Bridge Trustees Ltd v Yates & Ors [2008] EWHC 964 (Ch)

[2008] EWHC 964 (Ch)Case No HC0603676
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 1 May 2008
Before
SARAH ASPLIN QC(Sitting as a Deputy High Court Judge)
Between
(1) BRIDGE TRUSTEES LIMITEDClaimants
Mr Keith Rowley QC (instructed by Eversheds LLP) for ClaimantsMr Paul Newman (instructed by Pinsent Masons) for First Defendant and Mr Nicolas Stallworthy (instructed by Rowley Ashworth) for the Second and Third DefendantHearing Hearing dates: 10,11 and 14 April 2008
JudgmentMISS SARAH ASPLIN QC:
[1]The Claimant is the sole independent trustee of the Imperial Home Décor Pension Scheme, (“the Scheme”). It seeks the determination of various issues which arise in the winding up of the Scheme. Those issues are set out in a Claim Form dated 9 October 2006, which was amended by order of Mann J on 9 November 2007 and re-amended as result of permission granted at the start of the hearing. Parties[2]The Defendants are all members of the Scheme, the First Defendant, Mr Yates, being a pensioner and the Second and Third Defendants, Mr Houldsworth and Mr Hunter, being deferred members. Mr Houldsworth contributed to MoneyMatch and Mr Hunter to Voluntary Investment Planning, (“VIP”) to which I shall refer below.[3]Representation orders were sought in respect of the Defendants on an issue basis. In addition, as a result of a conflict, it was proposed that the Claimant, Bridge Trustees Limited, (“the Trustee”) be appointed to represent all the members of the Scheme in relation to one argument. Given the complexity of the matter and the underfunding within the Scheme, I am happy to make such orders pursuant to CPR 19.7(2). To do so is consistent with proportionality and the overriding objective. As the representation orders are defined by reference to the issues, I will set them out below.[4]The Trustee is represented in this matter by Mr Rowley QC, the First Defendant, by Mr Newman and the Second and Third Defendants, between whom there is no conflict, by Mr Stallworthy. I am grateful to all of them for their clear and careful exposition of this matter. Background to the Scheme[5]The Scheme was established by an Interim Trust Deed dated 15 December 1971 with effect from 1 January 1972. However, its first Definitive Deed was not executed until 17 September 1980. Unfortunately, the first instruments relating to the Scheme of which copies have been found are the Second Definitive Deed with the scheduled Second Edition of the Scheme Rules dated 13 September 1984. Throughout the lifetime of the Scheme, the principal employer was Imperial Home Décor Group (UK) Limited, (“the Company”), and other companies associated with it participated in the Scheme. It was a substantial scheme, the Annual Report for the eighteen month period to 31 March 2006 revealing that it had 2,433 deferred members and 1,287 pensioners and assets valued at £65.7 million, having taken account of a sum of £68.1 million paid to a life office to secure annuities during that period.[6]The Company went into administrative receivership on 26 June 2003 and on 18 July 2003, the Trustee was appointed pursuant to section 23 Pensions Act 1995. The Scheme went into winding up on 15 October 2003. At present, the deficit in the Scheme is estimated at as much as £39.6 million. Scheme history[7]Before turning to the issues, it is important to have an overview of the structure of the benefits provided under the Scheme. There are three distinct periods in its history. In the first period, from its inception until 6 April 1983, it appears from the contemporaneous booklet, which is the only documentation available, that the benefits provided were of a conventional final salary nature. Members paid 5% of Pensionable Salary (as defined), and received a pension at Normal Retirement Date of 1/60th of Final Pensionable Salary (as defined), for each complete year of service.[8]The Scheme was restructured with effect from 6 April 1983, although the documentation by which the restructuring was effected was executed on 13 September 1984. No point is taken by any of the parties in relation to this. The effect of the restructuring was to provide lower final salary benefits by a lower members’ contribution rate of 3% and a lower accrual rate of 1/80ths, but to introduce a level of what was considered to be money purchase benefits, where the member elected to pay further contributions as specified. Those benefits were known as Voluntary Investment Planning, (the VIP referred to above), and the final salary benefits which all members continued to accrue were referred to as the “Core Plan”. Although the VIP benefits were considered to be money purchase benefits, the question of their actual status is one of the issues before me.[9]Members were also able to continue to accrue final salary benefits in the sense of benefits under the Core Plan, at the level they had previously enjoyed if they elected to continue to pay contributions at the pre-revision level. This was by means of what was referred to in the Scheme documentation as “the 1983 Guarantee” to which I will return.[10]In the third phase in the life of the Scheme, from 6 April 1992 until the commencement of the winding up on 15 October 2003, a further tier of benefit was introduced. This was known as MoneyMatch and was also treated as a money purchase benefit. These further changes are assumed to have been effected by an Interim Deed dated 22 April 1992, which unfortunately, is also missing. The earliest document available which deals with MoneyMatch is the Scheme’s Third Definitive Deed with seven annexed schedules containing the Rules, dated 21 April 1994.[11]MoneyMatch offered a choice of benefits to existing members depending upon the number of their “Membership Points”, being an aggregate of their age and years of membership. Members with fewer than 64 points ceased to accrue final salary benefits and instead accrued benefits under the MoneyMatch section of the Scheme. They could convert their accrued final salary benefits into MoneyMatch and a financial incentive was offered to encourage them to do so, or they could retain them in their existing final salary form. Members with more than 64 points could, if they so elected, continue to accrue final salary benefits at the 1/80ths accrual rate or switch to MoneyMatch either in respect of future accrual only or additionally, by converting their accrued final salary benefits to MoneyMatch if they elected to do so.[12]Therefore, after 1992 there were different categories of member:(a) Option 1 members were those who had elected to convert their accrued final salary benefits into MoneyMatch and to accrue future benefits under the MoneyMatch section;(b) Option 2 members were those who retained their accrued benefits in the final salary section but accrued future benefits under MoneyMatch; and(c) Option 3 members were those who both retained their accrued benefits in final salary form and continued to accrue future benefits in final salary form and therefore, did not participate in MoneyMatch at all. They could accrue VIP benefits, this option being open only to those continuing to accrue final salary benefits. In addition, new joiners after 22 April 1992 accrued benefits exclusively by reference to the MoneyMatch section of the Scheme.[13]To complete the picture, the 1994 Deed was followed by a Consolidated Trust Deed and Rules dated 3 October 1995, occasioned by a merger of the Scheme with the Borden Wallcoverings Pension Scheme and following the Pensions Act 1995, a further Definitive Deed with eight annexed schedules was executed on 12 March 1998, (“the 1998 Deed”). It is the 1998 Deed with which I am primarily concerned.[14]I should add that prior to 6 April 1997, the Scheme was contracted out of State Earnings Related Pension Scheme, (“SERPS”) on a Guaranteed Minimum Pension, (“GMP”) basis. Thereafter, it provided protected rights. Relevant legislation and regulations[15]The questions contained in the Re-Amended Claim Form relate to the application of section 73 Pensions Act 1995 to the Scheme, as modified by regulation 13 Occupational Pension Schemes (Winding Up) Regulations 1996, 1996 SI 3126, in the form in which they stood at the date of the winding up of the Scheme on 15 October 2003. Section 73 which came into force on 6 April 1997, sets out the priority in which assets of an occupational pension scheme should be applied on a winding up. It provides a prescribed order for the application of scheme assets on a winding up by reference to a series of classes of scheme liabilities. Where the assets are insufficient to satisfy the liabilities in a particular class in full, they are applied across the class in the same proportions and any lower ranking class of liabilities remains wholly unsatisfied.[16]Section 73(1) – (3), in its October 2003 form, provides as follows:
“Preferential liabilities on winding up (1) This section applies, where a salary related occupational pension scheme to which section 56 applies is being wound up, to determine the order in which the assets of the scheme are to be applied towards satisfying the liabilities in respect of pensions and other benefits (including increases in pensions). (2)The assets of the scheme must be applied first towards satisfying the amounts of the liabilities mentioned in subsection (3) and, if the assets are insufficient to satisfy those amounts in full, then— (a) the assets must be applied first towards satisfying the amounts of the liabilities mentioned in earlier paragraphs of subsection (3) before the amounts of the liabilities mentioned in later paragraphs, and (b) where the amounts of the liabilities mentioned in one of those paragraphs cannot be satisfied in full, those amounts must be satisfied in the same proportions. (3) The liabilities referred to in subsection (2) are— (a) any liability for pensions or other benefits which, in the opinion of the trustees, are derived from the payment by any member of the scheme of voluntary contributions, (aa) where (i) the trustees or managers of the scheme are entitled to benefits under a contract of insurance which was entered into before 6th April 1997 with a view to securing the whole or part of the scheme’s liability for any pension or other benefit payable in respect of one particular person whose entitlement to payment of a pension or other benefit has arisen and for any benefit which will be payable in respect of that pension on his death, and (ii) either that contract may not be surrendered or the amount payable on surrender does not exceed the liability secured by the contract (but excluding liability for increases to pensions), the liability so secured (b) in a case not falling within paragraph (aa), where a person’s entitlement to payment of pension or other benefit has arisen, liability for that pension or benefit and for any pension or other benefit which will be payable in respect of that person on his death (but excluding increases to pensions), (c) any liability — (i) for equivalent pension benefits (within the meaning of section 57(1) of the National Insurance Act 1965), guaranteed minimum pension, protected rights, section 9 (2B) rights (within the meaning of regulation 12 of the Contracting-out (Transfer and Transfer Payment) Regulations 1996), or safeguarded rights (within the meaning of section 68A(1) of the Pension Schemes Act 1993) (but excluding increases to pension) or (ii) in respect of members with less than two years pensionable service who are not entitled to accrued rights under the scheme, for the return of contributions, (d) any liability for increases to pensions referred to in paragraphs (aa) and (b), (e) any liability for increases to pensions referred to in paragraph (c), (f) so far as not included in paragraph (c ) or (e), any liability for – (i) pensions or other benefits which have accrued to or in respect of any members of the scheme, (including increases to pensions), or (ii) future pensions or other future benefits , attributable (directly or indirectly) to pension credits (including increases to pensions.)” (“section 73”) (a) the assets must be applied first towards satisfying the amounts of the liabilities mentioned in earlier paragraphs of subsection (3) before the amounts of the liabilities mentioned in later paragraphs, and (b) where the amounts of the liabilities mentioned in one of those paragraphs cannot be satisfied in full, those amounts must be satisfied in the same proportions. (a) any liability for pensions or other benefits which, in the opinion of the trustees, are derived from the payment by any member of the scheme of voluntary contributions, (aa) where (i) the trustees or managers of the scheme are entitled to benefits under a contract of insurance which was entered into before 6th April 1997 with a view to securing the whole or part of the scheme’s liability for any pension or other benefit payable in respect of one particular person whose entitlement to payment of a pension or other benefit has arisen and for any benefit which will be payable in respect of that pension on his death, and (ii) either that contract may not be surrendered or the amount payable on surrender does not exceed the liability secured by the contract (but excluding liability for increases to pensions), the liability so secured (b) in a case not falling within paragraph (aa), where a person’s entitlement to payment of pension or other benefit has arisen, liability for that pension or benefit and for any pension or other benefit which will be payable in respect of that person on his death (but excluding increases to pensions), (i) for equivalent pension benefits (within the meaning of section 57(1) of the National Insurance Act 1965), guaranteed minimum pension, protected rights, section 9 (2B) rights (within the meaning of regulation 12 of the Contracting-out (Transfer and Transfer Payment) Regulations 1996), or safeguarded rights (within the meaning of section 68A(1) of the Pension Schemes Act 1993) (but excluding increases to pension) or (ii) in respect of members with less than two years pensionable service who are not entitled to accrued rights under the scheme, for the return of contributions, (d) any liability for increases to pensions referred to in paragraphs (aa) and (b), (e) any liability for increases to pensions referred to in paragraph (c), (f) so far as not included in paragraph (c ) or (e), any liability for – (i) pensions or other benefits which have accrued to or in respect of any members of the scheme, (including increases to pensions), or (ii) future pensions or other future benefits , attributable (directly or indirectly) to pension credits (including increases to pensions.)”
[17]Section 73 therefore, applies to a “salary related occupational pension scheme”, defined in section 93(1A) Pension Schemes Act 1993 and section 125(1) Pensions Act 1995, as meaning an occupational pension scheme which(a) is not a money purchase scheme and(b) does not fall within a prescribed class, which is irrelevant in this case.[18]“Money purchase benefits” and “money purchase schemes” are not defined in the Pensions Act 1995, but the definitions in section 181 Pension Schemes Act 1993, (“section 181”), are imported by virtue of section 124(5) of the 1995 Act. They take the following form: “money purchase benefits” in relation to a member of a person or occupation pension scheme or the widow or widower of a member of such a scheme, means 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.” and “money purchase scheme” means a pension scheme under which all the benefits that may be provided are money purchase benefits.”

and

[19]Section 73 is modified by regulation 13(1)-(3) Occupational Pension Schemes (Winding Up) Regulations 1996, 1996 SI 3126, (“the 1996 Winding Up Regulations”), in the case of what are termed “Hybrid schemes”. Regulation 13 provides as follows: “(1) In relation to any scheme-(a) which is not a money purchase scheme, but(b) where some of the benefits that may be provided are relevant money purchase benefits, section 73 applies as if – (i) the liabilities of the scheme did not include liabilities in respect of those benefits, and (ii) the assets of the scheme did not include the assets by reference to which the rate or amount of those benefits is calculated. (2) In paragraph (1) “relevant money purchase benefits” means money purchase benefits other than (a) benefits derived from the payment by any member of voluntary contributions, or (b) underpin benefits (3) In this regulation, “underpin benefits” means money purchase benefits which under the provisions of the scheme will only be provided in respect of a member if their value exceeds the value of other benefits in respect of him under the scheme which are not money purchase benefits.” (“regulation 13”). section 73 applies as if – By virtue of regulation 1(3)(a), expressions used in the 1996 Winding Up Regulations have the same meaning as those in the Pensions Act 1995, unless the context otherwise requires.

section 73 applies as if –

[20]In the light of the deficit within the Scheme, the application of the priorities has a serious effect upon the benefits payable to different categories of Members. The effect of regulation 13 is to exclude assets and liabilities in respect of money purchase benefits from the exercise required by section 73 and therefore, it becomes imperative to determine whether any benefits payable under the Scheme are “money purchase benefits”, and therefore, whether regulation 13 is engaged. If regulation 13 applies, it is also necessary to determine whether any benefits are derived from the payment of voluntary contributions or are underpin benefits for the purposes of regulation 13(2) and (3) and accordingly, are brought back within the section 73 regime.

The Issues

[21]In the light of the legislation, I am asked to determine whether on a true construction of the 1998 Deed,(i) A Member’s benefits derived from his Member’s Interest or any part or parts of it, (and if so which), constitute money purchase benefits as defined in section 181(1). The parts to be considered are MoneyMatch Contributions and/or Employer’s MoneyMatch Credits and MoneyMatch Plus Contributions and/or Employer’s MoneyMatch Plus Credit: (paragraph 2.1 of the Re-amended Claim Form);(ii) A Member’s benefits derived from his VIP Interest, or any part or parts of it, constitute money purchase benefits as defined in section 181(1): (paragraph 2.3 of the Re-amended Claim Form);(iii) If and to the extent that such benefits in (i) are money purchase benefits, whether pensions currently being paid out of the assets of the Scheme to members who converted the value of their Member’s Interests to pensions from the Scheme prior to the date on which it went into winding-up, amounted when the Scheme went into winding up, to liabilities falling within section 73(3)(b): (paragraph 2.1A of the Re-amended Claim Form);(iv) If and to the extent such benefits referred to in (ii) are held to be money purchase benefits, whether pensions currently paid out of the assets of the Scheme to Members who converted the value of their VIP Interest to pensions from the Scheme, amounted to liabilities falling within section 73(3)(b) when the Scheme went into winding up: (paragraph 2.3A of the Re-amended Claim Form);(v) If and to the extent that benefits under (i) above, are determined to be money purchase benefits and where applicable, pensions referred to in (iii) above are not held to fall within section 73(3)(b), whether a Member’s benefits derived from his Member’s Interest, or any part or parts of it, and if so, which, constitute underpin benefits within the meaning of the 1996 Winding Up Regulations, (“underpin benefits”): (paragraph 2.1B of the Re-amended Claim Form); and(vi) If and to the extent that a Member’s benefits derived from his VIP Interest referred to in (ii) above, are held to be a money purchase benefits, and where applicable, pensions referred to in (iv) above, are not held to be within section 73(3)(b), whether benefits derived from a Member’s VIP Interest or any part or parts of it, and if so, which, constitute underpin benefits where the Member is entitled to the benefit of the 1983 Guarantee: (paragraph 2.3B of the Re-amended Claim Form).[22]If and to the extent that benefits are determined to be money purchase benefits under paragraph 21(i) and/or (ii) above, I am also asked, in so far as may be necessary, to make an order approving the decision of the Trustee to form the opinion for the purposes of section 73(3)(a) Pensions Act 1995, that the benefits derived from(a) Member’s MoneyMatch Plus Contributions paid under Rule 1.2 of Schedule Three of the 1998 Deed or any Scheme rule in force prior to that time; and/or(b) Employers’ MoneyMatch Plus Credits paid under Rule 2.2 of Schedule Three of the 1998 Deed or any Scheme Rule in force prior thereto (paragraph 2.2 of the Re-Amended Claim Form) and/or (a) VIP Contributions paid under Rule 2.2 of Schedule Four of the 1998 Deed or any Scheme Rules in force prior thereto; and/or (b) Employer’s VIP Match contributions paid under Rule 3.2 of Schedule Four to the 1998 Deed or any prior Scheme Rules are derived from the payment by those Members of voluntary contributions: (paragraph 2.4 of the Re-amended Claim Form).

(a) Representation Orders

[23]Mr Yates, the First Defendant is appointed to represent Members in whose interest it is to argue that questions 2.1B and 2.3B are answered in the affirmative and questions 2.1, 2.2, 2.3 and 2.4 in the negative.[24]In other words, this class of Member wishes to contend primarily, that all benefits arising from MoneyMatch and VIP are not money purchase benefits but fall within section 73, to be dealt with according to the priorities set out in that section. In addition, they wish to argue that if such benefits are money purchase benefits, they are nevertheless, brought back into the section 73 regime by regulations 13(2) and (3) as underpin benefits. Finally, they oppose the making of an order approving the decision of the Trustee to treat benefits derived from Employer’s MoneyMatch Plus Credits and Employer’s VIP Match as being derived from the payment of voluntary contributions for the purposes of section 73(3)(a). Given his concession, the First Defendant no longer opposes the making of such an order in relation to benefits derived from Member’s MoneyMatch Plus Contributions and VIP Contributions.[25]Mr Houldsworth, the Second Defendant, a deferred Member of the Scheme who contributed to MoneyMatch and therefore, has a Member’s Interest, is appointed to represent Members in whose interest it is to argue that questions 2.1A, 2.1B and 2.3A are answered in the negative and questions2.1 and2.2 in the affirmative.[26]In other words, this class of Member wishes to submit that MoneyMatch are money purchase benefits and therefore, fall to be dealt with outside section 73 by virtue of regulation 13(1). In addition, they wish to argue that pensions paid from the Scheme whether derived from a Member’s Interest or a VIP Interest are not within section 73(3)(b), and that benefits derived from a Member’s Interest are not money purchase benefits brought back into section 73 by virtue of being underpin benefits falling within regulations 13(2) and (3). They also wish to support the making of an order approving the resolution of the Trustee to reach the opinion that the Scheme’s liability for pensions and other benefits derived from Member’s MoneyMatch Plus Contributions and Employer’s MoneyMatch Credits shall be treated as derived from the payment by any member of the scheme of voluntary contributions for the purposes of section 73(3)(a).[27]Mr Hunter, the Third Defendant, is a deferred Member of the Scheme who made VIP contributions and therefore, has a VIP Interest. He is appointed to represent Members in whose interest it is to argue that question 2.3B be answered in the negative and questions 2.3 and 2.4 in the affirmative.[28]In other words, Mr Hunter represents the class of member who wishes to argue that benefits derived from VIP Interests are money purchase benefits and therefore fall outside the section 73 regime and are not underpin benefits for the purposes of regulations 13(2) and (3). Furthermore, he wishes to argue in support of an order approving the resolution of the Trustee to reach the opinion that the Scheme’s liability for pensions and other benefits derived from VIP Contributions and Employer’s VIP Match contributions shall be treated as derived from the payment by any member of the scheme of voluntary contributions for the purposes of section 73(3)(a).[29]Finally, as I have already mentioned, the Trustee is appointed to represent all Members of the Scheme in whose interests it is to argue that questions 2.1A and 2.3A be answered in the affirmative.

(b) Detailed provisions of Money Match structure

[30]Before turning to the issues, it is essential to have a grasp of the way in which the MoneyMatch and VIP Interests are treated under the Scheme. I shall set out the MoneyMatch structure first.[31]By virtue of rule 4.1 of Schedule 2, the Member and the Employer is required to pay contributions under the Scheme in accordance with the MoneyMatch Rules or the Final Pay Rules as appropriate. A Member contributing to MoneyMatch will fall within either Option 1 or Option 2 to which I referred at paragraph 12. Only those members making VIP Contributions who fell within Option 3, could continue to accrue benefits under the Final Pay Rules.[32]A “Member’s Interest” is defined in Schedule 1 to the 1998 Deed as comprising MoneyMatch Contributions, any MoneyMatch Plus Contributions, any Supplementary Contributions, any MoneyMatch Credits, any MoneyMatch Plus Credits, any Opening Deposit, any Conversion Bonus, any transfers-in applied to provide benefits for the Member on a money purchase basis and investment returns on those items.[33]The MoneyMatch provisions are contained in Schedule 3 to the 1998 Deed. MoneyMatch Contributions are defined in Schedule 1 by reference to rule 1.1 of Schedule 3, which provides under the heading, “MoneyMatch Contributions”, that each Active Member shall pay contributions to the Scheme at the rate of 3 per cent of Contribution Earnings.[34]Rule 1.2 of schedule 3 provides that an Active Member who “so elects” shall pay MoneyMatch Plus Contributions, the maximum rate of which are set out in a table. The extent of such contributions may be increased or reduced subject to the terms of rule 1.4. That rule also provides:
“ . . .the nature of MoneyMatch Plus Contributions and the conditions attaching to them, shall be taken into account for the purposes of determining whether or not such contributions are treated as additional voluntary contributions and hence whether provisions (including restrictions on commutation) relating to additional voluntary contributions are, or as the case may be are not, applicable.”
[35]By rule2.1 of Schedule 3, the Employer was required in each Plan Year, to credit to the account of each Member in its employment, MoneyMatch Credits “of an amount equal in value to the value of the MoneyMatch Contributions paid by the Member in that Plan Year . . ” and by virtue of rule2.2 to provide MoneyMatch Plus Credits of the same value as any MoneyMatch Plus Contributions paid by the Member.[36]Rule 2 of Schedule 3 also contained the following provision: “2.3 The Employer shall on the advice of the actuary provide to the Trustee (or as it shall direct) such amounts as are required to enable it to make due provision for MoneyMatch benefits. In so advising, the Actuary shall have regard to the contributions by Members, the assets and liabilities of the Fund and expected benefits over the period until the next actuarial valuation.” “Fund” is defined in Schedule 1 to include all contributions, investments, policies and property held by the Trustees for the purposes of the Plan and all additions and accretions thereon and therefore, is not restricted to assets referable to any particular section.[37]By virtue of rule 3.1 of Schedule 3, MoneyMatch Contributions, (along with any Opening Deposit or Conversion Bonus), and MoneyMatch Credits were credited to the Guaranteed Interest Fund, (defined in Schedule 1 as “a notional investment fund established by the Trustees for the purpose of MoneyMatch”).[38]By virtue of rule 3.1.2, MoneyMatch Plus Contributions at the election of the Member, could be invested in any one or more of the Investment Funds, defined in Schedule 1 as “the funds which the Trustee may from time to time designate as investment options under MoneyMatch or for the investment of VIP Contributions.” As a result of rule 3.1.4 (a), the corresponding MoneyMatch Plus Credits of up to 2% of Plan Earnings are credited to the Guaranteed Investment Fund, and the excess is available at the direction of the Member, to be invested in the Investment Funds, along with any Opening Deposit and Conversion Bonus.[39]The Opening Deposit is defined as the cash equivalent of certain final salary benefits which a member may have elected to be converted to form part of his Member’s Interest under MoneyMatch and the Conversion Bonus was a bonus awarded to such members who elected to convert their final salary benefits.[40]An annual rate of interest was declared on the Guaranteed Investment Fund of 1% less than that available from a nominated building society on additional voluntary contribution accounts. At the end of each Plan Year, pursuant to rule 3.1.1(c)(b), the Trustee was required to make a comparison between “(i) the average rate of investment return on the Fund (but excluding for the purposes only of the present comparison such parts of the Fund as are attributable to the Investment Funds) applicable to the three preceding calendar years; with (ii) the average interest rate calculated for the Guaranteed Interest Fund during the last of the three calendar years in (i) above calculated as one quarter of the interest rate that applied at the start of that calendar year and three quarters of the interest rate that applied at the end of the calendar year.” and where (i) was greater than (ii), to declare a bonus percentage of 50% of the excess of (i) over (ii), not exceeding 4%. A formula was applied and the resulting amount added to the Member’s Interest.[41]By rules 3.1.2 and 3.1.4(b) of Schedule 3, the Member was permitted to direct into which of the Investment Funds any MoneyMatch Plus Contributions he may have elected to pay together with MoneyMatch Plus Credits in excess of 2% of Plan Earnings, be invested.[42]Rule 4 of Schedule 3 sets out the benefits payable in respect of MoneyMatch. Rule4.1.1 provides that the Member’s Interest shall be calculated and made “available for application” in one or more of the optional forms contained in rule4.1.2 as the Member and the Trustee may agree. Rule 4.1.2 provides:
“Application of Member’s Interest The Member’s Interest . . . . .shall first be applied to satisfy the Contracting-out Requirements. The remainder of a Member’s Interest shall be applied in one or more of the following ways as the Member selects and in the provision of pension increases under Rule 4.1.3: (a) a lump sum payable to the Member on retirement; (b) a pension payable to the Member for life . . .. . (c) a contingent pension payable to a Spouse or Dependant commencing no earlier than on the Member’s death. . . . . . . . .” . . . . . . . .”
[43]“Contracting-out Requirements” are defined in Schedule 1 of the 1998 Deed as “ . . the requirements applicable to the Plan pursuant to the Pensions Act and applicable as set out in Schedules Six and Seven.” 44. That is a reference to the Guaranteed Minimum Pension Rules which override any inconsistent provisions. The relevant parts of Schedule Six are as follows:
“4. ENTITLEMENT TO GMP 4.1 Guaranteed Minimum. This Rule 4 applies to a Member, . . . . where the Member has a guaranteed minimum in relation to the pension provided for the Member under the Plan in accordance with section 14 of the 1993 Act. 4.2 Member’s GMP. The Member shall be entitled to a pension for life paid at a rate equivalent to a weekly rate of not less than that guaranteed minimum. The pension will be paid from State Pensionable Age but commencement of the pension may be postponed for any period during which the Member remains in employment after State Pensionable Age . . . . . . . . . . . 4.7 Offsetting pension against GMP. Any pension payable to the Member in respect of Contracted–out Employment prior to 6th April 1997 . . . . may be offset against the pension entitlement under this Rule 5 (sic 4) except to the extent that: . . . . .”
[44]For completeness, I should also add that those with a Member’s Interest may also have the benefit of the 1983 Guarantee. The relevant provision is at rule 4.1.7 of Schedule 3 and is in the following form:
“Application of the 1983 Guarantee A Member to whom the 1983 Guarantee applies shall receive when his benefits fall to be determined the greater of:- (a) the 1983 Guarantee, and (b) that part of his Member’s Interest invested in the Guaranteed Interest Fund, excluding the accumulated value of the Member’s Conversion bonus plus such other benefits as fall to be paid.”
As very few Members with Member’s Interests also have the benefit of the 1983 Guarantee, I am not asked to consider the effect of the 1983 Guarantee in relation to Member’s Interests. plus such other benefits as fall to be paid.”[45]I was referred to the Annual Report for the Scheme for the year ending 5 April 2003 which revealed that the Scheme was treated as consisting of two main sections one being a defined benefit section and the other, a defined contribution section being the MoneyMatch Section, “where members’ and employers’ contributions and credits accumulate to provide a fund which is used to purchase benefits at retirement.”[46]The Report also recorded the value of VIP and MoneyMatch Plus accounts separately from the remainder of Scheme assets and sets out Core contributions, VIP Contributions and VIP Match contributed by the Employer and MoneyMatch Contributions and MoneyMatch Credits separately. Detail of VIP Structure[47]The provisions relating to VIP are found in Schedule 4 to the 1998 Deed which is entitled, “Final Pay Rules”. VIP Contributions are dealt with at rule 2.2 of Schedule 4 which provides as follows:
“The nature of VIP Contributions and the conditions attaching to them, shall be taken into account for the purposes of determining whether or not such contributions are treated as additional voluntary contributions . . . . ”
The provisions relating to Employer’s VIP Match are at rule 3.2 and rule 3.3 sets out the way in which VIP Contributions and Employer’s VIP Match were required to be dealt with:
“3.3.1 VIP Contributions and VIP Match shall be held by the Trustee upon the trust, and with and subject to, the powers, terms and conditions declared by the Plan to be applicable to them. The interest of each Member shall be both identifiable and quantifiable. 3.3.2 An Active Member who elects to pay VIP Contributions shall at the date of his election . . .select the form or forms of investment in which his VIP Contributions and VIP Match are to be applied by the Trustee on his behalf. 3.3.3 An Active Member who is paying VIP Contributions may, at such frequency as the Trustee shall decide, review both the composition of the investment comprising his VIP Interest and the manner in which future VIP Contributions and VIP Match are to be invested . . . .”
[48]A balance of cost provision is included at rule 3.1, albeit under the heading, “Ordinary Contributions”. It provides as follows:
“Subject to Rule 4 the Employers shall provide to the Trustee (or as the Trustee shall direct) such amounts (if any) as the Principal Employer acting on the advice of the Actuary [determines] are required to enable it to make due provision for the benefits specified under this Schedule 4. . . .”
By virtue of rule 8 of Schedule 4, as amended, a Member’s VIP Interest was required to be used to provide one or more the optional forms of benefit set out in rule 8.3. Those options included “(b) a pension payable to the Member for life . . . .beginning on the same date and subject to the same conditions as his other pension under the Plan”[49]Lastly, Schedule 4 rules9.1 and9.2 extend the 1983 Guarantee to those electing to pay VIP Contributions, in certain circumstances. The provisions are as follows:
“ 9.1 Application of Guarantee This Rule shall apply in the case of a Pre-1983 Revision Date Member who has elected to pay VIP Contributions at such rate as (when aggregated with the Member’s basic contributions under Rule 2.1) shall not be less in each Plan Year on and after the 1983 Revision Date than a rate equal to 5 per cent of what in the corresponding period would have been the Member’s pensionable salary for the purposes of the Old Rules. 9.2 Amount of Benefit Any benefit (other than under the Lump sum Trust) payable to or in respect of the Member under the Plan under the 1983 Rules on an event or in a contingency on or in which a corresponding benefit (exclusive as aforesaid) would have been payable to or in respect of the Member under the Old Rules shall not be less in value on the advice of the Actuary) nor payable on terms less favourable than such as were applicable to such corresponding benefit.”
The definition of the “Old Rules” contained in Schedule 1 makes reference to the rules of the Scheme annexed to the First Definitive Deed of 1980 and the definition of the “1983 Rules” refers to the Second Definitive Deed of 1984. I am asked to consider the effect of the 1983 Guarantee on VIP Interests. Submissions on behalf of the First Defendant[50]Mr Newman’s primary submission was that none of the benefits derived from a Member’s Interest or a VIP Interest could be classified as money purchase benefits but fell to be dealt with under section 73 because of the application of actuarial factors to the Interests, the way in which investment returns were applied to Member’s Interests, the existence of balance of cost provisions and salary related elements.[51]He referred me to the Court of Appeal’s decision in Aon Trust Corporation v KPMG (a firm) & Ors [2006] 1 WLR 97, a case in which one of the issues was whether the scheme in question was a “money purchase scheme” within the definition in section 181 and therefore, section 56 Pensions Act 1995 applied to it. As a “money purchase scheme” is one in which all the benefits are “money purchase benefits”, within the statutory definition, it was also necessary to decide the nature of the benefits provided.[52]Jonathan Parker LJ gave the reasoned judgment of the Court of Appeal, with whom Mummery and Chadwick LJJ agreed. He made some general remarks in relation to money purchase schemes at paragraphs 31 and 32 of the judgment, to which Mr Newman referred me. However, Mr Newman placed particular emphasis upon the following paragraphs of the judgment of Jonathan Parker LJ:
“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 . . . . As Mr Ham succinctly put it at the conclusion of his submissions, . . .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 . . . . 169 As noted earlier . . .an occupational pension scheme is a “money purchase scheme” if “all the benefits that may be provided are money purchase benefits”, ie “benefits the rate or amount of which is calculated by reference to [contributions] and which are not average salary benefits”: see section 181(1) of the 1993 Act. 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 contention. The expression “calculated by reference to” mean, in my judgment, “calculated only by 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 . . 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 section 56 of the 1995 At itself. As noted earlier . . .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). . . ”
[53]Applying the principles in the KPMG case, Mr Newman submitted that in the Scheme, in just the same way, pensions derived from both the MoneyMatch and the VIP Interest are arrived at by the application of conversion factors based on actuarial assumptions, to contributions which in the case of MoneyMatch were set out in a guide to assist Members. The only difference, which he says, is immaterial, is that the actuarial factors were written into the scheme in KPMG and are provided by the actuary in the Scheme.[54]In response to Mr Stallworthy’s reference to the fact that the Trustee had power to secure benefits externally, Mr Newman relied upon the fact that the Trustee had always provided MoneyMatch benefits by way of internal annuitisation and in this regard, referred to the 2nd witness statement of Mr Giles Orton, made on behalf of the Trustee. Fixed pension benefits were paid from the Scheme, on the basis that by the application of reasonable actuarial factors, the Scheme could offer better value for members than an insurance company seeking to make a profit from the transaction.[55]In response to Mr Stallworthy’s point that if the introduction of actuarial factors breaks the link between contributions and benefits, there can never be a money purchase benefit, the translation of all money purchase pots to benefits being dependent upon such an application, Mr Newman says that a distinction must be made between schemes where there is a choice between internal and external annuitisation and those in which the trustee is obliged to purchase an annuity in the market. He submits that the KPMG case was concerned with internal annuitisation and should be confined to those circumstances.[56]He adds that where one cannot be certain whether internal or external annuitisation will be take place, the benefit cannot fall within the definition of a money purchase benefit or regulation 13(2) and must be characterised as salary related.[57]Therefore, both in the case of the VIP Interest and the MoneyMatch, Mr Newman submits there is no material difference between the manner of calculation of benefits between the Scheme and that under consideration in the KPMG case. He says therefore, that the link between contributions and benefits is broken by the application of actuarial assumptions, which Jonathan Parker LJ held to be “fatal” to the contention that the benefits were money purchase benefits.[58]In addition, in relation to MoneyMatch benefits, Mr Newman submits that the benefits are not money purchase benefits because they are not the direct product only of the contributions made by or in respect of the member because they also include investment returns on assets other than the contributions themselves. In this regard, he referred me to rule 3.1.1 (c) of Schedule 3 to the 1998 Deed referred to at paragraph 40 above, which sets out the mechanism by which investment returns and bonuses are added to the Member’s Interest. The calculation referred to at rule 3.1.1(c )(b)(i) includes reference to the “Fund” which includes assets other than those attributable to the MoneyMatch contributions.[59]He says that there is no material difference between this process and that contemplated at the second stage in the KPMG case where a bonus may be added or reductions made depending upon the performance of the scheme’s investments as a whole.[60]He also refers to the fact that the calculation contemplated in rule 3.1.1(c)(b)(i) requires consideration of the average rate of investment over three preceding years which may include years before a member joined the Scheme. He says, inevitably, therefore, the requisite link between contributions and benefits is broken.[61]He countered Mr Stallworthy’s submission that the treatment of investment returns on MoneyMatch is akin to pooling, by contending that in any pooling exercise, the investment returns are allocated to member’s interests on a pro rata basis whereas in the case of the mechanism in rule 3.1.1(c)(b)(i), there is no correlation between the Member’s assets and the bonus.[62]Thirdly, Mr Newman refers to the existence of a balance of cost provision contained in rule 3.1 of Schedule 4 in relation to VIP benefits and in rule 2.3 of Schedule 3 in relation to MoneyMatch which are referred to above. He says that the existence of such provisions is inimical to a money purchase scheme. However, he accepts that Jonathan Parker LJ did not treat the existence of a balance of cost provision in the KPMG scheme as fatal to the provision of money purchase benefits but relies on it as an additional indicator.[63]Fourthly, Mr Newman submits that as a result of Schedule 3 rule 4.1.2, MoneyMatch is subject to the payment of GMPs and accordingly, benefits arising from the Member’s Interest are calculated by reference to earnings. To be a money purchase benefit, a benefit must be calculated only by reference to contributions and therefore, the whole of the benefits fall within section 73. Whether GMPs are separate pensions or only a method of calculation, he says makes no difference. This submission is limited to MoneyMatch and does not extent to VIP Interests, which are not subject to the payment of GMPs.[64]He makes the same points in relation to the effect of the 1983 Guarantee on the VIP Interests, to which I refer below.[65]He concludes therefore, that the Scheme does not provide money purchase benefits at all, and accordingly, is not a hybrid scheme. Therefore, all benefits fall within section 73 without need for reference to regulation 13.[66]In the alternative, he submits that the entirety of those Member’s Interests which relate to members with pre 1997 service and therefore, to whom GMPs applied, cannot as a result, be within the definition of money purchase benefits and therefore, fall within section 73.[67]If he is wrong about this as a matter of principle, Mr Newman submits that nevertheless, benefits derived from Member’s Interests are “underpin” benefits within regulation 13(2) and (3) and therefore, are to be dealt with under section 73 nevertheless.[68]The argument arises because Schedule 3 rule 4.1.2 provides that the Member’s Interest is first to be applied to satisfy the Contracting- out Requirements. As I have mentioned, until 6 April 1997, members of the Scheme were contracted out of SERPS and therefore, it was necessary that the Scheme provided for GMPs, which were intended to be of approximately the same value as the pension which would otherwise have been payable under SERPS.[69]The statutory provisions relating to the calculation of GMPs are now contained in sections 13 and 14 Pension Schemes Act 1993 and regulation 55 of the Occupational Pension Schemes (Contracting-out) Regulations 1996.[70]The provisions contained in Schedule 6 of the Scheme are overriding, (see rule 2), and by virtue of rule 4.1, apply where a Member “has a guaranteed minimum in relation to the pension provided . . . under the Plan”. Rule 4.2 of Schedule 6, set out at paragraph 43 above, provides that the Member “shall be entitled to a pension for life paid at a rate equivalent to a weekly rate of not less than that guaranteed minimum.”[71]Mr Newman referred to Mr Stallworthy’s argument based on dicta in Marsh & McLellan Companies UK Ltd v Pensions Ombudsman [2001] PLR 51, 72, that GMPs are not separate benefits, but merely a basis for the calculation of a scheme pension below which that pension cannot fall. If this is the case, they cannot be “other” benefits for the purposes of the definition of underpin benefits in regulation 13(3).[72]He says that I should reject such an analysis because(i) section 13(3) Pension Schemes Act 1993 requires GMPs to be provided at “pensionable age” which is defined in section 181 as 60 for women and 65 for men, whereas the main pension under a scheme must be paid at an equalised pension age;(ii) section 73 itself treats GMPs as a separate pension, giving them priority over non-contracted out benefits, (see section 73(3)(c)(i)); and(iii) Schedule 6 rule 4.7 contemplates “offsetting”, which itself is an indicator of the separate nature of GMPs. Lastly, he drew attention to a number of examples in the Rules which appear to contemplate the separate payment of GMPs and main pension, including Schedule 6 rule 14(b) where GMPs must be paid or applied for the maintenance of the dependants of a Member who is in prison whilst his main pension under Schedule 2 rule 10.2 can continue to be paid to the Member himself.[73]He says that the upshot of rule 4.1.2 of Schedule 3 and rule 4 of Schedule 6 of the 1998 Deed is that Members with a Member’s Interest who have a right to GMPs will have their Member’s Interest used first to provide GMPs and that it is possible, therefore, that there may be no “remainder” to apply in accordance with the options set out in rule 4.1.2. Therefore, the money purchase benefits, (if that is what they are), which may be provided out of the Member’s Interest can only be provided if they exceed the value of the GMP, which itself is calculated by reference to a member’s earnings and therefore, is not itself a money purchase benefit. The Member’s Interest is therefore, an “underpin” benefit within the definition in regulation 13(3).[74]If GMPs are separate benefits, he submits that the entirety of the Member’s Interest falls within section 73, which is designed to be a complete code. He highlights the fact that there is no suggestion of subdivision of benefits in regulation 13 and that the decision of the Court of Appeal in Cripps v Trustee Solutions Ltd & Ors [2007] PLR 237, was concerned solely with tranching of pensions which already fall within section 73. He submits therefore, that what he describes as “external tranching” is not permitted.[75]Conversely, he says that if GMP is merely a matter of calculation, in any event, Members entitled to GMP have part of their benefits derived from the Member’s Interest calculated other than by reference to the contributions made and therefore, none of the benefit can fall within the definition of money purchase benefit, rendering the entirety subject to the section 73 regime.[76]In the same way as with GMPs, Mr Newman says that those Members entitled to a VIP Interest who also have the advantage of the 1983 Guarantee are entitled to benefits which are salary related, the 1983 Guarantee having been met in practice from the VIP Interest. Therefore, whether the application of the 1983 Guarantee should be treated as a separate benefit or as a method of calculation applied to the VIP Interest, the effect is the same, namely that the VIP Interest cannot be money purchase benefits and the entirety of them are excluded from section 73. In addition, he says that regulation 13(3) applies in exactly the same way to render the benefits payable from the VIP Interest, underpin benefits.[77]In response to Mr Stallworthy’ reliance upon “the greater of” in relation to the nature of the 1983 Guarantee in rule 4.1.7 of Schedule 3, Mr Newman drew my attention to the final words of that rule which are “plus such other benefits as fall to be paid” and submitted that the other benefits were money purchase benefits which were only payable if there were sufficient assets left after payment of the final salary benefits comprised in the 1983 Guarantee. He supported this by reference to rule 9.2 of Schedule 4 which relates to VIP benefits and drew attention to the reference to any benefit ‘payable . . . under the Old Rules” and explained the inclusion of the reference to “value” as a necessary element to define the amount of the 1983 Guarantee.[78]Finally, if benefits derived from a Member’s Interest and/or a VIP Interest are money purchase benefits, Mr Newman addressed the issue of whether I should make an order approving the Trustee’s decision to form the opinion that benefits derived from MoneyMatch Plus Contributions and Credits and VIP Contributions and Employer’s VIP Match are derived from the payment by those members of voluntary contributions for the purposes of section 73(3)(a).[79]In the absence of a definition of “voluntary contributions” for the purpose of section 73(3)(a), Mr Newman invites me to apply the natural and ordinary meaning of the phrase which he says is those contributions which a member is permitted but not required to make. Such a meaning is consistent with the definition of “additional voluntary contributions” in the glossary to the Inland Revenue Practice Notes on the approval of occupational pension schemes (IR12) (2001) and in the Pensions Management Institute and Pensions Research Accountants Group Pensions Terminology Glossary.[80]Mr Newman concedes that MoneyMatch Plus Contributions and VIP Contributions are voluntary contributions for the purposes of section 73(3)(a) and therefore, does not seek to challenge paragraphs 2 and 4 of the Trustee’s resolution of 10 May 2006, although it remains to be determined whether it is appropriate to make an order.[81]He does challenge the inclusion of MoneyMatch Plus Credits and Employer’s VIP Match which were of course, paid by the Employer rather than the Member. Mr Newman submits that benefits arising from these two elements cannot be “derived from the payment by any member . . . . voluntary contributions” for the purposes of section 73(3)(a). He says that the key words are “derived from” which focuses on the source of the payment and not the cause of it. Furthermore, the important attribute of the contributions which fall within section 73(3)(a) is that they are “voluntary” and this cannot be said of the employer element.[82]Finally, he referred me to s685(1) and (3) Income and Corporation Taxes Act 1988 and Taxation of Chargeable Gains Act sub-sections 77(2) and (8) both of which include the phrase, “derived property” and define it as “income from [the property in question] or any other property directly or indirectly representing proceeds of, or of income from, that property or any income therefrom.” Submissions by Mr Rowley QC in relation to the “pensions in payment” issue[83]This issue, together with the arguments in relation to the application of the definition of “underpin benefits” in regulation 13(2) and (3), only arise if I reject Mr Newman’s argument that in any event, benefits derived from a Member’s Interest and/or VIP Interest cannot be money purchase benefits. If they are money purchase benefits, it is necessary to consider whether this remains true in relation to such Interests converted into pensions which were being paid from the Scheme at the date of the winding up, (paragraphs 2.1A and 2.3A of the Re-Amended Claim Form), and to go on to consider the underpin issue in relation to the Interests of Deferred Members at the date of the winding up of the Scheme and indeed, pensioners, if the argument in relation to section 73(3)(b) is rejected.[84]Mr Rowley’s submissions relate to pensions in payment which were originally derived from a Member’s Interest or VIP Interest which was subject to internal annuitisation. He submits that such pensions fall within section 73(3)(b) because they are, without doubt, benefits, in respect of which, “a person’s entitlement to payment . . .has arisen.” He makes a distinction therefore, between those with Member’s Interests and/or VIP Interests who are active or deferred members, whose interests may be money purchase interests and those whose benefits had come into payment at the date of the winding-up.[85]He contends that whether or not the Member’s Interest or VIP Interest may initially have been a money purchase benefit, it ceased to be so on conversion into pension because at that stage, as a result of the application of actuarial factors, the liabilities ceased to fall within the definition of a money purchase benefit. They were no longer liabilities, “the rate or amount of which is calculated by reference to a payment or payments made by the member or any other person in respect of the member.” This is the very argument which Mr Stallworthy uses to contend that such benefits are outside section 73.[86]Mr Rowley says that the difference in treatment between a person whose benefits have come into payment as a pension before the winding up of the Scheme and those whose benefits remain in unconverted form at that date, is no different from the distinction which is made on a winding up between those in a final salary scheme who have reached normal retirement date the day before the winding up and gain a higher position in the priority order under section 73 than those whose pensions have not come into payment at that date and therefore, are accorded less priority.[87]He says that such treatment of pensions is entirely consistent with the policy of section 73 which is to provide a high level of protection to pensioners. In the alternative, the Trustee could have secured their benefits by the purchase of an Approved Policy, (see for example, Schedule 2 rule 8 and the case of Deferred Members, Schedule 2 rule 7.3.2 (b)), but did not do so.[88]Looking at the matter from a different standpoint, the Rules require the Member’s Interest or VIP Interest to be “applied” to provide such benefits as the Member may elect. Mr Rowley says that once it is applied, the Interest itself ceases to exist and the benefits are payable under the Scheme. In response to Mr Stallworthy’s submission that in such circumstances, the member has a contractual right to his pension, Mr Rowley submits that the Rules do not support such an analysis.[89]In addition, Mr Rowley refers me to regulation 13(1)(b)(ii) which operates as if “assets” by reference to which benefits are calculated, are excluded from a scheme. Mr Rowley points out in the case of members who are pensioners at the date of the winding up, the “assets” in the sense of the Member’s Interest or VIP Interest no longer exist because they have been used to provide a scheme pension. Accordingly, unlike active and deferred members who retain their Member’s and/or VIP Interest, the benefits of such a pensioner are not carved out from the operation of section 73 by regulation 13 but remain within it. Submissions on behalf of Second and Third Defendants[90]In summary, Mr Stallworthy submits that all benefits derived from a Member’s Interest or a VIP Interest are money purchase benefits falling outside the ambit of section 73 because actuarial factors are merely used for conversion, the treatment of investment returns was akin to pooling, the balance of cost provisions are irrelevant and in any event, can be explained within the context of the Rules and GMPs are merely a basis of calculation and the 1983 Guarantee at best, leads to an enhancement of the Interest.[91]First, he points to the fact that actuarial conversion factors are not an express element of the rules of the Scheme in the way they were in the KPMG case. In that case, he says, one knew at each stage, what the benefits would be because of the actuarial tables written into the rules. He goes on to assert that if this were a defining issue, in the case of the Scheme, one would have no way of knowing what character of benefit a Member was accruing until retirement when the Member’s Interest fell to be converted into benefits.[92]Mr Stallworthy contends that the characterisation of the benefit cannot be subject to the vagary of whether the Member’s Interest is used to provide a pension from the Scheme and therefore, is subject to internal annuitisation or for example, it were used at an earlier stage to make a transfer payment, or at the point of retirement, an annuity was purchased in the market in the name of the Trustee. (See rule 9.1.1(b)(vi)).[93]Mr Stallworthy contends that the investment returns taken into account for the purposes of calculating a Member’s Interest are only those generated on the Guaranteed Investment Fund, returns on Investment Funds as defined, having been carved out in rule 3.1.1(c)(b)(i) of Schedule 3. “Investment Funds” are defined in Schedule 1 as “funds which the Trustee may from time to time designate as investment options under MoneyMatch or for the investment of VIP Contributions.”[94]He went on to submit that the method of calculating investment returns in rule 3 was no different from any pooling of investments and their returns and would not be sufficient to break the nexus between contributions and benefits for the purposes of the statutory definition.[95]With regard to the “balance of cost” provisions contained in Schedule 3 rule 2.3 in respect of MoneyMatch and rule 3.1 of Schedule 4 in respect of VIP, Mr Stallworthy first pointed out that it was acknowledged by Mr Newman, that the existence of a balance of cost provision was not treated as being determinative of the issue of whether the scheme was a money purchase scheme, in the KPMG case.[96]He went on to submit that rule 2.3 of Schedule 3 which refers to the Employer providing on the advice of the Actuary, “such amounts as are required to enable it [the Trustee] to make due provision for MoneyMatch benefits” was purely mechanistic, the Actuary merely stating the position of a running account. In relation to rule3.1 of Schedule 4, he submitted that it applied primarily to basic contributions under Schedule 4 in respect of final salary benefits. In this regard, he drew particular attention to the heading to rule 3.1 which is “Ordinary contributions” in contrast to the heading of rule3.2 which is “Employer’s VIP Match”. He also referred to the reference at the beginning of rule 3.1 to rule 4, which sets out the requirement for contributions payable both under rules 2 and 3, to be recorded in a schedule of contributions for Minimum Funding Requirement purposes, “where applicable”. He concludes therefore, that rule 3.1 is concerned primarily with ordinary contributions payable in respect of final salary benefits under Schedule 4.[97]He also added that there was no mismatch between assets and liabilities at the point of calculation which was the point of relevance for the purposes of the definition in section 181. He suggested that the balance of cost provisions catered for benefits to which internal annuitisation had been applied but where in fact, for example, the member’s longevity had exceeded the mortality assumption and therefore, had caused a strain on the fund after the calculation of the benefit.[98]With regard to the purported salary related element and the underpin argument, Mr Stallworthy points out what he says is the fallacy of Mr Newman’s argument by referring to the fact that prior to 1997, a scheme could only contract out on a GMP basis and that if Mr Newman were right, there could never have been money purchase benefits in a contracted out scheme which cannot have been the case.[99]He also submits that the simple answer is that GMPs are notionally satisfied from a money purchase pot and then ignored and in this regard, relied upon the dicta of Rimer J in Marsh & McLellan Companies UK Ltd v Pensions Ombudsman [2001] PLR 51, 72, to which I shall refer below. He says that if the money purchase pot were to prove insufficient to meet the GMPs, that money purchase benefit would remain characterised as such, but would be used to buy back into SERPs.[100]Mr Stallworthy submits furthermore, that the definition of underpin benefits in regulation 13(3) is not satisfied in relation to MoneyMatch Members with service before 6 April 1997, who are entitled to GMPs. He goes on to say that even if it were in part, as a result of tranching, considered in Cripps v Trustee Solutions Ltd & Ors [2007] PLR 237, it would be unnecessary, to render the entire Member’s Interest subject to section 73.[101]He says that money purchase benefits are provided from the Member’s Interest in any event, and that Schedule 3 rule 4.1.2 only requires those benefits to be topped up if their value would be less than the relevant GMP. Therefore, he submits, the rule contemplates a money purchase benefit with a final salary underpin which is the opposite of the definition of an “underpin benefit.”[102]In any event, he says GMPs are not “other” benefits for the purposes of regulation 13(3), relying on the dicta in Rimer J’s judgment in Marsh & McLellan Companies UK Ltd v Pensions Ombudsman. I was referred to paragraphs 68 and 82 of the judgment, which I should set out in full: “As regards GMPs, Mr Sumption submitted that the fallacy in the Ombudsman’s reasoning was to regard these as themselves pension, or as discrete parts of the scheme pension. He submitted that this was simply wrong. They are not pension at all. They are at most notional pension, broadly corresponding to what would be paid by the State under the SERPS, if that applied, which it does not. Their true character is that they are mere calculation factors identifying a minimum below which a pension calculated in accordance with the scheme rules may not fall. The scheme pension entitlement has to be calculated first, apart from the GMP. The GMP is then calculated separately for the purpose of(i) cross-checking that the scheme pension is above the required minimum and(ii) adding any anti-franking supplement. Even in a case where the minimum is actually payable, the GMP still does not become the pension. It is merely the calculation that requires the scheme to pay a pension of that minimum amount.” (68) “I agree with Mr Sumption that the better analysis of GMPs is that they are in the nature of calculation factors rather than pension themselves or discrete elements of the scheme pension. The scheme pension is one indivisible pension. No doubt, an element of it can be regarded as satisfying the minimum benchmark represented by the GMP, but I regard it as incorrect to regard the scheme as comprising two elements made up of a GMP and the excess above it . . . . . . . . Of course, the GMP calculation factors have roles to play other than the benchmark role. For example, in an insolvent winding up they will produce amounts that will enjoy priority over the balance of the pension obligations, but I do not regard this as converting the priority payment into a separate pension, although it may be realistic in practice to regard the GMP in this particular context as amounting to a discrete part of the pension since it is a part in respect of which priority is enjoyed.” (82)[103]Mr Stallworthy submits that regulation 13(3) contemplates “either/or” alternative benefits whereas, if Mr Newman is right the GMP is provided always and in any event.[104]Furthermore, treating the Member’s Interest as underpin benefits would have the result which Mr Stallworthy describes as “inconsistent and unjust”, that money purchase members who have borne their own investment risk would nonetheless be required to cross subsidise the defined benefits of final salary members who have borne no such risk.[105]If contrary to his argument, Mr Newman is right, Mr Stallworthy argues that nevertheless, the benefit should fall within section 73(3) as a result of the application of regulation 13(3), (to which I shall refer below), only in an individual case where the GMP exceeds the value of the money purchase pot and only to the extent that those funds are derived from MoneyMatch Contributions and Credits made prior to 6 April 1997.[106]Finally, Mr Stallworthy says that section 73 contemplates “tranching” of benefits and that the references in regulation 13(1)(b) to “some” and “those” benefits are indicators that what Mr Newman refers to as “external tranching” is contemplated. He also says that as a result of the voluntary nature of MoneyMatch Plus contributions and credits, and the terms of section 111(1)(c) Pension Schemes Act 1993, changes in the provisions of the Scheme since its 1994 version in which GMP was only payable from MoneyMatch Contributions and Credits, and express provision in Article 1.2 of the 1998 Deed that nothing shall prejudice any Pre-Merger Benefits, all MoneyMatch Plus Contributions and Credits cannot be made subject to the GMP by sweeping up the entirety of the Member’s Interest into section 73.[107]Lastly, Mr Stallworthy submits that Mr Newman’s view of the operation of the 1983 Guarantee which applies to VIP Members is misconceived. He referred me to a notice to members explaining the workings of the Guarantee which referred to total Plan benefits and then stated: “The Pensions Administrator acting on the advice of the Plan’s actuary, will also calculate a lump sum equivalent of these benefits. If this lump sum equivalent is less than the corresponding lump sum equivalent calculated using the benefit formula that was applicable immediately prior to 6 April 1983, then the Guarantee will “bite” and your Plan benefits will be increased accordingly. It is important for you to realise that the Guarantee does not mean that your actual monthly pension will necessarily be at least as much as it would have been if your pension had been calculated on the pre April 1983 formula. However, if it is not, the Trustees must be satisfied that your benefit is of equivalent value – for instance, a lower pension with higher increases. . . “[108]He referred me to rule 4.1.7 of Schedule 3 in respect of the application of the 1983 Guarantee to MoneyMatch and rule 9.2 of Schedule 4 in respect of its application to VIP, laying particular emphasis upon the use of “the greater of” in the comparison between the 1983 Guarantee and the part of a Member’s Interest invested in the Guaranteed Interest Fund in rule 4.1.7 and the use of “shall not be less in value . . .” in rule 9.2 which he contended supported the conclusion that those entitled to the 1983 Guarantee received an enhanced money purchase pot where the guarantee was effective, rather than the final salary benefits they would have been entitled to under the Old Rules.[109]With regard to Mr Rowley’s submissions on behalf of those in receipt of pensions at the date of winding up, whose benefits were derived from a Member’s Interest or VIP Interest, Mr Stallworthy accepted that once the pension was purchased, the Interest ceased to exist. He submitted however, that the money purchase character of the benefit continued because it is necessary to focus on the moment at which the benefit is determined. At that date the money purchase pot defined the pension payable and its extent, and therefore, the essential character of the benefit was fixed. He highlighted the fact that such an approach avoids,(a) the need to re-characterise a benefit,(b) inconsistencies depending upon whether the benefit is secured by means of the purchase of an Approved Policy or is subject to internal annuitisation within the Scheme, and(c) the incongruity of treating the benefit differently even where the same annuity rate may have been applied, merely because it is paid internally.[110]He also contended that both external and internal annuitisation can be characterised as a contractual exchange of the money purchase pot for a pension income stream. He says that the annuity rate used to convert the “pot” into pension does not prevent the benefit from being “calculated by reference to” that “pot” for the purposes of the definition of money purchase benefits.[111]In support of his contractual analysis, he referred me to the fact that under Schedule 2 rule 4.1.1, a Member’s Interest is available for application in the manner that the Member shall “agree” with the Trustee, the reference in the booklet to a Member’s Interest being used to “buy” benefits and a similar reference in the Trustee’s Report for the year ended 5 April 2003. He went on to refer to Schedule 2 rule 9.1.11, under which the Trustee is empowered to invest the Fund in an “application” and finally to the winding up provisions in Article 17 of the Trust Deed.[112]Mr Stallworthy referred me to the notes on the Pension Protection Fund website in relation to the KPMG decision, produced in 2007. Those notes state that the position in relation to the status of money purchase AVCs when pensions are paid from the scheme, is one of considerable uncertainty. In relation to valuations pursuant to section 143 Pensions Act 2004, they read as follows:
“The scheme has a practice of allowing members the option on retirement of converting their money purchase AVC fund to a pension paid directly form the scheme’s assets, rather than requiring an annuity to be purchased from an insurance company How should this AVC pension be treated for the purposes of a s143 valuation? In general, provided the terms of conversion of the AVC fund into pension are applied at the date of retirement, the AVC pension continues to be classed as a money purchase benefit once in payment . . ”
[113]On a winding up of the Scheme, he says that the obligation to provide internal annuities purchased with money purchase “pots” is amongst the “charges . . .of or incidental to the . .. winding upon of the Plan” to be paid in priority to Final Salary benefits under Article 17.2(b), the Member’s Interests and VIP Interests having been used to secure such benefits as the member shall agree. As I have set out above, this contractual analysis is rejected by Mr Rowley and, for good measure, by Mr Newman. They contend that when internal annuitisation takes place, the resultant pension is merely payable from the Scheme like any other and Mr Newman adds that otherwise, one would be able in effect, to contract out of the priorities in section 73.[114]With regard to the issue of whether the Trustee’s resolution in relation to voluntary contributions for the purposes of s73(3)(a) should be in respect of MoneyMatch Plus Credits and VIP Match, Mr Stallworthy says that the employer’s contributions should be viewed in the same way as any other accretion to the member’s contributions, such as investment returns. He referred me to the Oxford Dictionary definition of “derived” which includes “obtain or get” and therefore, he says requires no element of immediacy. He also referred me to Monarch v Special Commissioners Monarch Assurance Co Ltd v Special Commissioners & Inland Revenue Commissioners [1986] STC 311, a decision of Hoffmann J as he then was, as to whether gains realised on the sale of shares or options to acquire shares were “derived from” the business of the company, in the context of section 20(3) Taxes Management Act 1970, in which a wide view was adopted. Questions 2.1 and 2.3[115]The questions posed in paragraphs 2.1 and 2.3 of the Re-Amended Claim Form respectively, are whether benefits derived either from a Member’s Interest or any part of it, or benefits derived from a Member’s VIP Interest which includes both contributions and credits, are money purchase benefits in the statutory sense. If they are, the effect is that they are excluded from section 73 as a result of its modification in the case of hybrid schemes, by regulation 13(1). The assets attributable to those benefits would not be available therefore, to fund benefits in the order of priorities set out in section 73 but would be dealt with under the winding up provisions of the Scheme.[116]This affects the Scheme’s ability to fund increases in pensions in payment for pensioners who are represented by the First Defendant, Mr Yates. Obviously, if these categories of benefit fall within section 73, the members represented by Mr Houldsworth who represents those with MoneyMatch benefits and Mr Hunter who represents those with a VIP Interest, will correspondingly, be adversely affected.[117]I have to decide whether those benefits arising from the application of a Member’s Interest or VIP Interest, fall within the definition of money purchase benefits in section 181 and are therefore, “calculated by reference to” payments made by the member or in respect of him which are not average salary benefits. No suggestion has been made in this case, that the MoneyMatch and VIP benefits should be characterised as average salary benefits.[118]I turn therefore, to whether they are calculable by reference to payments made by the member or in respect of him. I take into account the observations as to the general nature of defined benefit and money purchase schemes, made by Jonathan Parker LJ at paragraphs 30 to 32 of his judgment in the KPMG case, in the following form:
“ 30 . . 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: ie. 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 benefits dictates the level of contribution. 31 Alternatively, an employer setting up an occupation 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. 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.”
I also adopt the structure used by Jonathan Parker LJ in his judgment in the KPMG case, at paragraph 151, namely to consider the relationship between contributions and benefits in the Scheme.[119]Contributions must be paid either under the Final Pay or the MoneyMatch Rules, (Schedule 2 rule 4.1). As I mentioned, MoneyMatch Contributions are payable at the rate of 3% of Contribution Earnings and Employer’s MoneyMatch Credits are required to be of the same value in each Plan Year. The payment of MoneyMatch Plus Contributions, however, is optional. They may be paid at any rate up to a maximum set out in a table. If those contributions are paid, however, Employer’s MoneyMatch Plus Credits of the same amount, are required to be paid.[120]The MoneyMatch Contributions and Credits, along with 2% of the MoneyMatch Plus Credits are notionally invested in the Guaranteed Investment Fund, the return on which was calculated by reference to the formula set out in Schedule 3 rule 3.1.1(c). MoneyMatch Plus Contributions and any excess of the MoneyMatch Plus Credits over 2% were invested at the behest of the Member in the Investment Funds.[121]These contributions and credits, together with the other elements to which I referred at paragraph 32 above, and investment returns on those items constitute the Member’s Interest. At retirement from Service at Normal Retirement Age or on early retirement with the consent of the Employer, the Member’s Interest “shall be calculated and shall be available for application in one of the optional forms set out in rule 4.1.2 of Schedule 3 as the Member shall agree with the Trustee . . . .”.[122]Rule 4.1.2 of Schedule 3 provides that it is first to be applied to satisfy the Contracting Out Requirements and “the remainder” shall be applied in one or more of the ways set out, as the Member may select and in the provision of pension increases: (Schedule 3 rules 4.1.2 and 4.1.3 and Schedule 2 rule 5). The alternatives include the payment of a pension payable for life.[123]If the Member elects to do so, VIP Contributions may be paid at such rate as the Member decides, subject to Inland Revenue maxima, (Schedule 4 rule 2.2). If they are paid, they must be matched by Employer’s VIP Match, the extent of which was ascertained as a percentage of each £1 of VIP Contribution, (Schedule 4 rule 3.2). The Member’s VIP Interest, which is required to be identifiable and quantifiable, (rule3.3.1 of Schedule 4), is defined in Schedule 1 as being the aggregate of VIP Contributions, Employer’s VIP Match paid in respect of him and the investment returns thereon, is invested in the manner selected by the Member, (Schedule 4 rule3.3.2 ).[124]In the same way as with the Member’s Interest, a Member’s VIP Interest may be used to provide any one or more of the optional benefits set out in rule 8.3 of Schedule 4 which includes the provision of a pension for life. The VIP Interest is not subject to the Contracting-out Requirements but as with the Member’s Interest, a member with a VIP Interest may have the benefit of the 1983 Guarantee.[125]It appears from the Rules, therefore, that the Member’s Interest and the VIP Interest are treated as if they exist as separate accounts which can be equated with the “pots” which are the indicia of schemes providing money purchase benefits. Both the Member’s Interest and the VIP Interest are potentially subject to the application of the 1983 Guarantee and the Member’s Interest must first be applied to satisfy any GMP to which I shall refer below.[126]The optional benefits in the provision of which the Member’s Interest and/or the VIP Interest may be applied are to be contrasted with the Standard Pension defined in Schedule 1 as “an annual amount equal to 1/80 of the Member’s Final Pay for each year of Pensionable Service . . .”[127]Although the Trustee has power with the beneficiary’s consent, to purchase an Approved Policy in order to secure benefits, (Schedule 2 rule 8.1), in fact, “internal annuitisation” took place and pensions both in respect of Member’s Interests and VIP Interests were paid from the Scheme. Schedule 2 rule 5 contains express provisions for the payment of increases on such pensions.[128]Of course, in order to convert a Member’s Interest or a VIP Interest into pension paid from the Scheme, it is necessary to apply actuarial factors to the “pot” available. Mr Newman says that this is fatal to such benefits being money purchase benefits and relies upon paragraph 171 in the judgment of Jonathan Parker LJ in the KPMG case.[129]However, in my judgment, the rules of the Scheme are materially different from those under consideration in the KPMG case which was described by counsel as a CARE scheme, in the form often referred to as a “building block” scheme. The actuarial factors in that case were an integral part of the calculation of the benefits provided under the scheme and could be described as defining the benefits provided. Jonathan Parker LJ described the tables at paragraph 156 of his judgment in the following way:
“The tables were 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.”
[130]It was accepted that the structure of that scheme, (“the KPMG Scheme”), was vastly different from the one under consideration here. In the KPMG scheme, standard benefits were calculated by multiplying total contributions for each period, paid at a specified rate, by a figure set out in a table. The multiplier was the product of actuarial assessment of factors such as future investment returns, inflation and mortality. Thereafter, bonuses were added according to a formula, if there was a surplus on the fund as a whole and the sum was decreased if a deficit was revealed.[131]To put the matter another way, the contributions secured for the member, an annual pension, the amount of which was determined by the application of multipliers which were based upon actuarial factors. Thus, pension payable for each year of membership was defined by application of the multipliers and therefore, the actuarial assumptions, to the contributions.[132]The Scheme, however, does not include provisions of this type by which the extent of the benefit to be provided in respect of each year in which contributions were made could be determined. In the case of the Scheme, the “pot” whether it be the Member’s Interest or VIP Interest, remains just that until it has to be applied in the provision of such benefits as the Member selects. Only at the stage at which a pension is selected, are actuarial factors used purely as a means of conversion from “pot” to pension. The actuarial factors did not define the benefit in the way that the tables in the KPMG case did but were merely a tool to effect their conversion.[133]In this regard, it is also relevant in my judgment, that the reference to conversion factors to which I was referred, which appeared in the 1992 version of a guide for members, expressly stated that the terms offered for the conversion, “will vary from time to time to reflect market conditions” and were only provided to give members an idea of current rates. This is altogether different from the exercise being undertaken in the KPMG case in order to determine the amount of benefit to which a member was entitled in any year, depending upon his age, gender and other factors. In the Scheme, the factors applied were subject to variation dependant upon current market rates, but as Mr Orton states in his second witness statement, were intended to provide the Member with a better deal than if an annuity were purchased which would include the inevitable profit margin for the provider.[134]Therefore, I consider that the KMPG case can be distinguished from the circumstances under consideration here. Accordingly, I reject Mr Newman’s submission that the application of actuarial factors is inevitably fatal to the contention that the benefits arising from the Member’s Interest and/or the VIP Interest are money purchase benefits.[135]Furthermore, in my judgment it should make no difference whether the Trustee secures such benefits by means of “internal annuitisation” or purchases an annuity in the market, whether in its own name or that of the Member. I accept Mr Stallworthy’s submission that to make such a distinction would create insupportable anomalies and leave the question of whether a benefit was money purchase in nature unanswered until the benefit was actually secured. Such uncertainty cannot have been intended and I reject Mr Newman’s submission that that very uncertainty renders all such benefits incapable of falling within the definition of money purchase benefits. If that were the case, all such benefits would have to fall outside the definition even if ultimately, an annuity was purchased in the market.[136]Equally, I reject Mr Newman’s assertion that the manner in which the investment returns are calculated under the notional Guaranteed Interest Fund means that the benefits arising from the Member’s Interest cannot be calculated “only” by reference to the contributions and therefore, satisfy the construction placed upon the expression by Jonathan Parker LJ in paragraph 171 of his judgment in the KPMG case.[137]Despite the fact that the final rate of return to be applied to the Member’s Interest is arrived at by the addition of a bonus percentage to the initial conservatively declared rate, in my judgment, it is merely a rate of return nevertheless. The mechanism by which the rate is arrived at is just that. The fact that one is required to have regard to returns on other funds over a number of years in order to determine the percentage to be applied is merely a product of the fact that the investment is only notional in the first place. In my judgment, its application does not prevent the benefits from being a direct product of the contributions.[138]Furthermore, the application of the bonus percentage in order to arrive at the investment return for the Guaranteed Interest Fund, envisaged in rule 3.1.1 (c)(c) of Schedule 3, can be distinguished from the bonus regime under consideration in the KPMG case. In that case, if an actuarial valuation relating to the assets and liabilities of the entire scheme, revealed a surplus, the trustees had power to reduce contributions or increase benefits by the declaration of bonuses. In my judgment this is entirely different from the arrival at a percentage investment return on a notional fund by reference to the performance of a variety of investments.[139]Next, I turn to the existence of the provisions referred to by both Mr Newman and Mr Stallworthy as “balance of cost” provisions. The respective rules are contained in rule 2.3 of Schedule 3 in respect of MoneyMatch and at rule 3.1 of Schedule 4 in respect of VIP. They are both similar in form. The provision in Schedule 4 is applicable to Final Pay benefits and Mr Stallworthy says it should be confined to them. In my judgment, given the heading “Ordinary contributions”, rather than VIP Contributions and the reference to rule 4, which itself refers to contributions to be recorded in an MFR schedule where applicable, it is possible to confine the application of the provision to the Final Pay benefits. However, this is not true of rule 2.3 of Schedule 3 which applies to MoneyMatch. In this regard, I accept Mr Stallworthy’s submissions that the provision caters for the situation in which the process of internal annuitisation has caused a strain upon the Fund.[140]In any event, I do not consider the existence of the “balance of cost” provisions to be fatal to the characterisation of benefits arising from a Member’s Interest or VIP Interest as money purchase benefits. Mr Newman conceded that the existence of such provisions was not considered determinative in the KMPG case.[141]Next, it is necessary to consider whether the use of the Member’s Interest, first to satisfy the GMP where applicable and the potential application of the 1983 Guarantee to both Member’s Interest and VIP Interests, is fatal to the characterisation of benefits derived from them as money purchase benefits.[142]Although this is a complex issue to which I shall have to return, at this stage, it is sufficient to state that in my judgment, although it is not in dispute that both the Guaranteed Minimum Pension and the benefits under the “Old Rules” to which the 1983 Guarantee relates are salary related, the mere reference to Contracting-out Requirements in rule 4.1.2 of Schedule 3 and to the 1983 Guarantee in Schedule 3 rule 4.1.7 and Schedule 4 rules 9.1 and 9.2, cannot as a matter of principle, render the benefits arising from the Member’s Interest and/or the VIP Interest salary related or conversely, exclude them from the definition of money purchase benefits.[143]I should add that in my judgment, for this purpose, it is unnecessary to distinguish between the different categories of contribution and credit set out at question 2.1 of the Re-Amended Claim Form. The fact that a member subject to the MoneyMatch regime was required to make MoneyMatch Contributions which were defined as a percentage of Plan Earnings is not significant. All the constituent parts formed the Member’s Interest which was applied to provide money purchase benefits.[144]Therefore, I answer questions 2.1 and 2.3 in the affirmative. Questions 2.1A and 2.3A[145]Are pensions which were in payment from the Scheme, when it went into winding up but which were derived from either a Member’s Interest or a VIP Interest, liabilities falling within section 73(3)(b) Pensions Act 1995 because they are benefits in respect of which “a person’s entitlement to payment . . has arisen”?[146]If this is the case, it is argued that the application of internal annuitisation will have the effect in respect of pensioners, of converting money purchase benefits, the assets and liabilities in respect of which would have been excluded from section 73 by virtue of regulation 13(1), into benefits within section 73, nevertheless. By contrast those who were Active or Deferred Members at the date of the winding up of the Scheme and were entitled to a Member’s Interest or VIP Interest at that date, would find the liabilities for their benefits and the assets relating to those liabilities, dealt with under regulation 13(1) and therefore, excluded from the section 73 regime.[147]Mr Rowley urged me to find that the application of actuarial factors to the Member’s Interest or VIP Interest at the date of conversion to a pension, took the benefit outside the definition of money purchase benefits at that stage. Given my conclusion in relation to the application of actuarial factors for the purposes of questions 2.1 and 2.3, I reject Mr Rowley’s submission in this regard. In my judgment, the application of actuarial factors at the point of calculation of the benefit cannot prevent the rate or amount of the liability being one which “is calculated by reference to a payment or payments made by the member or by any other person in respect of the member.” It is still calculated by reference to the pot available and remains a money purchase benefit. One must focus upon the time at which the benefit is determined. At the stage at which the Interest is applied in the provision of benefits, those benefits fall within the definition of “money purchase benefits” in section 181 and the essential character of the benefit is determined.[148]However, I should add that I reject Mr Stallworthy’s contractual analysis as to the status of such a pension following internal annuitisation which is wholly unsupported in the provisions of the Scheme. Once the pension is in payment, there is no suggestion in the rules that it is treated differently from any other pension under the Scheme and there is no provision which requires a separate fund to be ring fenced in respect of it.[149]This brings me to the way in which regulation 13 operates in such a situation. In the case of hybrid schemes, where some of the benefits provided are money purchase benefits, regulation 13 modifies section 73 so that it applies as if:
“(i) the liabilities of the scheme did not include liabilities in respect of those benefits, and (ii) the assets of the scheme did not include the assets by reference to which the rate or amount of those benefits is calculated.”
[150]However, as Mr Rowley points out, once the pension comes into payment, the assets “by reference to which the rate or amount of [those] benefits is calculated”, are no longer ascertainable. Although the assets forming the Member’s Interest nominally remained within the Scheme after the pension became payable, the Member’s Interest was applied in order to provide the benefit. As the assets referable to the rate or amount of the benefits are no longer ascertainable, in my judgment, regulation 13 cannot operate to carve them out from section 73. This conclusion is also supported by the use of “is” rather than “was” in regulation 13(1)(b)(ii). Therefore, in my judgment, pensions in payment derived from a Member’s Interest or VIP Interest, fall within section 73(3)(b).[151]This is consistent with legislative policy to give greater protection to pensioners than deferred and active members and therefore there is nothing peculiar about such pensioners being given priority under section 73 whilst those who retain a Member’s Interest or VIP Interest at the date of the winding up may be categorised as having money purchase benefits falling within regulation 13(1). Questions 2.1B and 2.3B[152]To the extent to which regulation 13 applies to them, are the benefits derived from a Member’s Interest and/or a VIP Interest and any part or parts of them, underpin benefits for the purposes of regulation 13(2)(b) and (3)? If they are, they are excluded from the exclusion from section 73 created by regulation 13.[153]First, I should set out once again, the definition of “underpin benefits”, contained on regulation 13(3). It is in the following form:
“ . . . “underpin benefits” means money purchase benefits which under the provisions of the scheme will only be provided in respect of a member if their value exceeds the value of other benefits in respect of him under the scheme which are not money purchase benefits.”
[154]Underpin benefits therefore, are money purchase benefits which are only paid if their value exceeds that of ”other” benefits which are salary related, to be provided in respect of the member.[155]It is not in dispute that a Member’s Interest is first to be applied to satisfy the Contracting out Requirements, which in this context is a reference to the provision of GMP in respect of service before 6 April 1997. Therefore, although rule 4.1.2 of Schedule 3 makes express reference to the Contracting out Requirements, only Members with pre 6 April 1997 service, will, in fact, have accrued GMPs and accordingly, be in a position in which their Member’s Interest would fall to be applied in such a way. I have decided therefore, that the mere reference to Contracting out Requirements, does not cause all benefits referable to all Member’s Interests whether in fact, the Member was entitled to GMP or not, to fall outside the definition of money purchase benefits.[156]What then of the benefits arising from the Member’s Interests of those with pre 6 April 1997 service who are entitled to GMPs? As I understand it, it is not in dispute that GMP is calculated on a salary related basis. This is clear from sections 13 and 14 Pension Schemes Act 1993. The next question is whether the GMP is a separate benefit? If this is the case, it satisfies the requirement for “other benefits” in the definition in regulation 13(3).[157]Sections 8(2) Pension Schemes Act 1993 defines GMP as:
“any pension which is provided by an occupational pension scheme in accordance with the requirements of sections 13 and 17 to the extent to which its weekly rate is equal to the earner’s . . . . .guaranteed minimum . . .”
Sections 13(1) Pension Schemes Act 1993 provides:
“13 Minimum pensions for earners (1) Subject to the provisions of this Part, the scheme must – (a) provide for the earner to be entitled to a pension under the scheme if he attains pensionable age; and (b) contain a rule to the effect that the weekly rate of the pension will be not less than his guaranteed minimum (if any) under section 14 to 16.” (a) provide for the earner to be entitled to a pension under the scheme if he attains pensionable age; and (b) contain a rule to the effect that the weekly rate of the pension will be not less than his guaranteed minimum (if any) under section 14 to 16.”
[158]In this regard, as I have already mentioned, I was referred by Mr Stallworthy and by Mr Newman, to dicta relating to the nature of a GMP, in the judgment of Rimer J in Marsh & McLellan Companies UK Ltd v Pensions Ombudsman [2001] PLR 51. That was a case comprising two appeals against a determination and direction of the Pensions Ombudsman in relation to the necessity or otherwise to equalise GMPs as a result of section 62 Pensions Act 1995. The scheme under consideration provided defined benefits. Rimer J held that the Pensions Ombudsman had no jurisdiction to determine the general issue of the equalisation of GMPs as regards all of the members of the scheme in question and therefore, he had no need to consider the merits of the substantive question itself.[159]However, he did consider the issue, albeit obiter, and as part of that exercise, observed that the better analysis is that the GMP is a calculation factor rather than a pension itself. He accepted however, that the GMP element enjoys priority in an insolvent winding up but did not regard such priority as converting it into a separate pension.[160]Although I would not suggest as Mr Newman urged me to, that Rimer J’s analysis was unreasoned, it appears to me that he did come to his conclusions in a completely different context from the one under consideration here. The scheme upon which he had been addressed was a defined benefit scheme and the issue which, in the event, he did not have to decide was the application of section 62 Pensions Act 1995 to GMPs.[161]In the light of the legislation to which I have referred which in my judgment, clearly envisages the GMP as a pension in its own right, together with the manner in which it is afforded separate priority within section 73 itself, I consider that for the purposes of section 73 and regulation 13 therefore, the GMP should be treated as a separate benefit rather than purely a method of calculation. Although they are no indicator in themselves, I also draw comfort from the numerous provisions of the Scheme itself, which are consistent with such an analysis. I also note that although Rimer J did not go as far as to conclude that GMP was a separate pension for section 73 purposes, he did observe that in that context it may be realistic to treat it as a “discrete” part.[162]Accordingly, in my judgment, for the purposes of section 73, the GMP is to be treated as a separate benefit and as a result may amount to the “other benefit” referred to in the definition of underpin benefits.[163]Furthermore, I consider that regulation 13(3) can be construed sufficiently widely to cover the situation which arises under rule 4.1.2 of Schedule 3. The lump sum, pension and other alternative benefits set out in that rule, will only be provided if their value exceeds that of the GMP. That much is clear from the use of the phrase, “the remainder” after the reference to satisfying the Contracting-out Requirements. Therefore, if the Member’s Interest is of sufficient value, the money purchase benefits will be provided in addition to the GMP. It is not necessary for the purposes of the definition of “underpin benefits” that the money purchase benefits are a complete alternative to the “other benefits”. In my judgment, the regulation is wide enough to encompass the situation in which they are paid in addition, if there is sufficient money available.[164]Therefore, the effect upon those Members not only with Member’s Interests but also with service prior to 6 April 1997, who were therefore, entitled to GMPs, is that the entirety of their Member’s Interest falls within the definition of an “underpin benefit” and therefore, as a result of regulation 13, is subject to the section 73 regime. Despite the provisions to which Mr Stallworthy referred me including rule 4.7 of Schedule 6 and rules contained in the 1994 deed, in my judgment, this is the effect of regulation 13(3). There is nothing in regulation 13(3) which suggests that it should be construed to allow tranching of the benefits arising from the Interests in this case. Furthermore, I accept Mr Newman’s submission in relation to Cripps v Trustee Solutions Ltd & Ors [2007] PLR 237, namely, that the Court of Appeal were dealing with tranching in relation to benefits already falling within section 73 and not within and without the section.[165]I also have to consider the effect of the 1983 Guarantee in relation to those with a VIP Interest. In my judgment, there can be little doubt from the provisions contained in Schedule 4 rules9.1 and9.2 that benefits were only payable in respect of a VIP Interest to the extent that they exceeded the value of benefits payable under the Old Rules. The Old Rules as defined, were annexed to the First Definitive Deed and contained benefits based on Members’ final pensionable salary and years of pensionable service. In practice, the assets referable to the VIP Interest were used to meet the 1983 Guarantee so that a Member received no benefit from his VIP Interest unless its value exceeded the salary related benefits by which the 1983 Guarantee was defined. In this regard, I prefer the explanation of the Scheme administrators to the notice to members to which Mr Stallworthy referred me.[166]Accordingly, the reasoning which applies to a Member’s Interest as a result of the requirement first to meet GMP and thereafter, to provide a range of money purchase benefits with any remainder applies equally in the case of the provision of the 1983 Guarantee from the VIP Interest. In my judgment, therefore, the money purchase benefits arising from the VIP Interest are also underpin benefits and therefore, brought into the section 73 regime, or more accurately not excluded from it by regulation 13. Questions 2.2 and 2.4 - Trustee’s resolution[167]Lastly, to the extent that the benefits are money purchase benefits, I am also asked to make an order approving the resolution of the Trustee made on 10 May 2006, that benefits derived from MoneyMatch Plus Contributions, MoneyMatch Plus Credits, VIP Contributions and VIP Match should be treated as derived from voluntary contributions for the purposes of section 73(3)(a).[168]The jurisdiction invoked is that described in the second category in the judgment of Robert Walker J in an unreported case cited by Hart J in Public Trustee v Cooper [2001] WTLR 901 which was applied by Blackburne J in the pensions context in Merchant Navy Ratings Pension Fund Trustees Ltd v Chambers [2001] PLR 137.[169]The test to be applied is whether it can be said that in reaching its decision, the Trustee has taken into account irrelevant, improper or irrational factors or whether it has reached a decision that no reasonable body of trustees properly directing themselves could have reached. Secondly, it has to be determined whether the Trustee has formed the opinion that it would be desirable to implement the particular proposal.[170]The second limb of the test does not need further consideration here, there being no doubt but that the opinion has been formed. In the circumstances of this case, therefore, the first limb boils down to whether the Trustee properly directed itself as to the law when forming its opinion. This is accepted by Mr Newman to be the correct formulation of the question before the court in this regard.[171]The issue in relation to voluntary contributions arises because section 73(3)(a) accords priority to “any liability for pensions or other benefits which, in the opinion of the trustees, are derived from the payment by any member of the scheme of voluntary contributions.” And by virtue of regulation 13(2), they are excepted from the exception for money purchase benefits from section 73.[172]I should state at the outset, that in my judgment, there can be no logical distinction between section 73(3)(a) and regulation 13(2)(a). Assets and liabilities subject to section 73 because they relate to benefits “derived from the payment by any member of voluntary contributions”, for the purposes of regulation 13, must equally be prioritised as benefits, which “in the opinion of the trustees, are derived from the payment by any member of the scheme of voluntary contributions”, for the purposes of section 73.[173]Mr Newman concedes quite rightly, that MoneyMatch Plus Contributions and VIP Contributions which were paid by the Member, are properly to be regarded as voluntary contributions. He does not accept this in relation to the corresponding credits paid by the Employer, being MoneyMatch Plus Credits and Employer’s VIP Match.[174]“Voluntary contributions” are not defined for the purposes of the Pensions Act 1995. However, the definitions of additional voluntary contributions to which Mr Newman referred me emphasise the fact that the contributions are paid by the member at his election. Mr Newman takes issue with the extension of the definition to include sums paid by an Employer even where, as in this case, once the member exercised his election to pay a contribution, the employer was obliged to match it.[175]He submits that the benefits referable to such amounts paid by the Employer as a result of the contribution by the member, are not “derived from” the payment by any member for the purposes of section 73(3)(a), whereas Mr Stallworthy stresses that the payment of the credits are entirely dependent upon the contributions being made in the first place and that the employer credits are accretions to the member contributions in just the same way as an investment return.[176]Mr Stallworthy referred me to tax legislation in which “derived” was used and to the case of Monarch Assurance Co Ltd v Special Commissioners & Inland Revenue Commissioners [1986] STC 311, in which a wide construction of “derived from” was adopted. I found that decision which turned upon the context of the phrase, namely, section 20(3) Taxes Management Act 1970, and the reference to “derived from” in the other tax legislation to which I was referred, of little assistance, given that inevitably, it was heavily dependent upon the context in which it was used.[177]Despite the wide definition of “derived from” in the Oxford Dictionary to which Mr Stallworthy referred me and its use in the tax legislation, I must construe it in the light of section 73(3)(a) and regulation 13(2), respectively, as a whole. In both those contexts, the phrase used is, “derived from the payment by any member . . .” I accept Mr Newman’s submission that the member’s voluntary contribution may be the cause of the employer’s matching payment but that the sub-section requires the “source” of the benefit in question to be payment by the member. Given the clear reference to the payment by the member, in my judgment, it cannot be construed to include benefits arising from a payment by the employer, even if that payment is parasitic on the member’s contribution.[178]Accordingly, in my judgment, the Trustee misdirected itself as to the law when forming the opinions contained in paragraphs 3 and 5 of the resolution of 10 May 2006. I am therefore, able only to approve the formulation of the opinion to the extent that it is set out in paragraphs 2 and 4 and the remainder of the resolution as it relates to MoneyMatch Plus Contributions and VIP Contributions.

Cited in 1 later judgment