Aon Trust Corporation Ltd v KPMG (A Firm) & Ors

The proceedings

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

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

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

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

The parties

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

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

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

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

The general nature of the Scheme

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

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

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

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

The history of the Scheme

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

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

In 1984 members’ manual records were replaced by computerised records. Since the early 1990s a member’s electronic record has shown (1) a fund value which is effectively accumulated contributions, interest and bonuses, and (2) the amount of the accrued pension to date, with bonuses added to that figure (as in the case of Mr Woolf).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

PA 1995 Part 1 applies to occupational pension schemes. It is common ground that the Scheme is an ‘occupational pension scheme’ as that expression is defined in PSA 1993 section 1 (a definition which is imported into PA 1995 by ibid. section 124(5)), that is to say it is a scheme:

“… which is comprised in one or more instruments … and which has … effect in relation to one or more descriptions or categories of employments so as to provide benefits, in the form of pensions or otherwise, payable on termination of service, or on death or retirement, to or in respect of earners with qualifying service in an employment of any such description or category”.

PA 1995 section 56 subjects certain occupational pension schemes to a ‘minimum funding requirement’ as defined in subsection 56(1), that is to say:

“… a requirement … that the value of the assets of the scheme is not less than the amount of the liabilities of the scheme”.

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

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

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

PA 1995 contains no definition of the expression ‘money purchase scheme’, but PA 1995 section 124(5) imports the definition contained in PSA 1993 section 181(1), viz:

“a pension scheme under which all the benefits that may be provided are money purchase benefits”.

The expression ‘money purchase benefits’ is in turn defined in PSA 1993 section 181(1) as meaning, in relation to a member of an occupational pension scheme or the widow or widower of a member of such a scheme:

“… benefits the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of the member and which are not average salary benefits”.

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

There is no all-purpose statutory definition of the expression ‘average salary benefit’ in either PSA 1993 or PA 1995, but PSA 1993 section 84 (basis of revaluation of benefits by the final salary method) contains, in subsection (4), a definition of that expression where it is used in that section. For that purpose the expression ‘average salary benefit’ is there defined as meaning:

“… benefit the rate or amount of which is calculated by reference to the average salary of a member over the period of service on which the benefit is based”.

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

Returning to PA 1995 section 56, section 56(4) provides that in calculating the value of any liabilities for the purposes of section 56:

“… a provision of the scheme which limits the amount of its liabilities by reference to the amount of its assets is to be disregarded”.

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

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

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

PA 1995 section 67(2) provides as follows (so far as material):

“The power cannot be exercised on any occasion in a manner which would or might affect any entitlement [or] accrued right … of any member of the scheme acquired before the power is exercised unless the requirements under subsection (3) are satisfied”.

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

“(a)

the accrued rights of a member of an occupational pension scheme at any time are the rights which have accrued to or in respect of him at that time to future benefits under the scheme, and

(b)

at any time when the pensionable service of a member of an occupational pension scheme is continuing, his accrued rights are to be determined as if he had opted, immediately before that time, to terminate that service;

and references to accrued pension or accrued benefits are to be interpreted accordingly.”

Neither PSA 1993 nor PA 1995 contains any definition of ‘entitlement’.

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

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

“(1)

Where any provision mentioned in subsection (2) conflicts with the provisions of an occupational pension scheme –

(a)

the provision mentioned in subsection (2), to the extent that it conflicts, overrides the provisions of the scheme, and

(b)

the scheme has effect with such modifications as may be required in consequence of paragraph (a).

(2)

The provisions referred to in subsection (1) are those of –

(a)

this Part [i.e. PA 1995 Part 1],

….”

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

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

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

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

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

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

Clause 1 of 3DR Schedule 1 contains definitions. ‘Member’ is defined as (so far as material):

“an individual who has been admitted to membership of the Scheme … and who remains entitled (whether prospectively or actually) to any benefit from the Scheme”.

‘Salary’ is defined as meaning, in relation to a member:

“(a)

at any time when the Member is not participating in a profit-related pay scheme constituted by his Employer, the annual rate of his basic salary or wages from his Employer as determined by the Principal Employer; or

(b)

at any time when the Member is participating in a profit-related pay scheme constituted by his Employer, the annual rate of his notional salary or wages from his Employer being the total of his basic salary or wages from his Employer as determined by the Principal Employer and his planned profit-related pay;

and such other element or elements (if any) of his remuneration from his Employer as his Employer may from time to time determine to be pensionable and notify as such to the Principal Employer and the Trustees”.

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

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

“Actuary

8.1

The Trustees shall have power, in consultation with the Principal Employer, to appoint an Actuary to be the Actuary to the Scheme on such terms as they shall think fit. The Trustees shall have power, in consultation with the Principal Employer, to remove the Actuary from office for any reason whatsoever.

Actuarial valuations

8.2

The Trustees’ duty to obtain actuarial valuations of the Scheme’s assets in relation to its liabilities is limited to the duty imposed on them by Regulation 8 of the [Occupational Pension Scheme (Disclosure of Information) Regulations 1986].

8.3

In addition, the Trustees shall have power, with the consent of the Principal Employer to obtain an actuarial valuation or an interim review prepared by the Actuary or such other Actuary, as at such date, on such basis, and for such purpose as the Trustees shall think fit.

Surplus revealed by actuarial valuation

8.4

If an actuarial valuation or interim review of the [Pre-2000] Fund shows a surplus the Trustees may, with the consent of the Principal Employer and after taking the Actuary’s advice and after making any such amendments to the Trust Deed and/or the Rules as may be necessary, decrease the contributions of any Member and/or increase (by declaration of bonuses or interim bonuses or otherwise) the benefits or future benefits of any Member or other person entitled to receive any benefit from the [Pre-2000] Fund.

Deficiency revealed by actuarial valuation

8.5

If an actuarial valuation of the [Pre-2000] Fund reveals a deficiency in the [Pre-2000] Fund’s resources, the Trustees may with the consent of the Principal Employer make such adjustments and amendments to the benefits secured or thereafter accruing for or in respect of the Members as are necessary in the opinion of the Trustees after taking the Actuary’s advice to secure the continued solvency of the [Pre-2000] Fund.

Actuarial advice and determination

8.6

Where any amount is required by any of the provisions of the Trust Deed or the Rules to be determined by the Trustees with the advice of the Actuary, or to be determined by the Actuary, tables from time to time supplied to the Trustee by the Actuary may be used for this purpose.”

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

“Request from Employer to Trustees

10.1

Any Employer may request the Trustees to grant additional or new benefits under the Scheme for or in respect of any of its employees or former employees whether or not the employee or former employee is or is not already a Member.

Estimate of cost of benefits

10.2

Before granting any benefits to which an Employer’s request pursuant to sub-Clause 10.1 relates, the Trustees shall obtain an estimate of the increase in the value of the liabilities of the Scheme which will result from doing so together with advice as to the funding of such increase.

Grant of additional and new benefits

10.3

The Trustees shall grant any benefits to which a request made pursuant to sub-Clause 10.1 relates, subject to the following conditions:

10.3.1

the benefits do not exceed Revenue Limits;

10.3.2

the Employer which makes the request makes such additional contributions to the General Fund, or enters into such other arrangements (if any) with the Trustees, as the Trustees may require in order to fund the increase in the value of the liabilities of the Scheme resulting from the grant of the benefits.”

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

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

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

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

“The Trustees shall have power with the consent of the Principal Employer at any time or times to alter, amend, add to and/or cancel all or any of the provisions of the Trust Deed or Rules provided that nothing shall be done which would:

(a)

cause the main purpose of the Scheme to cease to be that stated in sub-Clause 2.3 or

(b)

cause the payment or transfer of the Fund or any part of it to the Principal Employer or any Participating Employer.”

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

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

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

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

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

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

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

“Member’s entitlement to pension from Normal Retirement Date

7.1

A Member whose pensionable service terminates as a result of his retirement from Service on his Normal Pension Date shall be entitled to a pension from the Scheme which shall commence to be payable with effect from the day following his Normal Pension Date for the remainder of his lifetime and calculated in accordance with this Rule.

Annual amount of Member’s pension

7.2

The annual amount of a Member’s pension under sub-Rule 7.1 shall be calculated as follows:

(1)

by taking the total amount of the contributions paid by him and his Employer into the General Fund during or in respect of each Contribution Period up to and including the Contribution Period ending 31 March 2000 and multiplying it by the appropriate factor determined from the Tables in Appendix A in accordance with sub-Rule 7.3 in order to give the amount of pension derived from each Contribution Period;

(2)

by increasing the amounts determined in accordance with paragraph (1) of this sub-Rule by bonuses declared pursuant to sub-Clause 8.4 … and/or by reducing them by any adjustments made pursuant to sub-Clause 8.5; and

(3)

by aggregating the amounts of pension determined in accordance with paragraphs (1) and (2) of this sub-Rule.

….

Sources of additional pension

7.5

A Member’s pension on retiring at Normal Pension Date may exceed the pension determined in accordance with the preceding sub-Rules of this Rule by virtue of:

(1)

any additional voluntary contributions paid [by the Member] and not taken into account … in calculating the benefits payable to or in respect of him from the General Fund;

(2)

any rights and benefits granted upon the acceptance or a transfer payment in respect of him …; and

(3)

any augmentation of his benefits in accordance with Clause 10 or the corresponding provisions of the Scheme previously in force.

Other provisions applicable to Member’s pension

7.6

The Member’s pension payable under this Rule:

(1)

shall be reduced in accordance with Rules 10 and 11 if the Member exercises either or both of his options under them; …”

Rule 8 governs the calculation of pensions commencing before Normal Pension Date. It provides as follows (so far as material):

“Circumstances in which Member’s pension may commence early

8.1

A Member may elect that his pension shall commence from a date before Normal Pension Date if the following conditions are satisfied:

(1)(a) having attained the age of 50 he retires from Service …; or

(b)

he retires from Service before attaining age 50 … as a result of incapacity …; and

(2)

if the pension is to commence before the Member’s 60^th birthday, his Employer and the Trustees consent to the commencement of his pension from that date.

….

Annual amount of early retirement pension

8.3

Subject to sub-Rule 8.4, the annual amount of a Member’s pension under sub-Rule 8.1 shall be determined by taking the pension to which he would be entitled in accordance with Rule 7 on retiring at Normal Pension Date and adjusting it by such amount as the Trustees having taken the advice from the Actuary consider appropriate …”

Rule 9 governs the calculation of pensions commencing on a date after Normal Pension Date. Rule 9.1 enables a member who continues in pensionable employment after his Normal Pension Date to postpone the commencement of his pension. Rule 9.2 provides that where a member has exercised that power:

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

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

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

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

Rule 19 governs payment of pensions. Rule 19.1 provides that, subject to Rules 19.2 and 19.3, all pensions are to be paid in arrears by monthly instalments. Rule 19.2 confers power on the trustee to alter the date on which and/or intervals at which pensions are paid. Rule 19.3 deals with accrual of pension, as follows (so far as material):

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

Rule 20 governs increases in pension. It provides as follows (so far as material):

“20.1

[In so far] as any pension payable from the Pre-2000 Fund is attributable to contributions paid to the Scheme after 31 March 1997 … its annual rate shall be increased with effect from 1 January in each year by the lesser of:

(i)

the percentage annual increase in the RPI …; and

(ii)

5 per cent.

….

20.4

[In so far] as any pension payable from the Pre-2000 Fund is attributable:

(a)

to contributions paid to the Scheme before or on 31 March 1997; or

(b)

to contributions paid to the Scheme after 31 March 1997 in respect of employment before or on that date;

no increase in its annual rate is guaranteed, but increases may be payable as a result of the declaration of bonuses pursuant to sub-Clause 8.4.”

Rule 21 concerns the maintenance by the trustee of a Special Account. Rule 21.1 requires the trustee to maintain such an account, together with sub-accounts relating to each employer in the Scheme, to which the amounts specified in Rule 21.2 are to be credited. Rule 21.2 list various situations in which money is retained within the Scheme. Rule 21.4 provides as follows:

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

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

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

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

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

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

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

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

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

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

“32.

Then does the exercise of the power conferred by clause 8.5 necessitate such an addition or omission? In my view it does. The argument of Counsel for the Active Member appears to me to attribute to the word "scheme" a sense corresponding to the document in which it is recorded but excluding the rights conferred by it. It may be that an exercise of the power contained in clause 8.5 can be implemented without any alteration to the constituting documents of the scheme. In this sense an adjustment not involving an amendment can be made by deducting from the pension otherwise due the amount of the reduction. But to conclude from that consideration that the section does not apply appears to me to ignore the clear intention behind it.

33.

The purpose of the section is to protect, amongst other things, entitlements. A pension in payment is an entitlement under the scheme, Barclays Bank plc v Holmes [2000] PLR 339 para 129, albeit subject to reduction in the event of the exercise of the power conferred by clause 8.5. The entitlement is a part of the scheme. In my view to reduce the entitlement is, to that extent, to modify the scheme by the equivalent of an omission. The fact that the reduction or omission from that part of the scheme is effected by the use of another part of the scheme, that is clause 8.5, does not seem to me to be material. For these reasons I will answer question 2 in the affirmative. ”

In answer to question 3, the Vice-Chancellor held that the Scheme is not a ‘money purchase scheme’. After referring to the relevant statutory provisions, and after summarising the arguments which had been addressed to him, the Vice-Chancellor continued (in paragraphs 40 to 45 of his judgment):

“40.

I shall start by considering the derivation of the expression 'money purchase benefits' and the contexts in which it has been used. The earliest use to which my attention was drawn is in Schedule 1A to the Social Security Act 1985 which was inserted into the Social Security Act 1975 with effect from 1st January 1986. Such a benefit was defined as

"any benefit the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of him".

The schedule deals with the revaluation of pensions of early leavers, that is persons whose pensionable service terminates before normal pension age. Different methods of revaluation were to be applied to differently calculated pensions. Paragraph 3 dealt with pensions calculated by reference to the member's average salary, paragraph 4 to pensions calculated by reference to the member's length of service and paragraph 5 to pensions calculated by reference to a payment or payments made by the member or by any other person in respect of him. In the case of paragraph 5 "the investment yield and any bonuses arising from" such payments were to be applied in providing such benefit as would have been provided under the scheme.

41.

These provisions with amendments were re-enacted in ss. 84 and Schedule 3 to the 1993 Act. Schedule 3 provides for four methods of revaluation, final salary method, average salary method, flat rate method and money purchase method. The last mentioned method is applicable to money purchase benefits arising under an occupational pension scheme, see ss.84 (3). The method is to apply the investment yield and any bonuses arising from payments made by or on behalf of a member towards providing any pension or other retirement benefit which would have been payable under the scheme.

42.

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

43.

The second context in which the expression 'money purchase benefit' had been used is that of "contracting out". The Social Security Act 1986 made provision by s.6 and Schedule 2 for schemes providing money purchase benefits to contract out of the State Earnings Related Pension Scheme ("SERPS"). The definition of such benefits was

"benefits the rate or amount of which is calculated by reference to a payment or payments made by a member of the scheme or by any other person in respect of a member other than average salary benefits".

These provisions were re-enacted in ss.7 to 39 of the 1993 Act.

44.

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

45.

The third context on which counsel for KPMG relied is s.144 of the 1993 Act. This was concerned with cases of a deficiency of assets on the winding up of the scheme or of the employer. It has been re-enacted with amendments in s.75 of the 1995 Act. The effect was to deem the deficiency to be a debt due from the employer to the trustees. The relevance for present purposes is that the schemes to which the provision applied excluded money purchase schemes as defined in s.181 of the 1993 Act. ”

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

“52.

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

The Vice-Chancellor then turned to Rule 7.2, concluding (in paragraph 54 of his judgment) that the definition of ‘average salary benefits’ in PSA 1993 section 84, and in particular the phrase ‘calculated by reference to’:

“… points to the yardstick or measure by which the benefit is to be ascertained or defined in the context of an occupational pension scheme”.

The Vice-Chancellor continued:

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

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

“56.

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

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

“57.

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

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

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

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

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

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

In the particular, and somewhat unusual, circumstances of the instant case, I consider that it is appropriate that we should accede to Mr Nugee’s invitation and address that additional question, should it arise.

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

I also agree.