ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE BLACKBURNE)
HC07 C02367
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
THE RT HON. LORD JUSTICE WARD
THE RT HON. LADY JUSTICE SMITH
and
THE RT HON. SIR JOHN CHADWICK
Between :
ALLIED DOMECQ (HOLDINGS) LIMITED | Claimant/ Appellant |
- and - | |
ALLIED DOMECQ FIRST PENSION TRUST LIMITED ALLIED DOMECQ SECOND PENSION TRUST LIMITED | Defendants/Respondents |
(Transcript of the Handed Down Judgment of
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Mr Michael Furness QC (instructed by Macfarlanes LLP, 10 Norwich Street, London EC4A 1BD) for the Appellant
Mr Andrew Simmonds QC (instructed byDLA Piper UK LLP, 3 Noble Street, London EC2V 7EE) for the Respondents
Hearing date: 16 May 2008
Judgment
Sir John Chadwick:
This is an appeal from an order made on 7 December 2007 by Mr Justice Blackburne in proceedings brought under CPR Pt 8 by Allied Domecq (Holdings) Limited against the trustees of two occupational pension schemes in respect of which it is an employer. The issue raised in the proceedings is whether, under the rules of the schemes, the rates of contributions payable by the employer are determined by the actuary (or on the advice of the actuary) without the agreement of the employer.
That issue arises in the context of regulations 5(3)(b) and 8(2)(e) of, and paragraph 9(5) of schedule 2 to, the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (SI 2005/3377). Regulations 5(3)(b) and 8(2)(e) apply to a scheme:
“ . . . under which the rates of contributions payable by the employer are determined -
(i) by or in accordance with the advice of a person other than the trustees or managers and
(ii) without the employer’s agreement . . .”
Paragraph 9(5) of schedule 2 applies if the scheme is:
“ . . . a scheme under which the rates of contributions payable by the employer are determined by the actuary without the agreement of the employer . . .”
In relation to that issue the rules of the two schemes are identical: save in one minor respect which is not material. It is sufficient, for the purposes of this appeal, to refer only to the rules of the main scheme – the Allied Domecq Pension Fund – of which the trustee is the first respondent, Allied Domecq First Pension Trust Limited. It is accepted that, if the main scheme falls within regulations 5(3)(b) and 8(2)(e) and paragraph 9(5), then the other scheme – the Allied Domecq Executives Pension Fund, of which the second respondent is the trustee – also falls within those regulations and that paragraph.
The Scheme Rules
Each of the schemes is a multi-employer scheme: that is to say it is a scheme under which there are a number of employer companies (“Participating Companies”) within the Allied Domecq group whose employees are eligible for membership. But neither scheme is within paragraph 1(1) of schedule 2 to the 2005 Regulations. It follows that each scheme is to be treated as a single scheme notwithstanding that there is more than one employer.
Rule 12.1.1 of the main scheme is in these terms:
“12.1.1. What contributions the Participating Companies must pay
The Participating Companies shall pay to the Trustees such contributions as will, in the opinion of the Actuary, (as expressed in the last report made by him pursuant to Rule 18.7.2), enable the Trustees to make due provision for the Benefits payable under the Fund Schemes from the Fund.”
“Participating Companies” is defined by rule 1 to mean “the Principal Company and any subsidiary or associated companies which have bound themselves by deed to observe and perform the rules of any of the Fund Schemes so long as they remain subsidiary or associated companies of the Principal Company…”. In that context the “Principal Company” is the claimant, Allied Domecq (Holdings) Limited.
Rule 12.1.2 provides for the apportionment of contributions amongst the Participating Companies:
“12.1.2 Apportionment of contributions amongst the Participating Companies
The contributions payable by the Participating Companies under the provisions of Rule 12.1.1 shall be borne by the several Participating Companies in their respective due proportions, as determined by the Trustees, and the Trustees shall, by notice in writing, (on or before each 6 April), inform each one of the Participating Companies of the contributions, (or the basis of the contributions), required from it for the ensuing year for the Fund Schemes.”
Rule 12.1.3 provides for the time at which contributions are to be paid:
“12.1.3 When Participating Companies' contributions to be paid
The contributions so payable by the Participating Companies shall be paid to the Trustees at such intervals as may be agreed between the Trustees and the Principal Company and in accordance with any schedule of contributions for the time being in force under Section 58 of [the Pensions Act 1995].”
It is accepted that the aggregate contributions to be paid by the Participating Companies under Rule 12.1.1 are determined by the actuary without the agreement of the employer. Further, it is accepted that, in the context of a multi-employer scheme, it is the aggregate contributions – rather than the individual contributions paid by any one employer – which are relevant for the purposes of regulations 5(3)(b) and 8(2)(e) and paragraph 9(5). On that basis rule 12.1.1 plainly brings the scheme within those regulations and that paragraph. And, on that basis – that it is the aggregate contributions (rather than the individual contributions paid by any one employer) which are relevant - neither rule 12.1.2 (apportionment) nor rule 12.1.3 (timing) takes the scheme out of those provisions.
“18.7.2 Requirements for actuarial valuations of the Fund
(i) The Fund shall be actuarially valued by the Actuary at intervals of not exceeding three years and, for that purpose, all necessary accounts and information shall be supplied to the Actuary who shall report in writing to the Trustees and to the Principal Company;
(ii) Without prejudice to sub rule (i) above, the Trustees must obtain an actuarial valuation which satisfies the requirements of the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 prepared by the Actuary when required by those regulations to do so.”
Rule 18.7.3 (to which rule 18.7.4 is ancillary) provides for the application, at the direction of the Principal Company, of a fund surplus disclosed by the Actuary’s report. Rule 18.7.5 of the main scheme is in these terms:
“18.7.5 Restoration of solvency in the event of a deficiency
“If the Actuary's report in accordance with Rule 18.7.2 discloses a deficiency in the Fund, the Participating Companies shall collectively pay such an amount by lump sum and/or periodic payments (to be certified by the Actuary) as, after taking into account any reserve and making such other adjustments as the Actuary may consider appropriate, will, in the opinion of the Actuary restore the solvency of the Fund; such amount to be paid by the Participating Companies in such proportions as the Actuary shall certify and within such period as the Trustees may, on the advice of the Actuary, agree with the Principal Company.”
Rule 18.7.5 of the executives scheme differs in a minor respect: the reference in the first line is to “Rule 18.7.2(i)”. The difference is not material. It is sub-rule (i) of rule 18.7.2 which provides for the Actuary to make a report: when rule 18.7.5 of the main scheme is read with rule 18.7.2, it is clear that that is the report to which reference is made.
It was accepted on behalf of the trustees – as the judge noted at paragraphs [30] to [33] of his judgment, [2007] EWHC 2911 (Ch) – that the scheme would not fall within paragraph 9(5) of schedule 2 to the 2005 Regulations if, on the true construction of rule 18.7.5, the aggregate payments to be made by the Participating Companies under that rule (in a case where that rule applied) were not determined by the Actuary without the consent of the Principal Company: that is to say, if (on a true construction of the rule) the rates of contribution to be made by the Participating Companies collectively were determined by agreement between the trustees (albeit, acting on the advice of the Actuary) and the Principal Company. Nor, in such a case, would the scheme fall within regulations 5(3)(b) or 8(2)(e) of the 2005 Regulations. As the judge put it:
“[31] . . . In short, in order to establish that neither paragraph 9(5) nor regulations 5(3)(b) and 8(2)(e) apply to the Main Scheme at a time when rule 18.7.5 applies to it, the claimant needs only to show that rule 18.7.5 is outside those provisions.”
If, on the other hand, on a true construction of rule 18.7.5, the rates of contribution to be made by the Participating Companies collectively were determined by the Actuary (or on the advice of the Actuary) without the need for the agreement of the Principal Company, it was accepted on behalf of the claimant (or, if not accepted formally, it must follow from the position taken by the claimant in relation to contributions under rule 12.1) that the scheme would fall within regulations 5(3)(b) and 8(2)(e) and paragraph 9(5) notwithstanding that rule 18.7.5 required the agreement of the Principal Company to the individual contributions paid by any one employer: that is to say, notwithstanding that the proportions in which (and the times at which) the Participating Companies, individually, were to make payments was a matter for agreement between the trustees and the Principal Company.
The statutory context
The judge summarised the statutory context in which the relevant provisions of the 2005 Regulations fall to be applied at paragraphs [9] to [14] of his judgment. There is no challenge to that summary and I adopt it with gratitude:
“[9] Unless exempted by or under section 221 [of the Pensions Act 2004] - which the two schemes are not - every scheme is subject to the ‘statutory funding objective’ imposed by section 222(1). This requires that a scheme ‘must have sufficient and appropriate assets to cover its technical provisions’. For this purpose ‘technical provisions’ means, by section 222(2), ‘the amount required, on an actuarial calculation, to make provision for the scheme’s liabilities’.
[10] The subsequent sections of Part 3 [of the 2004 Act] then set out a mechanism for ensuring that schemes meet this objective. The mechanism comprises the following elements: (1) a ‘statement of funding principles’, as prescribed by section 223, namely a written statement to be prepared and from time to time reviewed by the trustees or managers setting out, inter alia, ‘their policy for securing that the statutory funding objective is met’, including any decisions by them as to the basis on which the scheme’s technical provisions have been calculated and the period within which and manner in which any failure to meet the funding objective is to be remedied; (2) actuarial valuations, as prescribed by section 224, to be obtained by the trustees or managers at intervals of not more than one year or, if they obtain actuarial reports for intervening years, at intervals of not more than three years; (3) a ‘recovery plan’, as prescribed by section 226, if ‘having obtained an actuarial valuation it appears to the trustees or managers of the scheme that the statutory funding objective was not met [ie the scheme was in deficit] on the effective date of the valuation’, with a requirement that such recovery plan set out the steps to be taken to meet the statutory funding objective and the period within which it is to be achieved; and (4) the preparation and, from time to time, review by the trustees or managers of a ‘schedule of contributions’, as prescribed by section 227, comprising a statement showing the rates of contributions payable towards the scheme by or on behalf of the employer and the active members of the scheme, and the dates on or before which such contributions are to be paid.
[11] Although the duty to procure the statement of funding principles, the recovery plan and the schedule of contributions is imposed on the trustees, the scheme actuary and the employer also have a role in their preparation. Thus, by section 225(1), the scheme actuary is required to certify that the calculation of the technical provisions in any valuation is in accordance with the 2005 Regulations. By section 227(6) he must certify that the schedule of contributions is consistent with the statement of funding principles and that the rates shown in the schedule are such that the statutory funding objective will continue to be met during the period for which the schedule is in force, or, as the case may be, that it will in future be met within the period specified by the recovery plan. Section 230 sets out matters on which, before doing any of them, the trustees or managers must obtain the advice of the actuary. There are therefore limits on what the trustees and employer can do which are circumscribed by the actuary. Nevertheless, the basic scheme of the Act is that funding is set by agreement between the trustees and the employer within the parameters of what the actuary will certify.
[12] Section 229(1) requires the trustees or managers to obtain the employer’s agreement to:
‘(a) any decision as to the methods and assumptions to be used in calculating the scheme’s technical provisions…;
(b) any matter to be included in the statement of funding principles…;
(c) any provision of a recovery plan…;
(d) any matter to be included in the schedule of contributions… .’
Of particular relevance to these proceedings is sub-section (1)(c).
[13] Where the statutory funding objective is not met on the effective date of the valuation, a copy of the recovery plan and of the schedule of contributions must be sent to the Pensions Regulator. Section 231 sets out the powers of the Regulator. They are exercisable when the actuary is unable to give either of the certificates referred to in sections 225 and 227 and in other circumstances, including where the trustees and the employer cannot agree on the matters to which, by section 229, the employer is required to agree. The Regulator’s powers under section 231(2) are (a) to modify the scheme as regards the future accrual of benefits, (b) to direct how the technical provisions are to be calculated or the period or manner in which any failure to meet the statutory funding objective is to be met, and (c) to impose a schedule of contributions. In all of these and in other circumstances where the mechanism for ensuring that the statutory funding objective is met has not been properly carried into effect, the Regulator can intervene. In the last resort other, wider, powers are available to him.
[14] From the above summary it is apparent, . . . , that under the 2004 Act the employer has considerable influence over the terms on which a scheme is funded. It can happen, however, that the employer under the regime set out in the 2004 Act would have more influence than it would otherwise have under the particular scheme rules. Although in many scheme rules contributions are set by agreement between the employer and the trustees, usually after having taken the advice of the actuary, under some they are set by the trustees alone, or by the actuary alone. Rules in this form are potentially favourable to the members of the scheme because funding rates can be set without regard to a veto from the employer. When it came to making the 2005 Regulations, Parliament evidently felt that it was unacceptable that the statutory regime, as set out in the 2004 Act, should give the employer a greater say in the terms on which the scheme should be funded than the employer would have had under the scheme rules unmodified by statute. Hence paragraph 9 of schedule 2 to the 2005 Regulations, headed ‘Schemes under which the rates of contributions are determined by the trustees or managers or by the actuary’. (Schedule 2 has effect, by regulation 19 of the 2005 Regulations, for the purposes of modifying Part 3 and the 2005 Regulations.)”
At paragraphs [15] to [19] of his judgment, the judge went on to explain the role of paragraph 9 of schedule 2 to the 2005 Regulations in more detail. Again, the appellant has no quarrel with the judge’s explanation; and I can adopt those paragraphs also:
“[15] Paragraph 9 of Schedule 2 deals essentially with two situations. Paragraphs (1) to (4) deal with the situation where the trustees or managers set the contribution rates payable by the employer under the scheme rules without the agreement of the employer, and no one else is permitted to reduce the rates or suspend the contributions. In that situation section 229 is modified so as to remove the requirement for employer consent to the matters set out in section 229(1). Instead, the trustees or managers are merely required to consult the employer on those matters. (Paragraph 9(2) sets out the particular modifications of section 229; paragraph 9(3) sets out modifications of regulation 13 (which, in its turn, sets out the period within which, where they are required under section 229 to obtain it, the trustees or managers must obtain the employer’s agreement); and paragraph 9(4) provides that where the power of the trustees or managers to determine the rates of contributions payable by the employer without the employer's agreement is subject to conditions the modifications provided for in sub-paragraphs (2) and (3) have effect only in the circumstances where the conditions are satisfied.) It is not suggested by the defendants that paragraphs 9(1) to (4) apply.
[16] Paragraph 9(5) deals with the situation where, under the scheme rules, the actuary sets the contribution rates payable by the employer but does so without the employer’s agreement. It provides:
‘In the case of the scheme under which the rates of contributions payable by the employer are determined by the actuary without the agreement of the employer, section 227(6) of the 2004 Act shall apply as if it required that, in addition to the matters specified there, the actuary’s certificate must state that the rates shown in the schedule of contributions are not lower than the rates he would have provided for if he, rather than the trustees or managers of the scheme, had the responsibility of preparing or revising the schedule, the statement of funding principles and any recovery plan.’
[17] Thus, where paragraph 9(5) applies, the actuary has to provide an extra element of certification when he certifies the schedule of contributions. He has to certify that the rates shown in the schedule of contributions are not lower than the rates he would have specified if he alone had responsibility for preparing the schedule, the statement of funding principles and any recovery plan. This is dealt with by paragraph 9(6) which provides that where paragraph 9(5) applies, regulation 10(6) and schedule 1 (which sets out the form of the actuary’s certificate) apply as if the form of certification of the adequacy of the rates of contributions shown in the schedule of contributions included the statement set out in that sub-paragraph.
[18] Paragraph 9(5) thus introduces what was referred to in argument as the ‘actuarial underpin’. This is because what the sub-paragraph does is require the actuary, regardless of what the trustees and the employer have agreed, to certify that if he, the actuary, had been left to his own devices he would have set a rate which was no greater than what the trustees and the employer have agreed.
[19] . . . , the thinking behind the whole of paragraph 9 is that the statutory regime set out in the 2004 Act has effectively supplanted the funding mechanism in the scheme rules with the result that, in order to comply with the 2004 Act, it is the trustees and the employer who generally will be setting the terms of the recovery plan and the schedule of contributions. In the case of paragraph 9(5), however, the draftsman is acknowledging that the 2004 Act is removing from the scheme something that might be of benefit to the members, namely the fact that the actuary has an unfettered right to set the rate. In those circumstances the overriding provisions of the Act are modified in order to reintroduce an element of actuarial scrutiny on the actual level of contribution setting. Paragraph 9 is therefore an acknowledgment that at some points the terms of the scheme rules ought to influence and modify the overriding statutory regime.”
At paragraphs [20] and [21] of his judgment the judge set out the provisions of regulations 5(3) and 8(2) of the 2005 Regulations (so far as material in the present context):
“5(3) In determining which accrued benefits funding method and which assumptions are to be used, the trustees or managers must: . . .
(b) in the case of a scheme under which the rates of contributions payable by the employer are determined -
(i) by or in accordance with the advice of a person other than the trustees or managers, and
(ii) without the employer’s agreement,
take account of the recommendations of that person.”
“8(2) In preparing or revising a recovery plan, the trustees or managers must take account of the following matters: . . .
(e) In the case of a scheme under which the rates of contributions payable by the employer are determined -
(i) by or in accordance with the advice of a person other than the trustees or managers, and
(ii) without the agreement of the employer,
the recommendations of that person.”
He went on – in a paragraph which, again, is not challenged – to say this:
“[22] The effect of these two regulations is that if the actuary is the person who determines the employers’ rates of contribution and he is empowered to do so without the agreement of the employer, the trustees or managers must take account of his advice in calculating the scheme’s technical provisions or in preparing and revising the recovery plan. It has a consequence on the exercise by the Pensions Regulator of his powers under section 231. This is because regulation 14(1) provides that in exercising any of his powers conferred by that section in the case of a scheme of the kind referred to in regulations 5(3)(b) and 8(2)(e), ‘the Regulator must take into account any relevant recommendations made to the trustees or managers under those regulations.’”
The need for a determination of the issue in the present case
It is unclear – in a case like the present, where the person who falls within sub-paragraph (i) of regulations 5(3)(b) and 8(2)(e) is the actuary (whose recommendations are obviously of weight in any event) - how much difference to any funding negotiation or regulatory intervention the application of those two regulations would make. But the claimant and the trustees are entitled to know - in case it does make a difference - whether those regulations do apply to these two schemes. Whether paragraph 9(5) of schedule 2 to the 2005 Regulations applies in the present case is of more significance. The actuarial underpin provided by that paragraph does make a difference to the contributions that the employers are required to pay into the schemes. As the judge observed:
“[24] . . . The evidence before the court indicated that, if the underpin applies, the monthly contributions for the period 1 August 2007 to 5 April 2020 (which is the period of the recovery plan in the case of each scheme) are greater for the period January 2008 to March 2013 than they are for that period if the underpin does not apply, whereas for the period April 2013 to March 2020 the position is reversed: the contributions are smaller if the underpin applies than they would be if it does not. The overall amount to be paid is the same but, where the actuarial underpin applies, the monthly contributions are, as it was put, ‘front loaded’ to the extent (across both schemes) of an additional £7.8 million annually in the period to March 2013 and thus of material consequence to the employers’ cash flow. Indeed, since the statutory timetable has required the 2006 valuations to be finalised within the relevant prescribed period, the parties have proceeded on the provisional footing that the answers to the questions raised by the claim form are both ‘yes’ (ie that the three statutory provisions do apply to the two schemes) but with an agreed mechanism for adjusting future employer contributions downwards if that is not the correct answer.
[25] From the claimant’s perspective, the commercial substance behind the construction issues, . . . , is that, although any disagreement on contribution rates will ultimately have to be resolved by the Regulator, the claimant feels that its bargaining position will be stronger if the Regulator is not required by regulation 14(1) to take into account the actuary’s recommendations, even though the Regulator might be expected in any event to have regard to them. From the defendants’ perspective, if paragraph 9(5) applies, the requirement for the actuarial underpin may, as has happened in relation to the 2006 valuation, lead to agreement on a higher or accelerated employer contribution rate without any need for Regulator involvement. Moreover, while trustees are always bound to obtain the actuary’s advice in relation to scheme funding matters (see section 230), regulations 5(3)(b) and 8(2)(e), if applicable, require them to take account of his recommendations, which may be of value in negotiations with the employer.”
The judgment below
The judge held that, in construing rule 18.7.5, it was appropriate to recognise that the rule comprised two distinct parts, separated by the semi-colon. The first part of the rule required the Participating Companies, collectively, to pay such amount (by lump sum or by periodic payments) as would, in the opinion of the Actuary, restore the solvency of the fund. The aggregate amount to be paid was determined by the Actuary. That corresponded to the requirement under rule 12.1.1. The second part of rule 18.7.5 provided, first, for the apportionment of the aggregate amount to be paid amongst the Participating Companies; and, second, for the time of payment. That corresponded to the provisions of rules 12.1.2 and 12.1.3. If, as was accepted, rule 12.1 (taken as a whole) had the effect that the rates of contribution payable under that rule were determined by (or on the advice of) the Actuary without the agreement of the employer, then rule 18.7.5 should be given the same effect. In expressing his conclusion the judge said this:
“[42] . . . I agree that rule 18.7.5 has the two parts to it which Mr Simmonds identifies and that it mirrors the approach adopted by rule 12.1, ie that the words after the semi-colon provide for apportionment between the individual employers of the collective contribution rates which have been determined by the actuary in the words down to the semi-colon.
[43] Forcefully as Mr Furness’s points were put, I am not persuaded that they lead me to prefer the claimant’s construction of the rule. Whether or not the collective contribution rates set by the actuary under rule 12.1.1 result in an adequately funded scheme inevitably involves, as Mr Simmonds points out, an element of guesswork. Rule 18.7 deals with what is to happen if, as a result of the actuary’s valuation, it should turn out that the scheme is either over-funded (for which rule 18.7.3 caters) or under-funded (for which rule 18.7.5 caters). In agreement with Mr Simmonds, I would not have expected the draftsman to have approached the mechanism for setting the overall contribution rates differently depending upon whether what is being funded are future accruing service benefits as distinct from making good a deficiency in past accrued service benefits.”
The judge had summarised the submissions made to him on behalf of the claimant in earlier paragraphs of his judgment.
“[34] . . . Mr Furness submits that, if [rule 18.7.5] had finished at the semi-colon, ie after the words ‘restore the solvency of the Fund’, and the remainder of the rule had been omitted, one might have inferred that the actuary is to decide what the amount of those instalments should be and thus is to determine the rates of contribution without the employer’s agreement (because there would, on that basis, be no reference to any employer involvement in the process). But, he says, the presence within the rule of the words ‘…and within such period as the Trustees may, on the advice of the Actuary, agree with the Principal Company’ means that the period within which the amount is to be paid is a matter for agreement with the employer. Since a rate of contribution is an amount per unit of time it is plain, he submits, that the employer’s agreement is an essential component in the setting of the contribution rate: until the Principal Company - as employer or on behalf of the employers - has agreed what the payment period is to be, no rates can be determined. In truth, he says, once the actuary has delivered his valuation report under rule 18.7.2 disclosing a deficiency (the prerequisite for the operation of rule 18.7.5), the actuary’s role thereafter is to certify what, in the light of the payment period agreed by the trustees with the employer, the payments are which are needed to discharge the deficiency. In effect, the employer’s agreement is essential to determine the contribution rates.
[35] He goes on to submit that this produces a reasonable result: if, he says, there is a scheme rule such as rule 18.7.5 where the actuary sets the amount of the deficiency but the employer has to agree the period of payment, it is perfectly reasonable that paragraph 9(5) should not apply. This is because the purpose of the [Pensions Act 2004] is to ensure that schemes where the actuary or the trustees have a free hand are not overridden by a legislative requirement that the employer has to consent to contribution rates and so forth. But where under the scheme the employer has a major say in the setting of the contributions there is no reason to suppose that it was the policy of the legislation to take that power away given that the general scheme of the legislation is favourable to the need for employer agreement.
[35] He therefore submits that, on a proper understanding of rule 18.7.5, paragraph 9(5) and the two regulations do not apply to that rule and, therefore, do not apply to the Main Scheme as a whole. Since the two schemes are in this respect identical, the same is true of the Executive Scheme.
. . .
[41] Mr Furness seeks to answer [the trustees’] arguments by pointing to what he submits is the clear and unqualified wording to be found after the semi-colon. He agrees that, whereas rule 12.1 is concerned with contributions going forward into the future, rule 18.7.5 is concerned with making good past deficiencies, but submits that that fact provides no reason for equating the two in terms of who has the responsibility of determining the collective contribution rates in question. An employer, he argues, might well say that while he is content for the actuary to set the ongoing contribution rates (under rule 12.1) nevertheless where, as here, there is a deficiency in funding he wants a say in the period over which he has to pay it off. Mr Furness says therefore that there is a good reason why the two rules might be and, he says, are differently framed. In any event, he submits, rule 18.6.6 gives to the trustees (admittedly not the employers) a right to submit to arbitration any ‘matters or things relating in any manner to the Fund’ so that if a deadlock were to arise it would be in the trustees’ power (if not the employers’) to bring about a resolution.”
The judge rejected those submissions, as paragraph [43] of his judgment makes plain.
The judge gave effect to his conclusion by declarations, in his order of 7 December 2007, that on the true construction of the trust deed and rules of both the main scheme and the executives scheme, regulations 5(3)(b) and 8(2)(e) of, and paragraph 9(5) of schedule 2 to, the 2005 Regulations applied to those schemes. He granted permission to appeal on the basis, as he said, that “the questions of construction are eminently arguable either way”.
This appeal
The claimant appeals on the sole ground that the judge erred (at paragraph [42] of his judgment) in concluding that the second part of rule 18.7.5 (after the semi-colon) was concerned only with apportioning the liability to pay contributions as between the several employer companies participating in the scheme. It is said (in the grounds of appeal) that the judge should have concluded that the effect of the second part of rule 18.7.5 was (a) to require the Principal Company’s agreement to the period over which the solvency of the fund should be restored; and (b) in consequence to require the Principal Company’s agreement to the rate at which any contributions payable under that rule should be paid.
The structure of rule 18.7.5
It is, I think, fair to describe the terms in which rule 18.7.5 has been framed as somewhat compressed. But it can be seen that the rule contains an initial condition - “If the Actuary’s report in accordance with Rule 18.7.2 discloses a deficiency in the Fund” - followed by a number of directions as to payment in circumstances where that condition is satisfied. The directions as to payment fall into two distinct groups, separated by a semi-colon. The distinction between the two groups lies in the use (or non-use) of the word “collectively”. The first group directs that: “the Participating Companies shall collectively pay . . . such an amount . . . ”. The second group directs that “such amount shall be paid by the Participating Companies in such proportions . . . ”. It is clear that the rule-maker intended to separate, by the semi-colon, directions as to the aggregate amount to be paid by the employers collectively from directions as to the amounts to be paid by each employer individually.
The first group of directions (“the collective directions”) itself comprises two distinct limbs: [1] “the Participating Companies shall collectively pay such an amount . . . as, . . . , will, in the opinion of the Actuary, restore the solvency of the Fund”, and [2] “the Participating Companies shall collectively pay such an amount by lump sum and/or periodic payments (to be certified by the Actuary)”. The first of those limbs directs how the aggregate amount to be paid is to be quantified. It includes words (which, for ease of analysis, I have omitted) - “. . . after taking into account any reserve and making such other adjustments as the Actuary may consider appropriate . . .” - which emphasise the role of the Actuary in determining that aggregate amount. The second limb directs the manner (lump sum or periodic payments) in which the aggregate amount is to be paid. It emphasises the need for the manner of payment to be the subject of an actuarial certificate.
The second group of directions (“the individual directions”) also comprises two limbs: [3] “such amount [is] to be paid by the Participating Companies in such proportions as the Actuary shall certify” and [4] such amount is to be paid by the Participating Companies . . . within such period as the Trustees may, on the advice of the Actuary, agree with the Principal Company”. Limb [4] accords with the comparable provision in rule 12.1.3: “The contributions so payable by the Participating Companies shall be paid to the Trustees at such intervals as may be agreed between the Trustees and the Principal Company”.
It is to be noted that (at first sight, at least) the proportions in which the aggregate amount is to be paid by the employers – that is to say, the amount to be paid by each individual employer – is not a matter for determination by the Trustees or a matter for agreement between the Trustees and the Principal Company. At first sight, limb [3] requires the apportionment of the aggregate amount between the employers to be determined by the Actuary. In that respect the individual directions in rule 18.7.5 differ from the provisions in rule 12.1.2.
The question raised by the appellant’s notice turns on the effect which is to be given to the words in the second group of directions (the individual directions): “such amount to be paid . . . within such period as the Trustees may . . . agree with the Principal Company” (limb [4]). Put shortly, it is necessary to decide whether the period which is to be the subject of agreement between the Trustees and the Principal Company under that limb is the period within which each individual employer is to pay its contribution; or is the period within which the aggregate amount payable by the employers collectively is to be paid – that is to say, the period within which the scheme is to be restored to solvency. In my view it is appropriate, in approaching that question, to set the scheme rules in the context of the statutory provisions in force at the time when they were made.
The Pensions Act 1995 and the 1996 Regulations
The judge took the view that, in construing the trust deed and the rules of the two schemes, it was necessary to have regard to the statutory context provided by the Pensions Act 2004: in particular, by the provisions in Part 3 of that Act (Scheme Funding). I agree. But it is important to have in mind that, at the date (27 May 2005) when the trust deeds were executed in the consolidated form in which they are before the Court, neither those provisions, nor the 2005 Regulations, were in force. Part 3 of the 2004 Act was brought into force on 30 December 2005 by The Pensions Act 2004 (Commencement No. 8) Order 2005 (SI 2005/3331). The 2005 Regulations, made on 8 December 2005, came into force on the same day. At the date when the trust deeds (to which the rules are scheduled) were executed, the legislation in force remained the Pensions Act 1995, as amended. The relevant valuation regulations were those contained in The Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 (SI 1996/1536).
In those circumstances it is necessary, as it seems to me, to have regard not only to the statutory context provided by the 2004 Act but also to the relevant provisions in the 1995 Act and the 1996 Regulations. I find support for that view, first, in the fact that, in both rule 12.1.1 and rule 18.7.5, reference is made to the report made by the Actuary pursuant to (or in accordance with) rule 18.7.2. As I have said, the requirement to make a report is imposed by sub-rule 18.7.2(i). But sub-rule (ii) of that rule requires the Trustees to “obtain an actuarial valuation which satisfies the requirements of the [1996 Regulations] prepared by the Actuary when required by those regulations to do so”. It cannot be suggested that a report under sub-rule (i) would not take account of a valuation within sub-rule (ii). Further, there is the requirement, in rule 12.1.3, that the contributions to be paid by individual employers are to be paid “in accordance with any schedule of contributions for the time being in force under section 58 of [the Pensions Act 1995]”. The rule-maker plainly had in mind that rules 12.1 and 18.7 would fall to be applied following – and in the light of – an actuarial valuation made under the 1995 Act and the 1996 Regulations. So it is appropriate to approach the task of interpreting rule 18.7.5 with an understanding of the funding requirements in that Act and those Regulations.
The 1995 Act imposed a requirement (the minimum funding requirement) that the value of the assets of the scheme be not less than the amount of the liabilities of the scheme (section 56(1) of the 1995 Act). Section 57(1) required the trustees or managers (a) to obtain periodic actuarial valuations and (b) to obtain an actuarial certificate stating whether or not in the opinion of the actuary “the contributions payable towards the scheme are adequate for the purpose of securing that the minimum funding requirement will continue to be met throughout the period or, if it appears to him that it is not met, will be met by the end of the period”. If the actuarial valuation showed the value of the scheme assets to be less than 90 per cent of the amount of the scheme liabilities (serious underprovision), the employer was required, within the period of three years, to make such payment to the trustees as taken with any contributions paid, would make up the shortfall (section 60(1) and (2)(a) of the Act, read with section 124(1) of the Act and regulation 20(1) of the 1996 Regulations).
Section 58(1) of the 1995 Act required the trustees or managers to prepare, maintain and revise a schedule of contributions showing (a) the rates of contributions payable towards the scheme by or on behalf of the employer and the active members of the scheme and (b) the dates on or before which such contributions are to be made. The rates of contributions to be shown in the schedule (if not agreed by the employer) were to be “determined by the trustees or managers, being such rates as in their opinion are adequate for the purpose of securing that the minimum funding requirement will continue to be met throughout the prescribed period or, if it appears to them that it is not met, will be met by the end of the prescribed period” (section 58(4)). Further, the rates were to be certified by the scheme actuary (ibid).
Section 58(6) of the 1995 Act was in these terms:
“58(6) The actuary may not certify the rates of contributions shown in the schedule of contributions –
(a) in a case where it appears to him that the minimum funding requirement was met on the prescribed date, unless he is of the opinion that the rates are adequate for the purpose of securing that the requirement will be met throughout the prescribed period, and
(b) in any other case, unless he is of the opinion that the rates are adequate for the purpose of securing that the requirement will be met by the end of that period.”
Periods to be covered by schedules of contributions were prescribed by regulation 16 of the 1996 Regulations: the basic rule was that the schedule must show the rates of contributions payable during the period of five years beginning with the date on which the rates were certified by the scheme actuary (regulation 16(1)); or, if the schedule were revised under section 58(3)(b) of the 1995 Act during such a period, the remainder of the period then current.
The schedule of contributions had to satisfy “prescribed requirements”: section 58(2). Those included the requirement in regulation 17(1)(b) of the 1996 Regulations:
“17(1) The schedule of contributions must show separately – . . .
(b) the rates and due dates of the contributions payable by or on behalf of each person who is an employer in relation to the scheme . . . ”.
It is important to keep that requirement in mind when construing rules 12.1.3 and 18.7.5. The rule-maker must have appreciated – when, at rule 12.1.3, he referred to “any schedule of contributions for the time being in force under section 58 of [the Pensions Act 1995]” – that such a schedule would need to show, separately, the rates and due dates of the contributions to be paid by each individual employer.
Regulation 17(2) was in these terms:
“17(2) In any case where -
(a) section 58(6)(b) applies; and
(b) in the actuary’s opinion on the date 7 days before the date on which he signs the certificate of the rates of contributions shown in the schedule the value of the scheme assets was less than 100 per cent. but not less than 90 per cent. of the amount of the scheme liabilities,
section 58(6)(b) shall have effect with the addition at the end of the words
‘and are such that the amount by which the value of the scheme assets falls short of the amount of the scheme liabilities will be reduced either—
(i) by additional contributions of equal or decreasing amounts made at not more than yearly intervals throughout that period, or
(ii) by increasing some or all of the contribution rates by a percentage which either remains the same throughout or decreases during that period’.
The “period” is the period prescribed for the purposes of section 58(4) and (6) of the 1995 Act by regulation 16 of the 1996 Regulations. As I have said, the basic rule was that the period was five years beginning with the date of the actuary’s certificate; or was the remainder of the five year period then current. In a case where the increase was to be secured by making an appropriate payment under section 60(2)(a) of the 1995 Act, additional payments and contributions of amounts totalling in aggregate an amount equal to that increase, were to be made before the expiry of the period of one year.
The position after 30 December 2005
Although, at the time when the consolidated trust deeds were executed (27 May 2005), Rule 18.7.5 was directed to a case which then fell within section 58(6)(b) of the 1995 Act, it must have been appreciated that (once Part 3 of the 2004 Act had been brought into force) the rule would apply to cases within section 226(1) and 227(6)(b) of the 2004 Act. In those circumstances it is appropriate to construe the rule – and Rule 12.1 - with regard to the new regime which would be introduced by Part 3 of the 2004 Act and whatever regulations would, in due course, be made under that Act. I should add, however, that I do not think it appropriate to construe those rules on the basis that they were made with the particular provisions of the 2005 Regulations in mind: there is no evidence that, as at 27 May 2005, those provisions were known.
I have already set out a summary of the provisions in Part 3 of the 2004 Act. It is important to have the following features in mind: (i) every scheme is subject to a requirement (the statutory funding objective) that it must have sufficient and appropriate assets to cover the amount required, on an actuarial calculation, to make provision for its liabilities (section 222(1) and (2) of the Act), (ii) that the trustees or managers must obtain periodic actuarial valuations, valuing its assets and calculating its liabilities (section 224(1)), (iii) if, in the light of an actuarial valuation, it appears to the trustees or managers that the statutory funding objective was not met, they must prepare or revise a recovery plan (section 226(1)) and (iv) the trustees or managers must prepare, review and (if necessary) revise a schedule of contributions (section 227(1)). There is no requirement, under the 2004 Act – or under the 2005 Regulations (save in a case within paragraph 1(1) of schedule 2) – for the schedule of contributions to show the contributions payable by each individual employer. It has been common ground on this appeal that the relevant “rates of contributions” are those contributions to be paid by the employers collectively. It follows that the position altered in that important respect when Part 3 of the 2004 Act and the 2005 Regulations came into force on 30 December 2005.
Discussion
As I have said, it is necessary to decide whether the period which is to be the subject of agreement between the Trustees and the Principal Company under what I have described as limb [4] of rule 18.7.5 – “suchamount to be paid by the Participating Companies . . . within such period as the Trustees may, on the advice of the Actuary, agree with the Principal Company” - is the period (or periods) within which each individual employer is to pay its contribution (or contributions); or is the period within which the aggregate amount payable by the employers collectively is to be paid in order to restore the fund to solvency.
Rule 18.7.5 begins with the words: “If the Actuary’s report in accordance with Rule 18.7.2 discloses a deficiency in the Fund”. At the time when the consolidated trust deeds were executed (27 May 2005) rule 18.7.5 was directed to a case which then fell within section 58(6)(b) of the 1995 Act. It follows that the construction of rule 18.7.5 must be approached on the basis that it was to be expected (when the rule was adopted on the consolidation of the trust deeds): (i) that the actuary’s report obtained in accordance with rule 18.7.2 would incorporate a schedule of contributions which did show the rates and due dates of the contributions payable by or on behalf of each person who was an employer in relation to the scheme (regulation 17(1)(b)); and (ii) that the report would state that the Actuary was of the opinion that the rates in the schedule (A) were adequate for the purpose of securing that the minimum funding requirement would be met by the end of the prescribed period and (B) were such that the amount by which the value of the scheme assets fell short of the amount of the scheme liabilities would be reduced either (a) by additional contributions of equal or decreasing amounts made at not more than yearly intervals throughout that period, or (b) by increasing some or all of the contribution rates by a percentage which either remained the same throughout or decreased during that period (section 58(6)(b) as varied by regulation 17(2)).
We were referred to observations of Mr Justice Warren in British Vita Unlimited v British Vita Pension Fund Trustees Ltd [2007] EWHC 953(Ch), [24]-[27]. After pointing out that the effect of section 117 of the Pensions Act 1995 was that “to the extent that the MFR regime ‘conflicted with’ the rules of a scheme, the rules were overridden” he went on to say this:
“[26] . . . It has never been suggested, as far as I know and is certainly not suggested in the present case, that a conventional contribution rule in an ordinary balance of cost defined benefit scheme is overridden by the MFR.
[27] Such a suggestion would, I think, be wrong. This is because the MFR does not purport to be a standard by which a scheme is to be regarded as fully funded. As its name suggests – a name found in section 56(1) itself and not just in the heading which would not be relevant to a question of construction – the MFR sought to identify a minimum level at which contributions were to be set. No doubt if the employer and the trustees agreed a rate of contribution which complied with a scheme rule but was more than the MFR required, a schedule of contributions providing that higher rate would have been compliant with section 58. But if the employer declined to agree that higher rate, he could not be compelled to do so, and the schedule of contributions could only have set out a rate of contributions which fell within section 58(4)(b).”
I respectfully agree. The contractual provisions of an occupational pension scheme were not displaced by the statutory provisions which underly the minimum funding requirement: save where the provisions were in conflict. But, where, as in the present case, the contractual provisions have been drawn with the statutory provisions in mind, it is appropriate to construe the contractual provisions (so far as the language permits) in a manner which avoids conflict.
At the time when rule 18.7.5 was adopted the period during which the contributions shown in the schedule of contributions were to be paid was prescribed by regulation 16 of the 1996 Regulations. Section 58(4) of the 1995 Act required that the rates of contributions were to be such as were adequate for the purpose of securing that the minimum funding requirement would continue to be met throughout the prescribed period; or (if not met when the schedule was prepared) would be met by the end of that period. I accept that it would have been open to the Trustees to agree with the Principal Company that the scheme be restored to solvency within a shorter period: but – in the absence of words which compel a conclusion that the effect of what I have described as limb [4] in rule 18.7.5 was to require the Principal Company’s agreement to the period over which the solvency of the fund should be restored - I find it impossible to accept the appellant’s contention that that was intended. If the rule were construed so as to have that effect, there would be an obvious potential for conflict between the contractual provisions and the statutory provisions. A construction which avoids that potential for conflict is to be preferred.
It is important to keep in mind that, if rule 18.7.5 is construed so as to confine what I have described as limb [4] to a requirement that the agreement of the Principal Company be obtained to the period within which each individual employer is to pay its contributions - having regard to the overall requirement that the period within which the aggregate amount payable by the employers (and the fund restored to solvency) is fixed by the Actuary under the first group of directions in the rule (the collective directions) in the light of the 1995 Act and the 1996 Regulations - that limb met an obvious need at the date (27 May 2005) when the trust deeds were executed and the rules adopted. As I have said, regulation 17(1)(b) of the 1996 Regulations required that the schedule of contributions must show the rates and the due dates of the contributions payable by or on behalf of each person who is an employer in relation to the scheme. The collective directions did not provide for the rates at which, or dates on which, the contributions by the individual employers were to be paid. The individual directions fill that lacuna. What I have described as limb [3] provides for the apportionment of the aggregate amount amongst the individual employers to be determined by the Actuary: limb [4] provides for the dates on which the individual employers are to make their payments to be the subject of agreement between the Trustees and the Principal Company.
Adopting the approach that a construction which both (i) avoids a potential for conflict with the statutory provisions in the 1995 Act and the 1996 Regulations and (ii) meets an obvious need imposed by that Act and those Regulations is to be preferred, it seems to me that the better view is that the effect of the second group of directions in rule 18.7.5 (the individual directions) – and, in particular, of the words which I have described as limb [4] – was to require the Principal Company’s agreement to the rate at which contributions payable by each individual employer should be paid. The period within which the fund was to be restored to solvency was determined by the Actuary under the first group of directions (the collective directions). As I have said, I accept that it would have been open to the Principal Company to agree with the Trustees that contributions be paid by the individual employers at a rate which restored solvency at an earlier date than that which the Actuary had determined; but that is immaterial in the present context.
If it were necessary to determine whether (at the time the rules were made on 27 May 2005) the scheme would have fallen within provisions in the terms subsequently enacted in regulations 5(3)(b) and 8(2)(e) of, and paragraph 9(5) of schedule 2 to, the 2005 Regulations (which it is not) the answer would be clear: the scheme would not have fallen within those provisions. That is because, at the time when the rules were made, the effect of the legislation then in force was that the relevant “rates of contributions” in a multi-employer scheme would have been those payable by each individual employer. And, as I have said, those rates were to be agreed by the Principal Company. The position was the same under both rule 12.1.3 and under rule 18.7.5. But it has been common ground that, after 30 December 2005, it is the rates at which contributions are payable by the employers collectively – rather than the rates payable by individual employers – which, alone, are relevant in the context of the relevant regulations.
It seems to me clear that the rules require that the rate at which contributions are to be paid by the employers collectively is to be determined by the Actuary without the consent of the Principal Company. It is accepted by the appellant that Rule 12.1.1 has that effect. Given that – as I have held – limb [4] of rule 18.7.5 is directed to contributions payable by individual employers and not to contributions to be paid by employers collectively, it must follow that what I have described as the collective directions in Rule 18.7.5 have the same effect as the directions in Rule 12.1.1.
Conclusion
I would dismiss this appeal.
Lady Justice Smith:
I agree.
Lord Justice Ward:
I also agree.