Alexander Forbes Trustees Services Ltd v Doe & Anor [2011] EWHC 3930 (Ch)

Claim No 1BM30078[2011] EWHC 3930 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue BIRMINGHAM DISTRICT REGISTRY, The Rolls Building, 7 Fetter LaneDate Friday 16 December 2011
Between
ALEXANDER FORBES TRUSTEES SERVICES LIMITEDClaimantJOHN DOEDefendantsRICHARD ROEDefendant
London
EC4A 1NL
B e f o r e:
HIS HONOUR JUDGE PURLE QC
(Sitting as a Judge of the Chancery Division)
B E T W E E N:
_____________________________
_____________________________MS WENDY MATHERS appeared for ClaimantMR CHRISTOPHER NUGEE QC appeared for First Defendant.MR KEITH ROWLEY QC appeared for Second Defendant.(all Counsel being instructed by Eversheds)____________________Transcription of Digital Recordingby John Larking Verbatim ReportersSuite 91 Temple Chambers,3 - 7 Temple Avenue, London EC4Y OHPTelephone 020 7404 7464_____________________________J U D G M E N T
[1]In this action I am required to determine a short but difficult point of law relating to section 73 of the Pensions Act 1995 and regulation 13 of the Occupational Pensions Scheme (Winding-up) Regulations 1996.[2]There are two pension schemes affected, namely the Sunley Turiff Pension Scheme, which is now governed by a definitive trust deed dated 14 March 1995 ("the Sunley scheme") and the Singer UK Limited Employee Benefits Plan ("the Singer scheme"), which is governed by a definitive deed dated 5 April 1987. The Singer scheme has been in wind-up since 30 June 2000 and the Sunley scheme has been in wind-up since 2 March 2003. The versions of section 73 and of the 1996 regulations then in force were slightly different on those two dates, but not significantly so for present purposes.[3]I take the basic facts from the witness statement of Andrew Bakewell of the claimant trustee. He explains that there are three types of schemes which are well known to pension lawyers, though they were not well known to me until the considerable assistance I had in this case from all counsel. A money purchase pension scheme is the first. Under such a scheme the benefits are payable to an individual member and are calculated by reference to contributions paid into the scheme in respect of that member, increased (it is hoped) by the investment return achieved. At retirement the member's accumulated fund, or pot, is used to purchase an annuity or scheme pension. The pension is therefore dependent on the level of contributions, investment return and the prevailing annuity rate at retirement.[4]The second type of scheme is a defined benefit pension scheme (sometimes called a "final salary scheme"). That is a scheme that promises the member a defined level of benefit on death or retirement, typically a pension of one-sixtieth of final salary for each year of service. The members generally pay a fixed rate of contribution calculated as a percentage of salary. Employers' contributions have then to be determined from time to time by an actuary so as to cover the balance of the cost of the promised benefits.[5]The third type of scheme is known as a "hybrid scheme", which is partly money purchase and partly defined benefit. Hybrid schemes usually have different sections in which members accrue benefits on either a money purchase or defined benefit basis. In some instances members accrue both types of benefit at the same time.[6]Each of the schemes in this case is a hybrid scheme. Moreover, each scheme has one fund out of which all the benefits, both money purchase benefits and defined benefits, have to be paid.[7]The Sunley scheme was decided explicitly by Warren J in Bainbridge v Quarters Trustees Limited [2008] EWHC 979 (Ch) to constitute a single fund, from which all benefits are payable. The Singer scheme is materially indistinguishable for present purposes. It was common ground before me that that also was a single fund scheme.[8]As from 6 April 2005, the Pension Protection Fund was established under the Pensions Act 2004. This has now been replaced by the Financial Assistance Scheme, which is relevant to these two schemes. Each of the schemes is in deficit by a clear margin. The defined benefit members, but not the money purchase members, qualify for compensation from the Financial Assistance Scheme.[9]The applicant is the statutory independent trustee of both schemes and seeks a determination of the point of law arising in this case. The issue relates to the order of priority in which the available assets should be applied. The essential question is: can money purchase pots be diverted from money purchase members to support the defined benefit members? This point is especially pertinent for money purchase members because as the law currently stands they do not qualify for support from the Financial Assistance Scheme. This is because that scheme has been designed on the assumption that the applicable law already operated fully to safeguard money purchase benefits upon the wind-up of hybrid pension schemes. These proceedings have been instituted to test that assumption. The assumption of those setting up the Financial Assistance Scheme is not, of course, material at all towards the issue of construction that I have to resolve.[10]The details of the schemes do not matter very much, although they have been helpfully set out in a note prepared in neutral terms by the trustee’s' junior counsel, for which I am very grateful. It is sufficient to note that under the priorities set out in the definitive deeds, money purchase members come after defined benefit members. There are a considerable number of money purchase members in the Sunley scheme, though in the Singer scheme there may only be one non-contracted-out money purchase deferred member who is potentially adversely affected by my decision.[11]The issue arises under section 73 of the Pensions Act 1995, which, to the extent that it applies, overrides the scheme priorities. I shall read the version which was in force in June 2000 which relates to the Singer scheme. As I have said, there is no material difference between this and the version in force for the purpose of the Sunley scheme. Section 73 provides as follows:
"73. Preferential liabilities on winding-up (1) This section applies where a salary related occupational pension scheme to which section 56 applies" -- and it was agreed on all sides that section 56 applies in this case -- "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 of all 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 ...."
There then follow several subparagraphs which, as indicated in subsection (2), are to be met in order. Subsection (3) ends with the following words:
"and for the purposes of subsection (2) the amounts of the liabilities mentioned in the various subparagraphs are to be taken to be the amounts calculated and verified in the prescribed manner."
Those words are important because the amounts calculated and verified in the prescribed manner need not be, and will ordinarily be less than, 100% of the benefits due to the members under the scheme rules. "(4) To the extent that any liabilities as calculated in accordance with the rules of the scheme have not been satisfied under subsection (2), any remaining assets of the scheme must then be applied towards satisfying those liabilities as so calculated in the order provided for in the rules of the scheme." That ties in with the explanation I have just given in relation to the closing words of subsection (3). The scheme liabilities may be and often will be greater than the amounts calculated in the prescribed manner, and in relation to those additional liabilities the scheme rules apply. That has no impact in the present case because there will be no remaining assets after dealing with the liabilities calculated in the prescribed manner.[12]Those provisions were modified by the 1996 Regulations. Again, I shall read the regulation which was in force in 2000. There are no material differences today. Regulation 13 deals with hybrid schemes, that is to say schemes of the type which I am considering. It reads as follows:
"13. Hybrid schemes (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."
[13]It is apparent that some money purchase benefits will be underpin benefits and therefore not relevant money purchase benefits within the meaning of the regulation, but many money purchase benefits are not underpin benefits. That is the position here in relation to substantial amounts.[14]In Bridge Trustees v Holdsworth [2011] 1 WLR 1912, 1936, Lord Walker, with whom the majority of the Supreme Court agreed, said this: "78. In these circumstances I think it is right to say that in my view regulation 13(1) must be interpreted on the basis that Parliament contemplated, as all sides agree, that money purchase benefits would normally be adequately funded, but not over-funded, and that the money or assets to be withdrawn from the unappropriated fund for the purpose of section 73 of the 1995 Act should be of an amount or value equal to the money purchase benefits.".[15]It also would appear to follow that what the draftsman must have assumed is that the amount so appropriated would be applied towards satisfying the relevant money purchase benefits as defined in regulation 13. It is difficult to see what point there would be in extracting a fund of that size, calculated in that way, save for the purpose of applying that fund in favour of those whose benefits have been so calculated.[16]Nonetheless, I am urged by Mr Rowley QC, who argues against that proposition, that the draftsman's assumptions do not make the law -- a proposition with which I wholly agree -- but it does not follow that the assumptions made are irrelevant to construing the particular statutory provision in question. Indeed, Lord Walker's judgment is plain authority to the contrary.[17]It is said by Mr Rowley QC that the only effect of regulation 13 is that money purchase benefits are taken out of the order of priorities specified in the regulations and section 73, and that in order to decide how the money, once taken out, is to be applied, one is thrown back on to the scheme rules themselves, because that is all that is left. Under the scheme rules, of course, the money purchase benefits are lower in the order of priority than defined benefits. Mr Rowley QC’s case therefore is that defined benefits have complete priority over relevant money purchase benefits under regulation 13 in relation to that part of the fund that has not been withdrawn (because liabilities for relevant money purchase benefits are excluded from that part of the fund) and priority also over money purchase benefits under the scheme rules in relation to the withdrawn part of the fund (because the scheme rules say so).[18]In this connection Mr Rowley QC prays in aid section 117 of the Pensions Act 1995, which is applicable to these schemes, although subsequently superseded. Section 117 provides as follows:
"117.

(a) "

Subsection (2) includes, amongst the provisions referred to in subsection (1), any subordinate legislation made or having effect as if made under the same Part of the Act, which includes regulation 13 of the 1986 regulations.[19]I was referred to the decision of Warren J in British Vita Unlimited v British Vita Pension Fund Trustees Limited and another [2007] PLR 157. Warren J was considering a later version of this Act, namely section 306 of the Pensions Act 2004, which was similar. He said this:
"82. If there is such a conflict, the rules are overridden to the extent of the conflict. But if there is no conflict then I do not consider that the appeal which Mr Green makes to the overall scheme of Part 3 as providing a complete code has any force. I would take that view even in the absence of section 306. If a person's contractual or other rights are to be overridden, or somehow qualified by legislation, that requires the use of clear words which either expressly or by necessary implication produce that result."
[20]I have no doubt that what Warren J said there is a useful and reliable guide in general to approaching questions of conflicts between the rules and the scheme. However, it cannot have a controlling effect upon the construction of rule 13. I am here looking not at an overall scheme to lead to a different result from what the words of regulation 13 say, but the actual words used construed in their legislative context in the light of the draftsman’s assumptions. My function is, as with any other question of construction, to establish, by reference to the words used, the intent of the draftsman.[21]In Stock v Frank Jones (Tipton) Limited (a case of unfair dismissal), HL [1978] 1 All ER 948, 953B, Lord Simon of Glaisdale said:
"But it is essential to bear in mind what the court is doing. It is not declaring Parliament has said X, but it obviously meant Y, so we will take Y as the effect of the statute. Nor is it declaring Parliament has said X having situation A in mind, but if Parliament had had our own forensic situation B in mind, the legislative objective indicates that it would have said Y. So we will take Y as the effect of the statute as regards B. What the court is declaring is Parliament has used words which are capable of meaning either X or Y, although X may be the primary natural and ordinary meaning of the words, the purpose of the provision shows that the secondary sense, Y, should be given to the words. So, too, when X produces injustice, absurdity, anomaly or contradiction. The final task of construction is still, as always, to ascertain the meaning of what the draftsman has said rather than to ascertain what the draftsman meant to say. But if the draftsmanship is correct, these should coincide, so that if the words are capable of more than one meaning it is a perfectly legitimate intermediate step in construction to choose between potential meanings by various tests (statutory objective, justice, anomaly, etc) which throw light on what the draftsman meant to say."
[22]Mr Nugee QC, who appeared for money purchase members claiming exclusive rights to the withdrawn fund, contended that it was the obvious intention of the draftsman, in dealing with hybrid schemes as he did:(i) to separate the assets; and(ii) limit the rights of the defined benefit members to the system of priorities set out in regulation 13, subject only to the additional rights which might arise (but not in the present instances) under section 73(4).[23]I accept Mr Nugee QC's submission. It seems to me that his submission is supported also by the wording of regulation 13. It does not say, as Mr Nugee QC pointed out, that section 73 does not apply to money purchase liabilities and assets. On the contrary, it says that section 73 applies as if(1) the liabilities of the scheme did not include liabilities in respect of those benefits, and(2) the assets of the scheme did not include the assets by reference to which the rate or amount of those benefits is calculated.[24]Accordingly, it seems to me that, on that wording, section 73 , as modified by rule 13, applies so as to set out exhaustively the priorities to which the defined benefit members are entitled, subject to section 73(4), and that those provisions represent a complete code in relation to the rights to which those members are entitled in relation to any part of the funds. It seems to me also that that construction is the preferable one, having regard to Lord Walker’s guidance in Bridge Trustees v Holdsworth. The point was not directly for decision in that case, as the terms of the particular schemes may not have given rise to this particular difficulty. But the approach to construction, set out by Lord Walker in paragraph 78, seems to me to point in the direction of the conclusion I have reached.[25]It was urged upon me by Mr Rowley QC that I should reach a different conclusion, having regard to the decision of Warren J, and before him the Pension Ombudsman, in the Bainbridge decision to which I have already referred. Mr Rowley QC did not suggest that this decision was determinative of the issue, but did forcibly submit, following a close analysis of the assumptions underlying the decision, that it was very much in his favour. The issue that arose there, as I have already mentioned, was whether the Sunley scheme was on its proper construction one which gave rise to one set of fund assets or two. Warren J held, as a matter of construction, that there was only one fund and so everyone was entitled to participate in that fund. He did not consider explicitly the impact of section 73 and regulation 13.[26]The appellant before Warren J was a money purchase member and appeared in person. It was self-evidently an underlying assumption that the appellant was materially adversely affected by the decision – otherwise, there was no point in an appeal or in the concluding comments of Warren J (by which he considered alternative avenues open to the appellant) - but the point I am considering was not directly a matter for decision. Although section 73 and the regulations were alluded to expressly by the Deputy Pensions Ombudsman, Warren J did not comment upon these provisions at all in his judgment. Warren J, who was described by Mr Rowley QC as having unparalleled experience in this area of the law, is unlikely to have been ignorant of the existence of these provisions. His silence may have been, I do not know, deliberate. I am not prepared to assume that he intended to, or has, decided anything in relation to the issue before me. It seems to me that his silence may just as much be a judicial stratagem as a potential Homeric nod.[27]At all events, I am now called upon to decide the question of construction and I decide it in the way that I have indicated. The decision is a just one, as Mr Nugee QC pointed out. All money purchase members carried the risk of adverse investment performance, and that risk will be reflected in the reduced fund in which they will share. Defined benefit members only carried that risk indirectly in the event of a deficit consequential upon poor performance of the fund and the employer’s insolvency. Money purchase members, one would imagine, would be outraged at the prospect of benefits which they would naturally regard as having provided for themselves being applied to make up the shortfall for those who have had the advantage of a guaranteed pension under a defined benefit scheme. It seems to me that that is an injustice which it is most implausible to suppose that the draftsman of the rules can have intended. In my judgment it is an absurd and somewhat pointless exercise to take out of an available pot a significant sum of money, leaving the remaining pot to be distributed exclusively amongst defined benefit members, for the money taken out of the pot to be returned to a scheme giving the defined benefit members a second and superior bite of the cherry. I would need clear language before I could reach that conclusion. It seems to me that the clear language is not present in this legislation, except in the limited circumstances posited in section 73(4). On the contrary, the intent of the draftsman must have been to avoid the result sought by Mr Rowley QC.[28]Accordingly, when I turn to section 117, having thus construed section 73 and rule 13, it seems to me that section 73 and those rules, in combination, override the provisions of the scheme, except to the limited extent that section 73(4) expressly brings back into consideration the scheme rules. Subject only to that, the provisions of the scheme are no longer relevant, but are overridden. The fund that has been extracted for the money purchase members must be applied for the purpose of satisfying relevant money purchase benefits as defined.[29]Finally, I say something about the procedure that has been adopted in this case. The first defendant is named as John Doe, and the second defendant is named as Richard Roe. By an order of 4 May 2011 District Judge Williams, sitting in the Birmingham District Registry, made representation orders appointing John Doe and Richard Roe to represent beneficiaries on both sides of the argument. Messrs Doe and Roe are not real beneficiaries but fictional characters introduced to enable all points to be argued and all interested parties bound.[30]The reason that course was undertaken was that the issue before the court was a pure point of law and did not admit of any fact-sensitive matters which would affect the determination of that point of law.[31]It was accepted before me that it is possible that, once that pure point of law is answered, there might be individual members who would have fact-sensitive claims, for example, based on estoppel, but that would still not alter the answer to the fundamental legal question. Such cases could be considered on their merits, having regard to the particular facts in question, though they are less likely to arise now in light of my ruling favouring money purchase benefits.[32]Had a representative beneficiary or beneficiaries been appointed from the real world, rather than from the mythical world of Messrs Doe and Roe, they might have sought independent advice, and raised fact-sensitive matters which should not be before the court at this stage. The appointment of Messrs Doe and Roe was, therefore, thought to be a cost-effective and appropriate process to adopt. It has, as I have said, acquired the approval of District Judge Williams. I am now asked to endorse that approach, though naturally, as there are no real defendants before me, District Judge Williams’ order has not been appealed. The trustees, who sought the order, have taken on the role of instructing, through one firm of solicitors, counsel in the name of each of Messrs Doe and Roe, as well as their own counsel.[33]In my judgment, where the court is merely asked by trustees to determine a pure point of law, it is appropriate for the court in a suitable case to accede to a request to deal with the matter without there being a real defendant before it. This may often be a more cost-efficient way of dealing with the matter, and the court will give directions to the trustees to enable all relevant arguments to be put by separate counsel.[34]However, whilst no mischief has been done in this case, on reflection I do not consider that it was necessary or appropriate to join Messrs Doe and Roe. There is no doubt that in an appropriate case these mythical creatures from the past may still be employed. I was referred to a number of cases stretching back to Barnet v French (a decision of the Court of Appeal in 1980) [1981] 1 WLR 848, in which the continued vitality of Messrs Doe and Roe has been affirmed. I have also been referred to post-CPR cases, where the same individuals have been prayed in aid.[35]The need, however, for Messrs Doe and Roe arises from the difficulty of bringing a claim where there is no defendant who can be identified, or where, as here, it is desirable not to have a defendant at all.[36]Under CPR 8.2A, it is now permissible for a claim form to be issued without naming a defendant, where a Practice Direction makes provision to that effect. Practice Direction 64B, which deals with applications for directions by trustees, does make such provision. It seems to me that the appropriate course in future, in a case such as this, where what is sought is the answer to a pure question of law, is to issue a claim form without naming a defendant. This requires the permission of the court, but the court will at the same time give directions. It is not necessary in all cases to have a representative defendant because, under CPR 19.7A(2), where trustees are before the court, as they would be whether or not a representative defendant is joined, the beneficiaries are bound, unless the court orders otherwise. In a case such as the present, there would be no reason for the court to order otherwise.[37]Accordingly, whilst the proposal to bring these proceedings without a real defendant was an entirely proper one, the naming of Messrs Doe and Roe was unnecessary. As it is desirable to avoid fictions wherever possible, it seems to me that, in this field of the law at least, Messrs Doe and Roe should now be put to rest.[38]In considering what directions to give, the court will have regard to whether or not it is necessary to join a representative defendant and will consider what role the trustees should play. In this case a very efficient system was adopted under which the two interests, Mr Doe and Mr Roe, were represented by leading counsel, Mr Nugee QC and Mr Rowley QC respectively, and the trustees were represented by experienced junior counsel, Ms Mathers, who performed the valuable function of preparing significant background explanations of the schemes which relieved Mr Rowley QC and Mr Nugee QC of a great deal of donkey work. In other cases it may be that the trustees will be directed, where, for example, there are only two sides to the argument, to instruct separate counsel to argue each side of the argument, without having additional representation of their own, thereby cutting down on costs. I doubt whether it would have cut down on costs in this case to dispense with separate representation for the trustee. There would have needed to be equality of arms for the 2 sides of the argument, and this was an appropriate case for leading counsel to have been retained on both sides. Leading counsel would need someone to do the groundwork at proportionate cost, and that would almost certainly entail the retention of junior counsel. As it happens, Mr Nugee QC and Mr Rowley QC have effectively had a common, albeit neutral, junior whose assistance has been invaluable.[39]As I consider that it was proper to bring the case without a defendant, the fact that the chosen mechanism in this case was to make use of the Doe and Roe families does not seem to me ultimately to matter. Whatever the chosen mechanism, it was entirely appropriate for the trustees to retain the counsel they did, and a single firm of solicitors. Had the matter begun life without even a fictional defendant, directions having the same practical effect would have been given and the point of law would have been decided, with argument and assistance from the same counsel, instructed by the same solicitors, at the expense of the fund, just as (but no more) efficiently, and at the same cost. ____________________________