Keymed (Medical & Industrial Equipment) Ltd v Hillman & Anor [2019] EWHC 485 (Ch)

“Whereas: (1) Mr Woodford was employed within [Olympus] from 16 March 1981 and by the [Olympus Corporation] from 1 April 2011 to 14 October 2011, when his employment was terminated. (The dates upon which his engagements started are: as president on 1 April 2011; as director on 29 June 2011; as representative director on 29 June 2011; and as chief executive officer on 1 October 2011, and his engagement ended: as president, representative director and chief executive officer on 14 October 2011; and as director on 1 December 2011). (2) Following termination of his employment, Mr Woodford commenced proceedings in the Employment Tribunal under Case Number 3200002/2012 on 3 January 2012 for automatic unfair dismissal under the Employment Rights Act 1996 (“ERA”) section 103A; unfair dismissal under ERA section 94; unfair detriment on the grounds of making one or more protected disclosures, contrary to ERA section 47B; unlawful discrimination and harassment due to his race, contrary to the Equality Act 2010 sections 39 and 40 (the “ET Proceedings”). (3) In order to achieve certainty and finality, it is the intention of Mr Woodford and [Olympus Corporation] in entering into this Agreement that it shall operate to terminate the relationship between them and, in consideration of the settlement set out herein, provide a full and absolute and irrevocable release by Mr Woodford and [Olympus] of all current and future Claims, in whatever jurisdiction, against (respectively) (i) [Olympus Corporation] or any Associated Company and (ii) Mr Woodford, whether or not the party in question has knowledge of them, whether or not they are in the contemplation of the parties and whether or not they exist in fact or law, as at the date of this Agreement. (4) Further, [Olympus Corporation’s] executive directors have undertaken to recommend to [Olympus Corporation’s] full Board of Directors that the terms of this Agreement be approved at the Board meeting scheduled to take place on 8 June 2012 and the Agreement is entered into by Mr Woodford on this basis.” 7. Mr Woodford’s counterparty to the Compromise Agreement was Olympus Corporation. Clause 4 of the Compromise Agreement contains various definitions. The following are material: “Associated Company”

“11. Full and Final Settlement 11.1 The Parties hereby agree that the above terms are in the full and final settlement of (and hereby agree irrevocably to release) all and any Claims (in any jurisdiction) that (i) Mr Woodford may have now or in the future against [Olympus Corporation] or any Associated Company or any current or former director, officer, employee or shareholder thereof; and (ii) that [Olympus Corporation] or any Associated Company may have now or in the future against Mr Woodford, relating to or arising directly or indirectly out of or in connection with Mr Woodford’s employment prior to the Termination Date, his engagement by [Olympus Corporation] under the Service Agreement, the termination of his employment with [Olympus Corporation] and/or of his Service Agreement, his treatment by [Olympus Corporation] following such termination, personal injury relating to matters arising from the termination of his employment, statements made by [Olympus Corporation] or Mr Woodford about each other and his shareholding in [Olympus Corporation] in the period up to and including the Effective Date including but not limited to any claim relating to or arising out of Mr Woodford’s directorships or other offices with [Olympus Corporation] or any Associated Companies or their termination (the “Specified Matters”). In particular, but without limitation, this full and final settlement (and release) extends (i) to the claims made in the ET Proceedings, (ii) to any Claim which Mr Woodford may otherwise have for breach or enforcement of his Service Agreement or other contract (including wrongful dismissal), unfair dismissal, any claim for unlawful discrimination (whether direct or indirect), harassment or victimisation on the grounds of race, any breach of (a) the Working Time Regulations 1998, and (b) section 47B or Part IVA of the Employment Rights Act 1996 (relating to detrimental treatment all dismissal relating to a protected disclosure) and any claim for defamation or (iii) to any Claim which [Olympus Corporation] or any Associated Company may otherwise have arising out of or in connection with the Protected Disclosures (the “Specified Claims”). 11.2 Mr Woodford covenants in favour of [Olympus Corporation] and its Associated Companies that he will not commence and/or pursue any proceedings in any jurisdiction in respect of the Specified Matters, including without limitation the Specified Claims and [Olympus Corporation] covenants (on behalf of itself and the Associated Companies) in favour of Mr Woodford that neither [Olympus Corporation] nor its Associated Companies will commence and/or pursue any proceedings in any jurisdiction in respect of the Specified Matters, including without limitation the Specified Claims.”

“10. PENSION INCREASES 10.1 Currently legislation requires increases on pension built up after 5 April 1997 in the Scheme, to be at least in line with increases in the Retail Prices Index (“RPI”), with a 5% annual maximum (5% “LPI”

“The Revenue Limits shall override any other provisions to the contrary contained in the [2000 Staff Scheme Definitive Deed and Rules]. No contributions payable by any Member to the Scheme, nor any benefit payable to or in respect of any Member under the Scheme, may exceed the appropriate maximum limit set out in the Revenue Limits.”

“Dear John I said I would drop you a line to describe how pension increases are limited by Inland Revenue requirements. Inland Revenue Rules permit pensions in payment to be paid at the level of the maximum pension at retirement (allowing for any cash taken), increased by the greater of 3% or the increase to the Retail Prices Index (RPI) (calculated on a year by year basis). As members who joined the Scheme after July 1997 receive increases at the lesser of 5% or RPI, this limitation will not apply. However, for members who joined before July 1997 who receive 5% per annum fixed increases, the limitation is relevant given the current low inflationary environment. When a pre-July 1997 member retires, his retirement pension in all future years will need to be compared with the Inland Revenue maximum pension for each year and, if it is greater, must be limited to the maximum. The following, for a pre-July 1997 member retiring at Normal Retirement Date (NRD), may make the position more clear: 1. The Scheme pension at the point of retirement is calculated using the Scheme’s normal pension formula, i.e. Scheme Pension = Years of Pensionable x Final Pensionable Salary (max 40) Salary 60 Where Final Pensionable Salary is broadly a three year average of gross earnings at retirement. For Directors, the formula is more generous and is designed to give a full two-thirds pension after 30 years’ service. 2. The Inland Revenue maximum pension at NRD is calculated as: IR Maximum = Years of Company x Final Remuneration Pension Service (max 20) 30 For pre 17 March 1987 entrants, the effective accrual rate is better than 30ths (members can accrue a full two-third pension after 10 years’ service). Final Remuneration is defined by Inland Revenue Rules and will generally produce a higher calculation than Final Pensionable Salary as it can include some earnings not included in Final Pensionable Salary. You can therefore see that there is scope for the Inland Revenue maximum pension at retirement to be significantly bigger than the Scheme pension. However, for a member retiring after 40 years’ service (or for a Director) with no benefits in kind, the two calculations will be similar. 3. Once the member has retired, the member’s Scheme pension in subsequent years has to be compared to the Inland Revenue maximum at that point. The Scheme pension in any future year is simply the pension in year 1 increased at 5% each year. However, this has to be compared with the Inland Revenue maximum pension in year 1 increased each year by the greater of 3% or the increase to the RPI for the year in question. For example, if the Scheme pension at retirement is £10,000, and the Inland Revenue maximum pension is £15,000 and RPI increases at 1%, 2%, 6%, 5%, and 2% for the first 5 years then, at the end of year 5: Scheme Pension = 10,000 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 = 12,763 IR Maximum Pension = 15,000 x 1.03 x 1.03 x 1.06 x 1.05 x 1.03 = 18,243 Therefore the Scheme pension is well within the Inland Revenue maximum. If, however, the Inland Revenue Maximum Pension was £10,400 at retirement, then after 5 years: IR Maximum Pension = 10,400 x 1.03 x 1.03 x 1.06 x 1.05 x 1.03 = 12,649 In this situation, the Scheme pension would need to be restricted to the maximum of £12,649 per annum for year 6. The comparison would continue along similar lines for future years. These annual checks are normally carried out by the organization paying the pension. In KeyMed’s case this will be the insurance company paying the pension. The insurance company is given details of the Inland Revenue maximum pension at the time of retirement for this check to be carried out. I hope this explains the situation clearly, but please let me know if anything is not clear.”

“53.1.2 Defined Benefit (“DB”) Scheme Under this arrangement, the benefits are defined, based on the individual’s final salary. This scheme was closed to new entrants with effect from 30 September 2002 and has proven successful in the retention of experienced, long-serving employees, offering benefits comparable to similar [Defined Benefit] schemes in other companies. Consistent with the objective of simplification, it was agreed that the current “Executive Member” category, which is now closed to new members, would be discontinued within the current [Defined Benefit] scheme and the benefits and related liabilities for the remaining current active executive members transferred to a separate [Defined Benefit] company pension scheme. In this context, [Mr Woodford], [Mr Virgo] and [Mr Hillman] declared their interests in this change as the only remaining active [Executive Members] of the existing [Defined Benefit] scheme and Members of the proposed new [Executive Scheme]. The objective is for this new scheme to be wound up on cessation of the liabilities of these three remaining executive members. As the assets of this new scheme will effectively be held in trust for only three Members and their dependents, it was agreed that these Members, rather than [KeyMed], should have the sole power of appointing the trustees of the new scheme. In effecting this transfer, the fundamental principle of “no gain, no loss” to either the individual or the company would apply. Importantly, there would be no enhancement of benefits for the existing active executive members compared with those currently derived from membership of the existing Executive Member category. There would also be no enhancement in funding and both the new scheme and the existing [Defined Benefits] scheme would be funded to exactly the same actuarial funding level to ensure equality of treatment.”

“The deed, without covering the benefit details, refers to the fact that benefits will be as set out in explanatory literature which will need to be attached to the deed. We understand the directors get fixed 5% pension increases. The existing KeyMed Rules would restrict these increases by the old IR limits rules which permit 3% RPI on the IR max pension. As requested, the literature will not refer to these old limits i.e. under the New Scheme, members will get fixed 5% increases (probably higher increases than previously would have been the case). This is a decision KeyMed have made as compensation for the fact that a 55% tax charge will be payable.”

“…by December 2005 at the latest, the Defendants had agreed or reached a common understanding that they would, with an intention to injure and/or cause loss to KeyMed, by establishing and administering the Executive Scheme in breach of their duties, seek to maximise the value and security of their own pension benefits.”

“170 Scope and nature of general duties (1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company. … (3) The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director. (4) The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.”

“171 Duty to act within powers A director of a company must– (a) act in accordance with the company’s constitution, and (b) only exercise powers for the purposes for which they are conferred.”

“In their Lordships’ opinion, it is necessary to start with a consideration of the power whose exercise is in question, in this case the power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.”

“Bona fides cannot be the sole test, otherwise you might have a lunatic conducting the affairs of the company, and paying away its money with both hands in a manner perfectly bona fide yet perfectly irrational.”

“The duty imposed on directors to act bona fide in the interests of the company is a subjective one. The question is not whether, viewed objectively by the court, the particular act or omission which is challenged was in fact in the interests of the company; still less is the question whether the court, had it been in the position of the director at the relevant time, might have acted differently. Rather, the question is whether the director honestly believed that his act or omission was in the interests of the company. The issue is as to the director’s state of mind. No doubt, where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director will have a harder task persuading the court that he honestly believed it to be in the company’s interest; but that does not detract from the subjective nature of the test.”

“173 Duty to exercise independent judgment (1) A director of a company must exercise independent judgment. (2) This duty is not infringed by his acting– (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or (b) in a way authorised by the company's constitution.”

“13.05 In the conduct of the management of its affairs, a company is entitled to the benefit of collective decision-making by its directors acting as a board, save to the extent that duties have been duly delegated. Breach of the duty to exercise independent judgment compromises collective decision-making. This duty under section 173(1) may be regarded as supporting the core duty to promote the success of the company, as stated in section 172, which used to be described as the duty to act in good faith in the interests of the company. 13.06 Breach of the duty under section 173(1) invariably arises when a director’s relationship with a third party puts him in a position of conflict of interest. It is, therefore, closely linked with the director’s duty under the 2006 Act, section 175(1) to avoid conflicts of interest and the duty under section 177 to declare his interest in proposed transactions or arrangements with the company. For example, where a director makes a prior agreement to vote in a third party’s interests on a particular transaction, thereby leaving himself no independent discretion as to how to act, he will be in breach of section 173(1).”

“174 Duty to exercise reasonable care, skill and diligence (1) A director of a company must exercise reasonable care, skill and diligence. (2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with– (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has.”

“177 Duty to declare interest in proposed transaction or arrangement (1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors. (2) The declaration may (but need not) be made– (a) at a meeting of the directors, or (b) by notice to the directors in accordance with– (i) section 185 (notice in writing), or (ii) section 185 (general notice). (3) If a declaration of interest under this section proves to be, or becomes, inaccurate or incomplete, a further declaration must be made. (4) Any declaration required by this section must be made before the company enters into the transaction or arrangement. (5) This section does not require a declaration of an interest of which the director is not aware or where the director is not aware of the transaction or arrangement in question. For this purpose a director is treated as being aware of matters of which he ought reasonably to be aware. (6) A director need not declare an interest– (a) if it cannot reasonably be regarded as likely to give rise to a conflict of interest; (b) if, or to the extent that, the other directors are already aware of it (and for this purpose the other directors are treated as aware of anything of which they ought reasonably to be aware); or (c) if, or to the extent that, it concerns terms of his service contract that have been or are to be considered– (i) by a meeting of the directors, or (ii) by a committee of the directors appointed for the purpose under the company's constitution.”

“Each Employer shall pay contributions to the Scheme in respect of its Employees who are Members. An Employer’s contributions shall be paid at a rate which: (a) from time to time the [t]rustees, after obtaining Actuarial Advice, shall determine to be necessary to provide the benefits under the Scheme for and in respect of the Members, taking into account any contributions payable by Members under Rule 12 (Members’ contributions) and any additional liability falling on an Employer under Rule 10 (Maternity absence); (b) will not prejudice Approval.”

“…the mere fact that the strict equitable self-dealing rule is excluded or modified, does not entail that the director is relieved from his other obligations to the company, including his duty to act bona fide in the company’s interests. The conflict between a director’s duty to the company and his personal interest does not disappear merely because the strict equitable rule against selfdealing has been excluded. On the contrary, if the conflict remains, there is a distinct danger that the director will be tempted, in breach of his duty to the company, to place his interests before that of the company. It is, indeed, this very danger that gave rise to the strict equitable rule. When the rule has, as I see it, been excluded, it becomes the duty of the court, in my judgment, to scrutinize the transaction with great care so as to determine whether in carrying it out the director has truly managed to avoid the temptation of putting his personal interests before that of the company.”

“KeyMed Pension & Assurance Scheme – Comprehensive Review of Company Pension Provision 53.1 Following a comprehensive review of pension legislation, the UK Government is introducing a range of rule changes with effect from 6 April 2005 (‘A Day’), with the aim of streamlining pension provision and establishing a simple and transparent tax regime. One of these new provisions is the introduction of a ‘recovery charge’, the implication of which is to create an effective tax rate of 55% on a significant element of the pension received by higher paid employees on retirement, compared with the current 40% tax rate. The directors discussed the practical implications of this and the action being taken by other companies in this respect, whereby some are compensating those affected by this change to equalise the after-tax effect for the individual. It was agreed, however, that in relation to Olympus KeyMed Group companies, the impact of this should be borne wholly by the individual without any compensation by the company – i.e., the company would provide no enhancement whatsoever of pension, salary, incentive or remuneration, to compensate any director or employee affected by this legislation. In the context of this objective of simplification and streamlining of pension provision, following a comprehensive review, and in consultation with the company’s pension advisors, the directors agreed to rationalise the pension provision available to directors/employees as follows: 53.1.1 Defined Contribution (“DC”) Scheme Under this scheme, the company contributes a defined proportion of salary, by way of pension provision, i.e. the contribution is defined, not the final pension received. This has been available to all new starters since 23 August 2002 and has proven competitive in recruitment of new staff, representing a real and positive benefit to individual members. No changes would therefore be made to the benefits available under, or the structure of, this scheme. 53.1.2 Defined Benefit (“DB”) Scheme Under this arrangement, the benefits are defined, based on the individual’s final salary. This scheme was closed to new entrants with effect from 30 September 2002 and has proven successful in the retention of experienced, long-serving employees, offering benefits comparable to similar DB schemes in other companies. Consistent with the objective of simplification, it was agreed that the current ‘Executive Member’ category, which is now closed to new members, would be discontinued within the current DB scheme and the benefits and related liabilities for the remaining current active executive members transferred to a separate DB company pension scheme. In this context, [Mr Woodford], [Mr Virgo] and [Mr Hillman] declared their interests in this change as the only remaining active executive members of the existing DB scheme and members of the proposed new separate DB scheme. The objective is for this new scheme to be wound up on cessation of the liabilities of these three remaining executive members. As the assets of this new scheme will effectively be held in trust for only three members and their dependents, it was agreed that these members, rather than [KeyMed], should have the sole power of appointing the Trustees of the new scheme. In effecting this transfer, the fundamental principle of ‘no gain, no loss’ to either the individual or the company would apply. Importantly, there would be no enhancement of benefits for the existing active executive members compared with those currently derived from membership of the existing Executive Member category. There would also be no enhancement in funding and both the new scheme and the existing DB scheme would be funded to exactly the same actuarial funding level to ensure equality of treatment. 53.1.3 [Mr Rowe], Group Financial Controller, to liaise with Mercers, the company’s pension advisors, to implement the above changes with effect from 1 February 2006.” aim of streamlining pension provision and establishing a simple and transparent tax regime. following a comprehensive review, and in consultation with the company’s pension advisors, the directors agreed to rationalise the pension provision available to directors/employees as follows: 53.1.1 Defined Contribution (“DC”) Scheme Under this scheme, the company contributes a defined proportion of salary, by way of pension provision, i.e. the contribution is defined, not the final pension received. This has been available to all new starters since 23 August 2002 and has proven competitive in recruitment of new staff, representing a real and positive benefit to individual members. No changes would therefore be made to the benefits available under, or the structure of, this scheme. 53.1.2 Defined Benefit (“DB”) Scheme Under this arrangement, the benefits are defined, based on the individual’s final salary. This scheme was closed to new entrants with effect from 30 September 2002 and has proven successful in the retention of experienced, long-serving employees, offering benefits comparable to similar DB schemes in other companies. Consistent with the objective of simplification, it was agreed that the current ‘Executive Member’ category, which is now closed to new members, would be discontinued within the current DB scheme and the benefits and related liabilities for the remaining current active executive members transferred to a separate DB company pension scheme. In this context, [Mr Woodford], [Mr Virgo] and [Mr Hillman] declared their interests in this change as the only remaining active executive members of the existing DB scheme and members of the proposed new separate DB scheme. The objective is for this new scheme to be wound up on cessation of the liabilities of these three remaining executive members. As the assets of this new scheme will effectively be held in trust for only three members and their dependents, it was agreed that these members, rather than [KeyMed], should have the sole power of appointing the Trustees of the new scheme. In effecting this transfer, the fundamental principle of ‘no gain, no loss’ to either the individual or the company would apply. Importantly, there would be no enhancement of benefits for the existing active executive members compared with those currently derived from membership of the existing Executive Member category. There would also be no enhancement in funding and both the new scheme and the existing DB scheme would be funded to exactly the same actuarial funding level to ensure equality of treatment. 53.1.3 [Mr Rowe], Group Financial Controller, to liaise with Mercers, the company’s pension advisors, to implement the above changes with effect from 1 February 2006.”

“PAH (JER) 31/01/06”

“Consistent with the objective of simplification, it was agreed that the current “Executive Member” category, which is now closed to new members, would be discontinued within the current [Defined Benefit] scheme and the benefits and related liabilities for the remaining current active members (MC Woodford, P Virgo and PA Hillman) transferred to a separate [Defined Benefit] company pension scheme. The objective is for this new scheme to be wound up on cessation of the liabilities in respect of these remaining executive members.”

“It was good to talk to you again this morning. As discussed, at our meeting earlier this week, the directors agreed to proceed with the changes to the pension arrangements we discussed and, in this context, please find attached the relevant excerpt from the draft minutes relating to this part of the meeting. I would appreciate your reviewing these and letting me know any comments you may have – if you call me, we can talk these through and make any necessary amendments.”

“The Pensions Act has confirmed the introduction of the Pensions Protection Fund (PPF) from 6 April 2005. The PPF will be funded by a levy on all pension schemes that have a final salary ([Defined Benefit]) element and will take on responsibility for some of these schemes if their employer becomes insolvent.”

“SECTION 1 – PREVIOUS MINUTES – 27 JANUARY 2004 3. INLAND REVENUE SIMPLICATION RULES 3.1 [Mr Wright] presented to the Trustees an outline of the new Inland Revenue simplification rules and its was agreed that a detailed review of the individual cases would be carried out to allow the best options to be considered by the Trustees. [Mr Wright] to check Inland Revenue rules for unapproved schemes and provide advice on how unapproved schemes operate in relation to the KeyMed Scheme. Update 4/04/05: [Mr Wright] provided a report to [Mr Woodford] and [Mr Hillman] in December 2004 explaining the changes in detail and explaining options for high earners. [Mr Wright] has agreed to carry out further work in this matter for the Directors.” 3.1 [Mr Wright] presented to the Trustees an outline of the new Inland Revenue simplification rules and its was agreed that a detailed review of the individual cases would be carried out to allow the best options to be considered by the Trustees. [Mr Wright] to check Inland Revenue rules for unapproved schemes and provide advice on how unapproved schemes operate in relation to the KeyMed Scheme. Update 4/04/05: [Mr Wright] provided a report to [Mr Woodford] and [Mr Hillman] in December 2004 explaining the changes in detail and explaining options for high earners. [Mr Wright] has agreed to carry out further work in this matter for the Directors.”

“3.2 Update 17/11/05 [Mr Wright] provided an update in relation to rules and requirements for high earners’ pensions following ‘A Day’. Trustees agreed that Mercers would manage the actions required to ensure the changes relating to ‘A Day’. [Mr Wright] to advise on the actions required to implement a separate Executive Scheme for existing members.” [Mr Wright] provided an update in relation to rules and requirements for high earners’ pensions following ‘A Day’. Trustees agreed that Mercers would manage the actions required to ensure the changes relating to ‘A Day’. [Mr Wright] to advise on the actions required to implement a separate Executive Scheme for existing members.”

“Key-point: member-nominated trustees (consistent with corporate governance rules).”

“The Trustees, in consultation with the company, advised that a special contribution of £12,000,000 would be made into the Scheme’s funds by 31 March 2006. This special contribution is based on the information provided by Mercers, as being the estimated funding shortfall in the Scheme at 31 March 2006.”

“6.4 Once all pensions are secured on the PPF basis, the KeyMed Scheme’s winding up rule then dictates how the remaining assets are applied. Basically, the winding up rule will require the assets to be applied to secure the following benefits, in order of priority: up rule will require the assets to be applied to secure the following benefits, in order of priority: 1. pensions in payments for members under NPA (level) 2. deferred pensions for other members (level) 3. increases on pensions under 1 and 2. 6.5 The issue here which the Trustees need to consider is whether paying a transfer value on the “Share of Fund” basis (c. £12.2 million) will result in a reduction to the security of benefits for those members who do not transfer. 6.6 Based on the estimated funding position of the KeyMed Scheme at 5 April 2005, I have estimated the following: • If the KeyMed Scheme had wound up at 5 April 2005 then the PPF level of benefits could have been secured for all members. In addition, the remaining assets would have been sufficient to cover 100% of benefits under 1 above and on average 65% of the remaining non-PPF benefits for all members in 2. • If a transfer had taken place to a new Executive Scheme on 5 April along the lines described above (i.e. with a Share of Fund transfer value of £12.2 million) and the Scheme had then wound up, then PPF level benefits would have been secured for all remaining members and the remaining assets would have been sufficient to cover on average 36% of non-PPF benefits in 2 for remaining members. 6.7 The reduction in cover for non-PPF benefits following the transfer reflects the fact that the payment of £12.2 million out of the KeyMed Scheme to a new Executive Scheme is far greater than value of PPF level benefits for the Executives.”

“Luke, You’re obviously beginning to chill out and I hope the wine is equally well-chilled! As discussed, the Yoda issues are up to date and we await further developments… In relation to the points discussed at part 2 of the Directors’ Meeting, please find attached minutes which are, I believe, clear but if you have any comments, then give me a call, otherwise please send me a one-line e-mail confirming your agreement, allowing these to be sent to Tokyo this evening. Back to the barbie (or, with Civil Partnerships in mind, maybe that’s Ken!) Paul”

“No worries, cobba – please proceed as discussed.”

“Currently the benefits provided under the Scheme are subject to [the Revenue Limits] and the definition of Final Pensionable Earnings for post ’89 employees is subject to the Earnings Cap. Under the [A-Day] proposals, these limits will cease to apply. Further…the new Lifetime Allowance will not restrict the benefits payable under the Scheme, merely the amount that can be paid with no tax charge applying. Therefore, if no action is taken, the benefits payable to post ’89 employees, who are currently subject to the Earnings Cap, may well increase since this cap will no longer exist and benefits will be based on full salary (although this will depend on exactly how the legislation is effected). This would result in an immediate increase in the value of the benefits accrued by these members, placing further strain on the funding of the Scheme. [Keymed] will need to consider whether it wishes to [sic] such members’ benefits to increase to be calculated in line with their actual (uncapped) salary. If so, the Trustees are likely to require [KeyMed] to increase its contribution and possible [sic] make an immediate cash injection. At this stage I have not investigated the potential amounts involved. Otherwise, an appropriate amendment will need to be made to the Rules to restrict these members’ benefits to the level currently envisaged, so ensuring no strain is placed on the Scheme’s funding position.”

“I confirm that the changes set out on Appendix B to this letter and dated 05/05/06 for identification are in line with our requirements and that Mercer should implement them with effect from 6 April. I understand and accept the points made in this letter regarding the residual risks to Trustees from the approach to provision of administrative services being adopted.”

“Paragraph 16.2 to 16.5 I would have had discussions with Mr Hillman about retaining the earnings cap in the Staff Scheme. This was an important issue of benefit design with cost implications arising out of the changes being introduced from A Day in April 2006 (over which I was liaising generally with Mercer in conjunction with Mrs McBrearty) so I would have referred it to Mr Hillman for a decision. I would not have decided the point myself. I would have adopted the same approach with all benefit design issues arising out of A Day changes, including the retention of Inland Revenue limits. It was Mr Hillman and Mr Woodford who took the substantive decisions in relation to pensions on behalf of KeyMed.”

“If accrued benefits have previously been restricted by the Inland Revenue Limits, there may be potential for [those] restrictions to be removed and the benefits increased. The default is to assume the restrictions remain in place, on the basis that they were part of the original contract with the member. There is a risk that the member complains on the basis that the restriction was either inadvertent or not disclosed, and hence should be relaxed given the change in legislation.”

“Maintain all current revenue limits.”

“15.1 It had always been my understanding that my pension, and that of all the Executive Category members, would increase by a fixed 5% once the member was drawing their pension. My annual pension “benefit statement” and the pension booklet, in their various iterations, had always explicitly stated a 5% increase for pensions in payment, with no mention whatsoever of any HMRC limit. 15.2 In the summer of 2006, [Mr Hillman] brought to my attention that a HMRC limit to pension increases applied to the Executive Category, a point that he had only been made aware of by Mercer during the preparations for the new scheme. 15.3 I now understood, for the first time, that the tax rules governing pensions until A Day had meant that, although the scheme provided for a fixed 5% annual increase for pensions in payment, if the pensions received exceeded the permitted HMRC limit, the increases applied to pensions over that limit would revert to the higher of 3% or RPI inflation, up to a maximum of 5%. I do not recall having been involved in any discussions of the issue up to this point. 15.4 [Mr Hillman] explained to me that this restriction, which I hadn’t known affected me, was no longer a requirement following the A-Day changes, and that companies could now elect whether to retain or disapply the limit. However, Paul explained that a decision had already been made earlier in the year to retain, rather than disapply, these limits, without an appreciation of the implications. At this point, having learnt that the limit actually did apply, I was annoyed that this decision had been implemented without, it seemed to me, proper consideration being given to the consequences for the members affected, or it having been discussed with the directors. 15.5 I recall, for a period of approximately 2 weeks after this discovery, discussing my frustration collectively with [Mr Hillman], [Mr Williams], [Mr Calcraft] and [Mr Rowe]. I cannot recall the exact number of times that we met, but I do remember discussing this issue more than once, and that [Mr Hillman], [Mr Williams], [Mr Calcraft] and [Mr Rowe] were present. I can picture, in particular, a meeting at which John was extremely sheepish about how he had managed the issue. I recall stating my view that, in the spirit of fairness, the rules of the Executive Scheme (once set up) should include the 5% increase for pensions in payment, as had always been intended. I referred to the fact that the 5% increase had been repeatedly confirmed over 2 decades in writing to me in my personalised annual benefit statement as, I was told, had also been the case for [Mr Hillman]. 15.6 I felt that there was a clear onus of responsibility upon the company to respect what Paul and I had been repeatedly informed in writing, and now the previous legislation had fallen away, I could see no justification for the company to refuse to provide the benefits promised. Once I had explained to the group the background of the A day changes, including the fact that we would be personally responsible for the recovery charge and the effective 55% tax rate, Luke and Nick readily agreed that the company should honour what was specified in the member benefit statements and scheme booklets. I remember they were both empathetic, and supportive of the need to remedy the situation. I recall that this was not a controversial issue and we agreed that it would be addressed in the documentation relating to the new scheme. 15.7 Whilst the 5% increase for pensions in payment was written into the rules for all pre1997 members of the scheme, I recall being told at this time by [Mr Hillman] that only he and I were potentially affected by the impact of this particular HMRC limit on this element of the benefits. Paul explained this was due to our length of service and rate of accrual, which by virtue of our membership of the Executive Category was set by 1/45ths and not 1/60ths.”

“Well, I don’t recall any discussion between the directors or the trustees about this issue”…He says, “Okay, well we can correct this by making sure we address it in the right way in the documentation of the Executive Scheme as part of the set-up of that scheme”

“Well, you knew that, we sent you the minutes, and then you got the letter as a member, you didn’t say anything before, why are you upset about this point now?”

“If our pensions reach – we’ve found out now that if our pensions reach a certain maximum level” – I’ll tell you what that means in a minute – “then further increases in payment above that level will be restricted by what was called the “revenue limits”.”

“The deed, without covering the benefit details, refers to the fact that benefits will be as set out in explanatory literature which will need to be attached to the deed. We understand the directors get fixed 5% pension increases. The existing KeyMed Rules would restrict these increases by the old IR limits rules which permit 3%RPI on the IR max pension. As requested, the literature will not refer to these old limits i.e. under the New Scheme, members will get fixed 5% increases (probably higher increases than previously would have been the case). This is a decision KeyMed have made as compensation for the fact that a 55% tax charge will be payable.” (3) On 4 December 2006, Mr Rowe emailed Mr Wright with his comments on the scheme booklet. He had a query in relation to page 3: “It states that all pension in payment increase by 5% each year – do we need to refer to the 2.5% maximum for service post 6 April 2005?”

“Page 3 – the 2.5% LPI change which took effect from 6 April 2005 was specifically not applied to Executives i.e. KeyMed wanted the fixed 5% pa increases to continue to accrue for Executives. Note that on a related point to this we pointed out when providing the balance of powers schedule comparing the Executive Scheme to the Main Scheme...that the old Inland Revenue limits, whilst being retained for the main scheme, were not for the Executive Scheme. The implication of this is that while it was likely that the 5% p.a. increases for Executives in the main scheme were likely to be ‘capped’ at some point in the future by the old limits (which basically restrict increases to 3% or RPI if higher) this will not now be the case. I recall this decision was made on the grounds that it will compensate the executives for the effective 55% tax rate applying on future accrual but clearly as this is potentially a big cost item you may want to just check you are happy with this.”

“…it is admitted that the Executive Scheme did not include a cap on increases in pension in payment by reference to the former “Inland Revenue limits” of 3% per annum (or by the increase in the Retail Prices Index if greater) but instead provided for a fixed 5% per annum increase. However: a. It is denied that this was an enhancement of benefits for the members of the Executive Scheme: as set out above, the provision for fixed 5% per annum increases in pensions in payment reflected the existing entitlements applicable under the Staff Scheme for any member joining the scheme before 21 July 1997. Since all members of the Executive Scheme fell within this category, the inclusion of that term in the Executive Scheme reflected their existing entitlements. b. Alternatively, if contrary to the above, the change is properly characterized as an “enhancement”, it was not an enhancement due to the creation of the Executive Scheme but was an amendment that would have been considered appropriate and/or would have been made if the Defendants had remained in the Staff Scheme. c. Moreover, and in any event, the terms of the Executive Scheme including the fixed 5% per annum increases were reviewed and approved at a meeting of the directors of [KeyMed] in November 2007. (To the best of the Defendants’ recollection, the meeting took place on or around 12 or 13 November 2007 around a meeting of [KeyMed’s ExCom] of board members and senior managers). Even if the fixed 5% per annum increases had been contrary to the earlier agreement reached by the board, the board’s approval of the terms of the Executive Scheme including the fixed 5% per annum increases superseded such earlier agreement.” [KeyMed] in November 2007. (To the best of the Defendants’ recollection, the meeting took place on or around 12 or 13 November 2007 around a meeting of [KeyMed’s ExCom] of board members and senior managers). Even if the fixed 5% per annum increases had been contrary to the earlier agreement reached by the board, the board’s approval of the terms of the Executive Scheme including the fixed 5% per annum increases superseded such earlier agreement.”

“The limits on increases that can be awarded on pensions in payment, that were required to be applied to approved pension schemes before 6 April 2006, continue to apply to the Existing Scheme. However, those limits will not apply to benefits under the New Scheme.”

“We had a call from Hugh today who was chasing for the copies of the remaining items. We sent him the interim deed, but he hasn’t had anything else. Can you send me copies and we will circulate?”

“With effect from 6 April 2009, both the lump sum death benefit and the pension payable to your spouse and/or Dependent Children will be based on your “Final Pensionable Earnings” and not your “Pensionable Earnings” as stated in the Explanatory Booklet. For this purpose, “Final Pensionable Earnings” means the highest average of your Pensionable Earnings on any three consecutive anniversary dates (6 April) within the ten years preceding the date of your death. … Any spouse’s pension due from either Death in Service or Death in Retirement will not be subject to a reduction due to the difference in age between you and your spouse.”

“160. Mr Hillman claims in his witness statement to have an extraordinarily detailed recollection of discussions with Mr Calcraft on 27 August 2009 and with Messrs Williams and Rowe on 1 September 2009 during the course of which the directors agreed to the removal of the spousal reduction and Messrs Williams and Rowe agreed to sign the amending deed on behalf of the company. It is simply incredible that almost nine years later he claims to have such a detailed recollection of these conversations (e.g. the recollection that Mr Williams read through the announcement and recognized without prompting that the change affected Mr Hillman personally; the same goes for the recollection that Mr Rowe actively offered to sign on behalf of the company). 161. Neither Mr Williams nor Mr Rowe remembers these conversations: 161.1 Mr Williams’ evidence is that, if the discussion had happened in the way described in Mr Hillman’s witness statement, he would expect to remember it, as it was unusual for him to be called into Mr Hillman’s office. He believes that the likelihood is that the deed was presented to him for signature and, if it was already signed by the Defendants, he would have signed himself without further consideration. He also stated that if he had been aware that he was approving a change to the spousal reduction, he would have been favourably disposed to it, but he would have expected the change to be applied to the Staff Scheme too, and that he would expect to have remembered raising this with Mr Hillman. Of course, it is common ground that no costs implications of the change were provided to Mr Williams (see further below). 161.2 Mr Rowe has no recollection of the removal of the spousal reduction. He states that Mr Hillman’s account of a discussion is inconsistent with how documents were generally signed at KeyMed and that because of this he would be likely to remember it if his signature was obtained in the way Mr Hillman claims. In cross-examination, Mr Rowe agreed as a matter of reconstruction that before signing the deed, he would have read the announcement and that therefore he would have been aware at the time that the spousal reduction was being removed. That reconstruction is inconsistent with Mr Rowe’s surprise at learning about the removal of the spousal reduction during the course of these proceedings. But the point does not go anywhere because Mr Rowe was not a director. Mr Williams is clear he would have signed the deed without any consideration (see above).”

“the terms of the amendment to the explanatory memorandum removing the reference to a reduction in surviving spouses’ benefits and the accompanying amending deed were specifically discussed by Mr Hillman with each of Mr Woodford, Mr Calcraft, Mr Williams and Mr Rowe on various occasions over the period 26 August 2009 – 1 September 2009 and approved by each of them.”

“POWERS OF INVESTMENT 51.1 Subject to sub-rules 51.2 and 51.3, the Trustees may invest all or any part of the Fund in any form of investment which they could invest in if they were absolutely and beneficially entitled to the assets concerned. The investments need not produce income. The Trustees may also transpose and vary any of the investments. 51.2 Where required to do so by section 35 of the [Pensions Act] 1995 (Investment Principles), the Trustees shall consult the Employers (or their nominated representative) on a regular basis about the investment strategy to be followed by the Trustees in investing the Fund.”

“From the point of view of paying a lump sum the mortality basis is one assumption that can be reviewed given the Pension Regulator’s consultation document and the need to continually monitor and update our mortality allowance. Depending on the level of prudence the Trustees and [KeyMed] wish to incorporate in the basis, this alone could justify up to an additional £13m. Alternatively, a lump sum of say £10m could be used say under basis 3 to get both schemes up to 97% funded – split £7.9m Staff and £2.1m Executives. If [KeyMed] and the Trustees wish to make a lump sum along the above lines then I will need to write formally to the Trustees of both Schemes to confirm the above points and the impact on both Schemes.”

“As a result of the market conditions continuing to be volatile both in terms of equity/asset valuations and affecting the movements in liabilities. The pension scheme actuaries, Mercers, were requested to carry out a funding update and provide a report to the [KeyMed] Board in relation to Staff and Executive Schemes. The report was reviewed by the [KeyMed] Board, which highlighted a requirement for the company to pay an additional £7.8 million to the Schemes to remove the deficit in funding levels. The principal increase in liabilities was the result of a 0.4% p.a. drop in long term gilt yields – this was due to the “quantitative easing” policy announced by the Government i.e. – the Government buying back bonds, which was announced on the 5 March 2009. The [KeyMed] Board agreed that the company should ensure that the Schemes’ funding remains at the 100% level on an ongoing funding basis in the context of maintaining the protection of this benefit for the majority of the key employees within the [KeyMed] group at all levels of the organization. [Mr Rowe] to arrange for the payment to be made on 31 March 2009 and to advise the trustees of the Schemes accordingly.”

“I do not believe that the deletion of the documents described above would have hampered or delayed any investigation carried out by KeyMed into the issues raised in this claim.”

“I do not know if the Board of KeyMed discussed the issue.”

“As Mr Hillman and Mr Woodford took decisions (for example on funding and investment issues) for both the Trustees and KeyMed, there was no distinction in their roles. The discussions at Trustee meetings effectively involved them in both their Trustee and Director capacities. At Trustee meetings, Mr Wright would sometimes flag that a particular decision on a matter was something for KeyMed, at which point Mr Woodford would tell him he was making the decision on behalf of KeyMed. I believe that any reference in the Trustee minutes to the Board making a decision or consulting with KeyMed was purely for the purposes of the minutes. The decisions were taken by Mr Hillman or Mr Woodford. I assumed that Mr Hillman and Mr Woodford would update their fellow UK Directors on any decisions that were made but, as I did not attend Director’s meetings until I became Company Secretary for KeyMed in April 2009, I cannot say whether this in fact occurred before that date…”