG could, if it saw fit, veto the declaration of a bonus for the same reason. He points out that clause 8.4 enables the Trustee to reduce the contributions to be made by a member, whilst maintaining the level of benefits, thereby demonstrating that benefits are not linked to contributions. He further points out that under clause 8.4 (as in the case of clause 8.5) the Trustee may treat members differently. This, he submits, is a further demonstration of the fact that increases in benefit have nothing at all to do with investment returns and everything to do with the fact that some cases may be more deserving of an increased benefit than others.

[133]As to the absence of a ‘balance of cost’ obligation in the Scheme, Mr Green submits that whilst most defined benefit schemes include such an obligation, not all do. He submits that the effect of rules 5 and 6 is to share the cost of the benefits as between employer and employee, in the proportions specified.

[134]As to the quotation from Hansard to which Mr Sumption referred us (see paragraph 111 above), Mr Green submits that when Mr Major used the expression “straightforward multiple” he meant that the calculation process was a simple mathematical exercise whereby the average salary in a given contribution period is multiplied by a factor specified in the scheme. Mr Green submits that in essence that is what the Scheme requires. He submits that notwithstanding that the calculation includes a weighting factor, the process of calculation for each contribution period is nevertheless a straightforward multiplication.

[135]As to question 4, Mr Green submits (in his written skeleton argument) that clauses 17.11.3, 19.4.3 and 20.12 of 3DR acknowledge the application of PSA 1993 section 144 in a winding up of the Scheme. He further points out that 3DR clause 1.2 provides that references to statute include re-enactments, and that PA 1995 section 75 is the re-enactment of PS 1993 section 144.

[136]He submits, therefore, that KPMG entered into the Scheme on the footing either that it was not a ‘money purchase scheme’ or that PSA 1993 section 144 should apply to it, and that accordingly PA 1995 section 75 applies on a winding up of the Scheme, irrespective of whether it is a ‘money purchase scheme’.

C. The arguments for the pensioner member

[137]The pensioner member (through Mr Ham) supports the case of the active member on questions 2, 3 and 4. As to question 1(i) (viz. whether the power in clause 8.5, on its true construction, enables the Trustee to reduce pensions already in payment) she contends that the Vice-Chancellor erred in answering that question in the affirmative.

[138]Addressing question 1(i), Mr Ham submits that clause 8.5, on its true construction, does not confer a power to reduce benefits already in payment. He recognises that, depending on the answers given to questions 3 and 4, question 1(i) may not arise in practice; but equally there is a possibility (which he cannot ignore) that it may do so. Moreover, as Mr Nugee explained to us, whatever the answers to questions 3 and 4, there may still be a funding gap which KPMG is not statutorily obliged to fund; and in such a situation question 1(i) could be a live question.

[139]Mr Ham submits that the rule 7.2 calculation is a once-for-all calculation. He points out that rule7.1 refers to ‘a pension’ (in the singular). Rule

7.2 prescribes the method of calculating the amount of that pension. He submits that the reference in rule 7.2 to the ‘annual amount’ of the pension means no more than that the pension is expressed as a yearly figure rather than as a monthly or weekly figure, and that it does not imply that one has to recalculate the amount of the pension year by year.

[140]Mr Ham also relies on the express reference to a reduction in pension in rule 7.6 (see paragraph 69 above). He submits that if clause 8.5 were intended to extend to reductions to pensions in payment one would expect to see some similar provision in clause 8. He further submits that rule 19.3 (see paragraph 74 above) is inconsistent with the notion that pensions in payment may be reduced. In support of this submission he relies in particular on the expression ‘at an equal daily rate’ in rule 19.3.

[141]Mr Ham points out that (in contrast to clause 8.4) clause 8.5 does not apply to all benefits under the Scheme. He submits that whereas clause 8.4 is completely comprehensive, in that it covers every possible benefit under the Scheme, the formula in clause 8.5 is different, in that it refers to ‘adjustments and amendments to the benefits secured or thereafter accruing for or in respect of the Members …’. Mr Ham submits that the natural interpretation of clause 8.5 is that it is directed at rights to future benefits: what section 67 calls an ‘accrued right’, as opposed to an ‘entitlement’ (a word which, he submits, refers to a benefit which has actually come into payment). He submits that the reference to ‘benefits secured’ in this context is a reference to benefits which have been accrued to date; and that the reference to ‘benefits … thereafter accruing’ is a reference to benefits which will be secured by contributions in future years.

[142]Mr Ham submits that the Vice-Chancellor’s reliance (in paragraph 25 of his judgment: see paragraph 78 above) on the definition of ‘Member’ as including pensioner members was misplaced. He also relies on what he calls “ordinary Revenue practice” in approving the Scheme as an occupational pension scheme.

[143]Reverting to rule 7, he points out that rule 7.5 (see paragraph 69 above) lists the possible components of additional pension, but contains no reference to any possibility of such components being reduced once the pension has come into payment.

[144]Mr Ham points to the practical difficulties which would arise if the Trustee has power to reduce pensions already in payment. In particular, he refers to the possibility of a buyout of a member’s benefit, asking (rhetorically): How can you buy out something which is liable to be reduced in the future? A similar point would arise, he submits, in relation to commutation.

[145]Mr Ham invites us to take into account the evolving nature of the Scheme. He submits that the transitional provisions of 3DR inevitably refer back to the pre-existing provisions in 2DR. He relies on the definition of ‘Member’ in 2DR as meaning an active member. He submits that it is clear as a matter of construction of 2DR that pensioner members were not exposed to a risk of their pensions being reduced.

[146]Turning to question 2, Mr Ham referred us by way of background to passages from the Goode Report. As to PA 1995 section 67, he submits that, given that its general thrust is the provision of safeguards for members, the section should be broadly rather than narrowly construed. He submits that it is inherent in any ‘power’ that the person on whom the power is conferred has a choice whether or not to exercise it in any particular circumstances. He accepts that if something happens automatically under the Scheme in response to some external event or circumstance, no exercise of a power is involved. But, he submits, that is manifestly not the position under the Scheme, where any adjustment is at the discretion of the Trustee. He submits that the expression ‘modify the scheme’ in section 67 does not refer to alterations in the terms of the scheme documentation; rather, it means modifying the rights and obligations arising under the scheme.

[147]Mr Ham adopts Mr Green’s submissions on questions 3 and 4.

[148]As to question 3, Mr Ham submits that, if one is looking for common sense badges of a ‘money purchase scheme’, one such badge is the fact that in such a scheme the measure of the benefit is the value of the fund, and hence there is no need for an actuary. He submits that the fact that the tables to be applied in calculating the amount of a member’s basic pension under the Scheme incorporate actuarial factors is a very strong indication that the Scheme is not a ‘money purchase scheme’. There is, he submits, no equivalent under the Scheme to the “pot” which is the badge of a ‘money purchase scheme’.

D. The comments of the Trustee

[149]In a written note supplied to us following the conclusion of the hearing, Mr Nugee warns us against reaching final conclusions as to the meaning and scope of section 67 which may not be strictly necessary for the purpose of giving a definitive answer to question 2.

PART 9: CONCLUSIONS

[150]I begin by addressing question 3 (viz: Is the Scheme a ‘money purchase scheme’ within the meaning of PA 1995 section 56(2)?). I do so first without regard to PA 1995 section 67.

[151]The key to answering question 3 lies, in my judgment, in the relationship between contributions and benefits, as that relationship emerges from a consideration of the Scheme as a whole, properly construed. So, faced with such a plethora of argument and counter-argument, I think it helpful to start at the beginning and remind myself of the salient features of the Scheme in that respect.

[152]First, contributions. The basic position in relation to contributions is straightforward. Contributions are governed by rule 5 (members’ contributions) and rule 6 (employer’s contributions). These rules provide for compulsory annual contributions of amounts equal to a specified percentage of a member’s annual salary in each year of his pensionable employment (see the definition of ‘Salary’ in 3DR clause 1, quoted in paragraph 58 above), the specified percentages being referable to the member’s age. Clause 8.4 gives the Trustee power (with the consent of the principal employer and after taking the actuary’s advice) to reduce contributions if (but only if) an actuarial valuation or an interim review reveals that the Scheme is in surplus.

[153]As Mr Green and Mr Ham pointed out, there is no obligation on the trustee to exercise the clause 8.4 power: the Trustee may, for example, leave the contributions at their current level in order to build up a reserve in the Scheme. Alternatively, the Trustee may decide to take an intermediate course by allowing a smaller reduction than that which would be required to extinguish the surplus. It is, in other words, a matter for the Trustee (subject to the requirements of the principal employer’s consent and actuarial advice)(a) whether to exercise the clause 8.4 power at all, and

(b) if the power is to be exercised, to decide how it is to be exercised. Nor is there any stipulated period of time following the actuarial valuation or interim review revealing the existence of the surplus within which the Trustee is required to decide whether to exercise the power, and if so how. The existence of the surplus, as revealed by the actuarial valuation or interim review, does no more than set the scene for the possible exercise of the clause 8.4 power: it does not dictate how the power is to be exercised, or, for that matter, whether it is exercised at all.

[154]Finally, so far as contributions are concerned, clause 10 obliges the employer to make additional contributions (or other satisfactory funding arrangements) to fund any additional benefit or new benefit which the Trustee may grant; and rule 21.4 gives the employer power to direct the Trustee to apply sums in the special account in or towards payment of its future contributions.

[155]Next, benefits. I turn first to what I will call the standard pension, that is to say the pension which comes into payment on Normal Pension Date and which continues to be payable during the remainder of the member’s lifetime. The annual amount of the standard pension is to be calculated in accordance with rule 7 (see rule 7.1, quoted in paragraph 69 above). The calculation process, as prescribed by rule 7.2, comprises three stages.

[156]The first stage in the calculation of the standard pension, as prescribed by rule 7.2(1), is to find the total amount of contributions (including employer’s contributions) made in respect of each contribution period (a contribution period is a year to 31 March) and to apply to that total the appropriate multiplier as determined by the tables. The tables themselves are designed to show the amount of pension ‘secured by’ (which must connote ‘attributable to’) a contribution of £1 in respect of each successive year of the member’s life until age 65. Different multipliers are given for males and females. Moreover, it is common ground that the multipliers are (at least in part) the product of actuarial assessments of factors such as future investment return, inflation and mortality. Thus the quantification of the standard pension depends in part upon actuarial assessments of future anticipated trends.

[157]The second stage in the calculation process, as prescribed by rule 7.2(2), is to adjust the totals resulting from the first stage of the process by adding any bonuses declared pursuant to clause 8.4 or (as the case may be) deducting from them any reduction made pursuant to clause 8.5.

[158]The third and final stage of the calculation process, as prescribed by rule 7.2(3), is to aggregate the totals (adjusted pursuant to rule 7.2(2), as the case may be). The result of that aggregation represents the amount of the member’s standard pension as at the date of the calculation.

[159]Rule 8 (which deals with pensions coming into payment before Normal Retirement Date) and rule 9 (which deals with pensions coming into payment after Normal Retirement Date) are subsidiary to rule 7 in that the calculation process under each of those rules is based on the rule 7 process. So all the pensions for which the Scheme provides share the characteristic that the process of calculation includes actuarial factors. This seems to me to be a highly relevant consideration in the context of question 3, and I return to it below.

[160]As noted earlier, Mr Sumption’s basic submission on question 3 is that the calculation process prescribed by rule 7 is a single process, of which the intermediate ‘adjustment’ stage (as per rule 7.2(2)) is an integral part. From that premise, he submits that a member’s only accrued right or entitlement, so far as his pension is concerned, is to the final figure which results from that entire process: that is to say, to a figure which has been adjusted to take account of any increase or reduction in benefit resulting from an exercise of the powers in clause 8.4 or clause 8.5.

[161]I have already considered the nature of the power in clause 8.4 to reduce contributions where an actuarial valuation or interim review reveals a surplus. Also included in clause 8.4, however, is the power to increase benefits by declaring bonuses where an actuarial valuation reveals a surplus. It is this aspect of the clause 8.4 power which is relevant in the present context. The powers to adjust benefits in clauses 8.4 and 8.5 respectively are complementary in that each enables (but does not oblige) the Trustee to make appropriate adjustments to the level of benefits in the light of actuarial valuations revealing a surplus or a deficit, as the case may be. Moreover, as in the case of the clause 8.4 power to reduce contributions, there is no prescribed time limit within which the Trustee has to decide how (if at all) to exercise such powers.

[162]Clause 8.5 differs from clause 8.4 in that the power in clause 8.5 is exercisable only in respect of adjustments or amendments which are ‘necessary in the opinion of the Trustees after taking the Actuary’s advice to secure the continued solvency of [the Pre-2000 Fund]’. The terms of that restriction recognise that the mere existence of a deficit on actuarial valuation does not necessarily threaten the Scheme’s continued solvency.

[163]So I conclude that, on the true construction of clause 8.4 and 8.5, the existence of a surplus or a deficit (as the case may be) does no more than set the scene for the possible exercise of the powers of adjustment of benefits conferred by those clauses. The relevant power may not be exercised at all; or it may be exercised in a way which leaves some part of the surplus or deficit still in existence. There is, therefore, no question of any automatic adjustment of benefits following an actuarial valuation which reveals the existence of a surplus or a deficit; still less of an adjustment which will have the effect of extinguishing the entirety of that surplus or deficit.

[164]There is also the time factor to be considered. Even if the Trustee, with the employer’s consent and acting on actuarial advice, decides to exercise the appropriate power of adjustment (according to whether the actuarial valuation has revealed a surplus or a deficit) there will inevitably be an interval of time (which may be substantial) between the date when the surplus or deficit first arose and the date when the power is exercised. Yet during that time rights will inevitably have accrued under the Scheme and benefits will inevitably have been paid out, notwithstanding the existence (by definition) of a continuing mismatch between assets and liabilities. Moreover, the effect of any adjustment of benefits (whether upwards or downwards) will usually take effect over time, by gradually eroding the surplus or deficit. Thus even in a situation where the adjustment is designed entirely to extinguish the surplus of deficit, the mismatch between assets and liabilities may continue for a substantial period of time after the adjustment has been made.

[165]In the light of the above analysis, I conclude that Mr Sumption’s basic submission must be rejected. So far as the clause 8.4 power to increase benefits is concerned, the declaration of a bonus will give the member the right to an increased pension. But it does not follow that the member has no right to a pension under rule 7 until the Trustee has considered whether or not to exercise that power (and, it may be, decided not to exercise it, or to exercise it not by declaring a bonus but by reducing contributions). The same consideration applies, in my judgment, to the clause 8.5 power. In my judgment it does not follow from the existence of that power that a member has no right to a pension under rule 7 until the Trustee has taken a decision as to whether the power should be exercised, and if so how.

[166]The correct analysis in law, in my judgment, is that on the true construction of the Scheme a member has an accrued right to a pension under rule 7 in the (unadjusted) amount calculated by aggregating the total amounts referred to in rule 7.2(1), but subject to any adjustments made under clause 8.4 or clause 8.5. I therefore reject the notion that that calculation produces only a “provisional” sum (to quote Mr Sumption). In my judgment, to read the Scheme in that way is to attempt to force a square peg into a round hole.

[167]Looking no further for the moment, therefore, the Scheme would appear to lack the basic characteristics of a money purchase scheme (using that expression for the moment in a colloquial as opposed to a statutory sense) as identified in Part 3 of this judgment. In the first place, the requisite direct relationship between contributions and benefits is broken by the introduction of actuarial factors (see paragraph 159 above). As Mr Ham succinctly put it at the conclusion of his submissions (see paragraph 147 above), in the case of a money purchase scheme you do not need an actuary. Secondly, by including the powers in clauses 8.4 and 8.5 the Scheme not only recognises but positively caters for a continuing mismatch between assets and liabilities.

[168]However, the overall appearance of the Scheme (on its true construction) is not necessarily determinative of the question whether it is a ‘money purchase scheme’ in the statutory sense. I therefore turn to the relevant statutory provisions (but leaving PA 1995 section 67 on one side for the moment).

[169]As noted earlier (see paragraphs 40 to 42 above) an occupational pension scheme is a ‘money purchase scheme’ if ‘all the benefits that may be provided are money purchase benefits’: i.e. ‘benefits the rate or amount of which is calculated by reference to [contributions] and which are not average salary benefits’ (see PSA 1993 section 181(1)).

[170]I turn first to the question whether either of the two elements in the pension benefit as prescribed by rule 7.2, that is to say the standard pension benefit and any bonuses declared in exercise of the clause 8.4 power are, on analysis, ‘calculated by reference to’ contributions within the meaning of that definition.

[171]In my judgment the inclusion in the first stage of the calculation process of the actuarial factors to which I referred earlier is fatal to such a contention. The expression ‘calculated by reference to’ means, in my judgment, ‘calculated onlyby reference to’, in the sense that the benefit in question must be the direct product of the contributions (that being the basic characteristic of a money purchase scheme, as that expression is commonly understood: see Part 3 above). Neither the standard pension nor bonuses fall within that category.

[172]Support for this strict interpretation of the definition of ‘money purchase benefits’ is, in my judgment, to be found in PA 1995 section 56 itself. As noted earlier (see paragraph 46 above) it is implicit in that section that a provision in the scheme which is designed to achieve automatic equilibrium between assets and liabilities by limiting the amount of the scheme’s liabilities by reference to its assets is not in itself enough to render the scheme a ‘money purchase scheme’: for if it were, section 56 would not apply to it. Yet the inclusion of such a provision in a scheme would, on the face of it, inevitably produce a situation in which benefits (liabilities) would be calculated by reference to contributions (assets). As indicated in paragraph 53 above, the same considerations apply in relation to section 75.

[173]Accordingly, I respectfully agree with the Vice-Chancellor that neither of the two components of the pension benefit prescribed by rule 7, that is to say the standard pension and any bonuses declared under clause 8.4, is a ‘money purchase benefit’. It follows that in my judgment (and leaving aside PA 1995 section 67) the answer to question 3 is: No.

[174]I turn next to the question whether either or both of those components is an ‘average salary benefit’. I accept Mr Green’s submission that an ‘average salary benefit’ for this purpose is a benefit which is referable not to a member’s final salary but to his salary from year to year throughout the entire period of his pensionable employment. As such, it is in the nature of a defined benefit, and for that reason it is difficult to see why Parliament thought it necessary to amend the relevant statute by expressly excepting it from the definition of ‘money purchase benefits’. Nor, I must confess, do I derive any assistance from what Mr Major said in the House of Commons when moving the amendment (see paragraph 112 above). In the circumstances, the true reason will have to remain a mystery, at least for the purposes of this judgment.

[175]In paragraph 56 of his judgment (quoted in paragraph 87 above) the Vice-Chancellor concluded that the standard pension benefit is an ‘average salary benefit’, since it is “calculated by reference to the average salary of a member over the period of service on which the pension is based”. I respectfully agree with that conclusion. As Mr Green demonstrated in argument, the effect of the application of the tables in carrying out the first stage of the calculation process prescribed by rule 7.2 is that the pension benefit is based upon the average salary of the member throughout his period of pensionable employment.

[176]I would for my part reach the same conclusion in relation to bonuses, at least to the extent that they are expressed (as up to now they have been) in terms of a percentage of the accrued pension. In my judgment, just as the accrued pension is based (in effect) on the member’s average salary throughout his pensionable employment, so also is a bonus which takes the form of a percentage of the accrued pension.

[177]I now turn to question 2, and to PA 1995 section 67.

[178]I can deal with question 2 quite shortly. In my judgment the power in clause 8.5 to reduce benefits where the Scheme is in deficit is plainly a power to ‘modify’ the Scheme within section 67(1) (see paragraph 47 above). I do not accept Mr Sumption’s submission that the reference to ‘the scheme’ in section 67(1) is a reference only to the terms of the scheme as recorded in the scheme documents. In my judgment, the modification of a benefit under the scheme in the exercise of an express power in the scheme to make such a modification is self-evidently a modification of the scheme.

[179]I do not for my part find it necessary, as the Vice-Chancellor did, to analyse the effect of an exercise of the power in clause 8.5 by reference to the statutory definition of ‘modifications’ in PSA 1993 section 181(1) (see paragraph 48 above): that is to say, in terms of ‘additions, omissions and amendments’. If one thing is certain, it is that that definition was intended to be all-embracing. Moreover, it is expressed in inclusive, not exhaustive, terms.

[180]Mindful of Mr Nugee’s warning (see paragraph 148 above), I will resist the temptation to express a concluded view as to whether or not the power in clause 8.4 to increase benefits is also a power to ‘modify’ within the meaning of section 67(1). I content myself with expressing the provisional view that it would, to my mind, be somewhat surprising if it were. The idea of requiring the members’ consent to an increase in benefits seems to me, at first sight, to be somewhat incongruous. Moreover the requirement in section 56(3) for an actuary’s certificate that a proposed exercise of a power to ‘modify’ will not adversely affect any member of the scheme would appear to add further support for my provisional view. In the circumstances, I leave the point there.

[181]Accordingly, I respectfully agree with the Vice-Chancellor that the exercise by the Trustee of the power in clause 8.5 is subject to the restrictions imposed by PA 1995 section 67(2). As to the meaning of ‘entitlement’ and ‘accrued right’ in that subsection, I accept the submissions of Mr Green and Mr Ham that ‘entitlement’ refers to a pension already in payment, whereas ‘accrued right’ refers to a member’s current right to a future pension. This interpretation accords with the many other references in the Scheme to ‘accrued’ benefits, as listed in paragraph 62 above, and is supported by the definition of ‘accrued rights’ in PA 1995 section 124(2) (see paragraph 50 above).

[182]I have already rejected Mr Sumption’s submission that on the true construction of the Scheme clause 8.5 is an integral part of the calculation process, and I have no hesitation in rejecting his further submission that for that reason section 67(2) does not apply to any exercise of that power. To my mind, the ingenuity of that argument is matched only by its artificiality.

[183]In the light of my conclusion on question 3, it is unnecessary for me to consider the effect on the clause 8.5 power of section 67 (coupled with PA 1995 section 117 (see paragraph 52 above)) in the context of that question. I would prefer not to express a view on that question, which seems to me to be one of some difficulty.

[184]I turn next to question 1(i). On this question, I respectfully differ from the Vice-Chancellor. In the first place, I accept Mr Ham’s submissions to the effect that on the true construction of the Scheme the calculation of a pension is a once-for-all calculation, carried out as at the date when the pension first comes into payment. That seems to me to be the natural construction of rule 7.2, and it is supported, in my judgment, by the other provisions of the Scheme on which Mr Ham relies.

[185]Against that background and in that context, a power to reduce pensions already in payment would in my judgment require the clearest words. I accordingly return once again to clause 8.5. Far from clearly conferring such a power, the terms of clause 8.5 lead, in my judgment, to the opposite conclusion. The power is expressed as a power to adjust or amend ‘the benefits secured or thereafter accruing’ in respect of members. The antithesis of ‘benefits secured’ as against ‘benefits … thereafter accruing’ makes it plain, in my judgment, that what is envisaged is a situation in which a member is still accruing pension rights, year on year. The pension already accrued constitutes the benefit ‘secured’: the benefit ‘thereafter accruing’ refers to pension rights accruing in the future.

[186]Accordingly, in respectful disagreement with the Vice-Chancellor, I would answer question 1(i) in the negative.

[187]Given my answer to question 3, question 4 does not arise.

RESULT

[188]I would uphold the Vice-Chancellor’s decisions on questions 2 and 3, but reverse his decision on question 1(i). It follows that question 1(ii) does not arise.

[189]I agree with the conclusions reached by Lord Justice Jonathan Parker on the questions raised by this appeal, and with the reasons which lead to those conclusions.

[190]I also agree.

Cited in 14 later judgments

and 5 more of the most senior