South Tyneside Metropolitan Borough Council, R (on the application of) v Lord Chancellor and Secretary of State for Justice & Anor [2009] EWCA Civ 299

[2009] EWCA Civ 299Case No C1/2008/0083
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE ADMINISTRATIVE COURT
QUEEN’S BENCH DIVISION
MR JUSTICE WYN WILLIAMS
CO/5557/2007
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 7 April 2009
Before
LORD JUSTICE SEDLEYLORD JUSTICE KEENELORD JUSTICE MOSES
Between
The Queen on the Application of South Tyneside Metropolitan Borough CouncilAppellantThe Lord Chancellor and Secretary of State for JusticeRespondentand AnotherRespondent
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr Michael Furness QC and Ms Elisabeth Laing QC (instructed by The Treasury Solicitor) for AppellantMr Tim Kerr QC, Mr Paul Newman and Ms Judy Stone (instructed by South Tyneside Metropolitan Borough Council) for RespondentHearing Hearing date: 11 th March, 2009
JudgmentLord Justice Moses :
[1]By letter dated 24 May 2007, the Lord Chancellor and Secretary of State for Justice declined to accept liability to pay contributions to the Tyne and Wear Pension Fund to make good a deficit in its funds. That deficit was attributable to the pension entitlement of former employees of magistrates’ courts committees which had been abolished. The statutory administering authority required to maintain that fund is the South Tyneside Metropolitan Borough Council. It challenged the Lord Chancellor’s refusal by way of judicial review. Wyn Williams J granted a declaration that the Lord Chancellor was liable [2007] EWHC 2984 (Admin.). The Lord Chancellor appeals.[2]The contest as to liability has its origin in the transfer of liabilities from the committees ultimately to what was the Lord Chancellor. Nothing turns on the manner of that transfer, so I can explain it briefly. On 1 April 2000, the former committees of five magistrates’ courts in the North East were abolished and their liabilities transferred to the committee which replaced them, the Northumbria Magistrates’ Courts Committee. Staff employed by those former committees transferred to Northumbria MCC and ceased to be members of the Tyne and Wear Pension Fund. They became members of a different fund, the Northumbria County Council Pension Fund. But staff who had left the employment of the former committees before 1 April 2000 remained members of the Tyne and Wear Pension Fund with entitlement to pensions from that fund. Those members may have yet to reach pensionable age (“deferred pensioners”) or may already have done so (“pensioners”). But neither group contributes to the fund; they are not in the argot of local government pensions “active members”. It appears to be accepted that the liability in issue is a liability to make good a deficit in the funding of benefits to former employees of the abolished committees, who are members of the Tyne and Wear Pension Fund. They make no contribution to the fund but are or will be entitled to benefits from it. The Tyne and Wear Pension Fund made a transfer payment to the Northumbria County Council Pension Fund to which staff employed at the time of abolition transferred, but no deduction was made in respect of the pension rights of non-active, non-contributing members of the Tyne and Wear Pension Fund.[3]On 1 September 2004, by virtue of the Courts Act 2003, magistrates’ court committees, including Northumbria MCC, were abolished. Under a scheme made by the Lord Chancellor, pursuant to powers conferred by the Courts Act, on 31 March 2005, the liabilities of magistrates’ court committees passed to the Lord Chancellor. Thus, on that date he inherited the liabilities of Northumbria MCC. If Northumbria MCC was liable to make contributions to the Tyne and Wear Pension Fund in respect of the deficit I have described, then the Lord Chancellor agrees he has inherited that liability. But the issue in this appeal is whether any such liability was imposed on that committee on a true construction of the Local Government Pension Scheme Regulations 1997 (“the 1997 Regulations”).[4]As part of their statutory triennial valuation of the Tyne and Wear Pension Fund, on 30 March 2005, actuaries to that fund issued a statutory “rates and adjustment” certificate fixing Northumbria MCC with liability to pay £214,000 during the three year period 1 April 2005 to 31 March 2008. Their report set recovery periods for the future to make good an estimated £3-4 million attributable to the pension entitlements of those formerly employed by the predecessors of the Northumbria MCC. Northumbria MCC no longer employed any member of the Tyne and Wear Pension Fund on 30 March 2005, the date of the actuaries’ certificate. Wyn Williams J concluded that it was, nonetheless, liable to contribute to that fund in respect of the costs of benefits paid and payable to those members of the fund who were former employees of the abolished committees whose liabilities it inherited. The question in this appeal is whether the statutory scheme authorised such a liability.[5]The Tyne and Wear Pension Fund is one of a number of different pension funds within the Local Government Pension Scheme, an occupational pension scheme constituted by, amongst other instruments, the 1997 Regulations. The governing provisions of that scheme were, at all material times, the 1997 Regulations, made pursuant to powers conferred by the Superannuation Act 1972.[6]Eligibility for membership of the Scheme depends upon employment by bodies identified within the 1997 Regulations. Active membership is limited to employees of Scheme employers, which include local authorities and a number of other public bodies, or to those employed by non-Scheme employers identified in the regulations. Regulations make provision for joining and leaving the Scheme.[7]By Schedule 1 of the 1997 Regulations and s.124(1) of the Pensions Act 1995 an “active member” of the Scheme is one who “is in pensionable service under the scheme” (my emphasis); a “deferred member” is one who has accrued rights under the scheme and “a pensioner member” is one who is presently entitled to payments of pension or other benefits.[8]The only member required to make contributions to the Scheme is one identified as an active member. His contribution is calculated at a standard rate on each employment in which he is an active member (see regulation 12).[9]Chapter IV of Part II governs the calculation and payment of benefits. Benefits are payable out of the “appropriate fund” as defined in regulation 74 in Part IV. Part IV of the regulations deals with administration. “Administering” authorities are those bodies, like South Tyneside MBC, which are required to maintain pension funds for the Scheme pursuant to regulation 73. The key provisions for resolving the issue whether the regulations imposed a liability on Northumbria MCC are to be found within part IV, in regulations 77 and 79.[10]The dispute whether the regulations imposed a liability on Northumbria MCC focussed on regulations 77 and 79. Regulation 79 provides:- “79Employer's contributions(1) An employing authority must contribute to the appropriate fund in each year covered by a rates and adjustments certificate under regulation 77 or 78 the amount appropriate for that authority as calculated in accordance with the certificate and paragraph (4).(2) During each of those years an employing authority must make payments to the appropriate fund on account of the amount required for the whole year.(3) Those payments on account must— (a) be paid at the end of the intervals determined under regulation 81(1), and (b) equal the appropriate proportion of the whole amount due under paragraph (1) for the year in question.(4) An employer's contribution for any year is the common percentage for that year of the pay on which contributions have during that year been paid to the fund under Part II by employees who are active members (other than contributions under regulation 18(3)), increased or reduced by any individual adjustment specified for that employer for that year in the rates and adjustments certificate.(5) The common percentage is the common rate of employer's contribution specified in that certificate, expressed as a percentage.[11]Regulation 77 provides:- “77Actuarial valuations and certificates(1) Each administering authority must obtain— (a) an actuarial valuation of the assets and liabilities of each of their pension funds as at 31st March in 1998 and in every third year afterwards, (b) a report by an actuary, and (c) a rates and adjustments certificate.(2) Each of those documents must be obtained before the first anniversary of the date (“the valuation date”) as at which the valuation is made or such later date as the Secretary of State may agree.(3) A rates and adjustments certificate is a certificate specifying— (a) the common rate of employer's contribution, and (b) any individual adjustments, for each year of the period of three years beginning with 1st April in the year following that in which the valuation date falls.(4) The common rate of employer's contribution is the amount which in the actuary's opinion should be paid to the fund by all bodies whose employees contribute to it so as to secure its solvency, expressed as a percentage of the pay of their employees who are active members.(5) The actuary must have regard— (a) to the existing and prospective liabilities of the fund arising from circumstances common to all those bodies, and (b) to the desirability of maintaining as nearly constant a rate as possible. [(5A) The actuary must have regard to the administering authority's funding strategy statement published under regulation 76A.](6) An individual adjustment is any percentage or amount by which in the actuary's opinion contributions at the common rate should in the case of a particular body be increased or reduced by reason of any circumstances peculiar to that body.(7) A rates and adjustments certificate must contain a statement as to the assumptions on which the certificate is given as respects— (a) the number of members who will become entitled to payment of pensions under provisions of the Scheme, and (b) the amount of the liabilities arising in respect of such members, during the period covered by the certificate.(8) A report under paragraph (1)(b) must contain a statement as to the demographic assumptions used in making the valuation, showing how they relate to the events which have actually occurred in relation to members of the Scheme since the last valuation.(9) The authority must provide the actuary preparing a valuation or a rates and adjustment certificate with the consolidated revenue account of the fund and such other information as he requests.(10) The authority must send copies of any valuation, report or certificate under this regulation or revision under regulation 78— (a) to the Secretary of State, (b) to each body with employees who contribute to the fund in question, and (c) to any other body which is or may become liable to make payments to that fund.(11) ……….”[12]It is essential, I believe, to appreciate the distinction between those two provisions. Only regulation 79 imposes a liability to make a contribution. Regulation 77 imposes obligations on an administering authority to obtain actuarial valuations, reports and rates and adjustment certificates in respect of each of their pension funds; it specifies the contents of a rates and adjustment certificate; and it sets out the manner in which the constituent elements of the certificate are to be calculated. But whilst regulation 77 establishes the steps by which liability to contribute is calculated, it does not itself create any liability. It is regulation 79 which alone imposes a duty to contribute and it is on the proper construction of that provision that the issue in this appeal turns. It is the only provision which triggers a liability to make contributions based on a rates and adjustment certificate.[13]No liability could have been imposed on Northumbria MCC unless it was an employing authority as defined by Schedule 1 of the regulations at the date of the certificate: 30 March 2005. Schedule 1 defines an employing authority as “a body employing an employee who is eligible to be a member”. (my emphasis) By Schedule 1 of the regulations and s.124(1) of the Pensions Act 1995, a member is defined as an active and deferred or pensioner member. But an authority is only an employing authority if, at the date of the certificate, it is employing someone who is eligible to be a member. The requirements for eligibility are contained in regulation 4:
“Chapter IMembership Eligibility for active membership General eligibility for membership: employees of Scheme employers etc (1) A person may only be an active member if this regulation, regulation 5 [regulation 5A] or Chapter 1 of Part V enables him to be one and he is not prevented by regulation 6. (2) A person may be a member if he is employed by a Scheme employer. (3) A Scheme employer is a body which is listed in Schedule 2 or is a resolution body.”
Eligibility for active membership General eligibility for membership: employees of Scheme employers etc[14]Thus, regulation 4(1) identifies three types of active member according to the nature of the employer. If the employee is not employed by an identified non-Scheme employer (regulations 5 and 5A and Part V regulation 127), regulation 4(1) enables the employee to be a Scheme member if his employer is a Scheme employer as defined in regulation 4. The particular provision which enables such an employee to be a member is regulation 4(2); there is no other provision within this regulation. The reference in 4(2) to a member must, therefore, be a reference to an active member. Were it not so there would be no provision in regulation 4 enabling a Scheme employee to be an active member. The conclusion finds further support in the interpretation provision, regulation 2:- “(1) [Schedule 1 (Interpretation) and Schedule 1A (Interpretation for pension sharing on divorce [and dissolution orders]) contain definitions of expressions used in these Regulations which apply for their interpretation unless the context indicates that they have a different meaning. (2) Unless that is so, references to members and membership generally refer to active members and active membership respectively.”[15]I labour the point because Mr Kerr submitted and Wyn Williams J accepted that the reference to eligibility in the definition of employing authority within Schedule 1 could encompass eligibility to be a deferred or pensioner member, that is, one who has ceased to be employed (§37). One who has ceased to be in the employment of the authority may, it is true, be a member of an appropriate fund, as a deferred or pensioner member (regulation 74(1)(b)) but it is not possible to describe that former employee as eligible to be a member. Such a member already is a member; he has joined pursuant to regulation 7 and has not left the Scheme pursuant to regulation 8. The expression employing authority, as defined in Schedule 1, is not apt to cover an authority which has ceased to employ a member.[16]However, the terms of regulation 4 and of regulations 7 and 8 (joining and leaving the Scheme) and of s.124(1) (referred to in §7) make it clear that eligibility for membership and references to a member are references to membership of the Scheme, i.e., the Local Government Pension Scheme, not to membership of a particular fund. Accordingly, the definition of employing authority does not have the effect of limiting liability to one who currently employs a member of a particular fund within the Scheme. The Scheme is to be distinguished from the various pension funds which together make up the Scheme. There is no dispute but that Northumbria MCC was an employing authority when the actuaries issued their certificate, since at that date it did employ members of the Scheme, namely those members of staff who became active members of the Northumbria County Council Pension Fund. But, as I have indicated, the definition of employing authority does confine liability to a body currently employing a member of the Scheme.[17]The essential submission of Mr Furness QC, on behalf of the Lord Chancellor, is that unless the authority is an employing authority with active members who are making contributions to their appropriate fund, that authority is not liable to make any contributions under regulation 79. The terms of regulations 77(3)(4) and (6) and of regulation 79(4) and (5) demonstrate, so he contends, an underlying assumption that an employing authority’s liability to make contributions goes hand in hand with the employment of active members who are paying employees’ contributions into their appropriate fund.[18]Regulation 79(1) requires the employing authority to contribute to the appropriate fund. The only definition of appropriate fund is to be found in Schedule 1, which provides that “in relation to a member” it has the meaning given in regulation 74. Regulation 74 identifies the appropriate fund for the purpose of specifying the source of the benefits to which members of the Scheme will be or have become entitled. It provides:- “74Appropriate funds(1) The appropriate fund for a member or a person who is entitled to any benefit in respect of a person who has been a member is— (a) in the case of an active member, the fund specified for a member of his description in accordance with Schedule 5, (b) in the case of— (i) a deferred or a pensioner member who was an active member on the commencement date or has been an active member since that date, or (ii) a member in respect of whom another person has rights under the 1995 regulations and these Regulations, the fund so specified for a member of his description when he ceased to be an active member; and (c) in the case of any other deferred or a pensioner member, the fund specified for him by virtue of regulation 19 of the Transitional Regulations.(2) Where these regulations refer to payments being made without referring to the fund to which or from which they are to be made, the reference is to payments being made to or from the fund which is the appropriate fund for the member in question.”[19]For example, Paragraph 1 of the Table in Schedule 5 identifies the appropriate fund for an active member, subject to exceptions, as that which is administered by his employer. The appropriate fund for a deferred or pensioner member is the fund specified when he ceased to be an active member (regulation 74(1)(b)).[20]Since funds are specified both for active and deferred or pensioner members, regulation 74 identifies the appropriate fund by reference to the identity of the employer either whilst the employee remains an active member, contributing to the fund, or at the time he ceased to be an active member. The appropriate fund into which contributions must be paid will include funds of which the members are both present and past employees of the employing authority. But unless the expression employing authority is wide enough to encompass past employers, the definition of appropriate fund does not carry South Tyneside’s argument forward. I did not understand Mr Furness to rely upon the reference to the appropriate fund as support for his submissions.[21]The submissions of Mr Furness, on behalf of the Lord Chancellor, do, however, depend upon those provisions which specify the manner in which the amount appropriate to a particular employing authority contribution is to be calculated. The contribution challenged by the Lord Chancellor was not, so he submits, calculated in accordance with a certificate under regulation 77 nor in accordance with 79(4).[22]The certificate must specify the amount which the actuaries of the fund calculate should be paid to secure its solvency (regulation 77(3) and (4)). Solvency is not defined. The actuaries, in their report, say that the Fund is deemed to be solvent when the market value of the assets is equal, to put it simply, to the present value of expected payments (described as the funding target). But the source of such an amount is limited to all bodies whose employees contribute to the fund in question, i.e. active members. The amount of the contribution must be expressed as a percentage of the payof their employees who are active members. Thus, the purpose of the contribution at the common rate is to secure solvency from all those who employ active members of the fund. The measure of their contribution to the fund is based upon a calculation of what is needed from all those who employ active members, contributing to the fund in question. The actuary is required to make, for the purpose of setting the common rate, two calculations, first, a calculation of what is needed from all the employers of active members of the fund, to secure solvency, and then a calculation of what percentage that figure represents of the total pay of the employees who are active members of the fund.[23]Those calculations may be observed in the certificate in the instant appeal for the Tyne and Wear Pension Fund. The actuaries’ report (pursuant to regulation 77(1)(b)) states the funding objective of ensuring that the Fund is always able to meet its liabilities, the monetary funding target and the funding deficit. It considers that the deficit could be eliminated over the next 25 years by a contribution of 140% of members’ contributions (subject to a reduction in the first three years). Membership data is set out in Appendix C; the report identifies the number of active members of the Fund against a specified employer, and the sum of their salaries. At page 17 it records the actuaries’ opinion that the future contribution rate of employers should be 240% of members’ contributions (page 17 of the report). The rates and adjustment certificate, in accordance with that opinion, sets the common rate under regulation 77(3)(a) at 240%.[24]Pursuant to regulation 77(3)(b) the actuaries then make individual adjustments. The definition of individual adjustment in regulation 77(6) requires the actuaries to consider the extent to which contributions at the common rate should be increased or reduced by reason of any circumstances peculiar to a particular body. Absent any adjustment to contributions at the common rate, the employer’s contributions would be 240% of the pay of all the active employees contributing to the fund. An individual adjustment will be an adjustment to that common rate of 240%.[25]The certificate relevant to the instant appeal demonstrates those adjustments. As I have recalled, Appendix C of the report sets out the number of active members of the Fund against a specified employer, and the sum of their salaries. It also identifies the number of deferred members and the number of pensioner members against their employers. Some of those employers have active members but some do not. For example the now abolished North Eastern magistrate’s court committees, such as North and South Tyneside, are identified. In the rates and adjustment certificate, the contributions at the common rate of those who employ active members of the Fund, have been adjusted, sometimes increased and sometimes reduced. Not one of them ischarged at the common rate; for example, Gateshead MBC is charged at 238% for the three years covered by the certificate and Tyne and Wear Enterprise Trust Ltd at 277%. Additional monetary amounts for each of the three years are also shown. Thus what the certificate shows is an individual adjustment of the common rate of each of those bodies whose employees contribute to the fund, expressed as a percentage of the total pay of all of those employees.[26]This does appear to me to be an individual adjustment as defined in regulation 77(6). Contributions at the common rate, which is the rate set for all bodies whose employees are active members contributing to the fund, are contrasted with individual adjustments set for particular bodies.[27]At the end of the certificate, 15 bodies, including Northumbria MCC, are identified, none of whom have active members. In their case, no adjusted contribution rate is shown, only an additional monetary amount. In their case there is no possibility of adjusting their contributions at the common rate since no contribution at the common rate can be set for them. Their employees do not contribute to the Fund. Therefore, they do not number amongst those bodies who provide the only source of amounts intended to secure the solvency of the fund. The additional monetary amounts specified against the name of Northumbria MCC are not increases or reductions of any contribution at the common rate because no contribution at a common rate can be set for Northumbria MCC.[28]Mr Kerr QC rightly points out that the individual adjustment may be expressed as an amount and not only as a percentage (regulation 77(6)). But the adjustment must be an increase or reduction of contributions at the common rate, not simply of contributions. The reference to a particular body is not a reference to some other body whose employees do not contribute to the fund, but to an individual body whose peculiar circumstances justify an adjustment to what would otherwise be a contribution at the common rate.[29]There is a reference to other bodies whose employees do not contribute to the fund who are or may become liable to make payments to the fund (regulation 77(10)(c)). Mr Kerr suggested that that demonstrated that those whose employees do not contribute to the fund may be liable under a certificate. So it does. But regulation 77(10)(c) does not advance the case of either side. If the Lord Chancellor is right, content for that provision may be found in regulation 78 (dealing with the revision of certificates when a private admission body leaves a fund) or in regulation 91 (imposing liability on the last employing authority as defined). If Mr Kerr is to succeed, he must establish that the charging provision, that is, regulation 79, imposes liability on Northumbria MCC as an employing authority. Regulation 77(10)(c) admits of the possibility that Northumbria MCC is an employing authority even though it does not have employees who contribute to the fund but does not itself impose any liability; it is merely a provision which requires notification on a body whose liability must be established elsewhere within the regulations.[30]I stress again that regulation 77 itself imposes no liability whatever. But regulation 79, which does, provides for a calculation which echoes the provisions of regulation 77. The reference in regulation 79(4) to the common percentage is, by virtue of regulation 79(5), a reference back to regulation 77(4), and the increases or reductions are, as in regulation 77(6), increases or reductions to contributions at the common rate. In short, regulation 79 imposes a liability to contribute to any particular fund only on those whose employees contribute to that fund.[31]That is a conclusion which Mr Kerr resists with a forceful and eloquent plea for justice. The regulations should not be construed in a way which permits the Lord Chancellor to offload the liabilities of a former employer in respect of benefits payable to its former employees onto others whose unconnected employees still contribute to the fund. Law should be just and fair and Mr Kerr asserts a construction which will avoid the injustice he identifies and secure the aequm et bonum. Mr Kerr’s silver tongue persuaded the judge. Faced with no decisive interpretation on one side or the other, Wyn Williams J came down on the side of what he perceived to be Northumbria MCC’s escape from its responsibilities to its former employees.[32]I have every sympathy for the judge, confronted with the exasperating opacity of the regulations. But with diffidence, I do not accept a construction which requires from Northumbria MCC a contribution consisting of an adjustment to a rate which can have no application to that body. Nor do I accept that it is possible to invoke the need to avoid injustice in so specialised and arcane a sphere as the funding of local government pensions. It is an area remote from those in which courts have construed legislation to achieve what they perceive to be a just result. The Courts have been and are equipped to recognise injustice in relation to a statutory conveyance which prejudiced the interests of a third party, a stranger to the transaction in question (De Vesci (Evelyn Countess) v O’Connell [1908]AC 298), the point when estate duty became exigible on a reversionary interest (Fry v IRC [1958] 1 Ch 86), and the right of a statutory tenant to retain possession pursuant to the objectives of the statute (Remon v City of London Real Property Co Ltd [1920]1 KB 49). Mr Furness met the complaints of injustice with steely insouciance: the regulations could have imposed liability on former employers in respect of former employees, but they did not. His finesse was, in my view, well made. The regulations make no specific provision for cases in which former employers of those entitled to pensions under the Local Government Pension Scheme are abolished. The liabilities fall on those who remain responsible for securing the solvency of the funds in question. Whether that is unjust or not seems to me a matter of financial policy, to be formed by those endowed with functions and experience remote from those of the courts. The usual authorities cited in relation to trespass into the forbidden area of financial policy were not, I am happy to record, aired before us. In my view this case turns on my construction of technical secondary legislation, a construction which, I regret, differs from that of the judge. I would allow the appeal. Lord Justice Keene: I agree. Lord Justice Sedley: I also agree.