International Management Group (UK) Ltd v German & Anor

The court gave an oral ruling on a preliminary point of law at the end of the hearing on 18 June. Written reasons were to follow. It was hoped that the ex tempore decision would assist the parties in their negotiations for a compromise, which could then be put before the court for approval.

The preliminary point is whether s91 of the Pensions Act 1995, as amended, (the 1995 Act) prevents the parties from entering into and the court from approving a compromise of the appeal. Does the proposed compromise involve an unenforceable “surrender”, or an unenforceable agreement to effect a “surrender”, of inalienable pension entitlements or rights by members of the pension scheme? The court unanimously concluded that s91 does not prevent the parties from making, or the court from approving or enforcing, a bona fide compromise of disputed or doubtful entitlements or rights under an occupational pension scheme.

The appeal and the cross-appeal are from the main judgment handed down by Arnold J on 10 November 2009 ([2009] EWHC 2785 (Ch)) and a supplementary judgment on 2 December 2009 ([2009] EWHC 3410 (Ch)). The judge answered a number of questions on the construction of an occupational pension scheme dating from October 1977 (the Pension Plan). The present trustee of the Pension Plan brought the proceedings in order to clarify its terms, benefits, entitlements and rights. The parties informed the Court of Appeal shortly before the hearing that they wanted, if possible, to obtain this court’s approval to a compromise of the appeal, which would bind the parties and those whose interests are represented in the proceedings. In the light of Arnold J’s answer to one of the questions (question 6), s91 was seen as a possible obstacle to the court’s approval of a global compromise.

The material parts of the section read-

“Assignment, forfeiture, bankruptcy etc

91.

Inalienability of occupational pension

(1)

Subject to subsection (5), where a person is entitled to a pension under an occupational pension scheme or has a right to a future pension under such a scheme-

(a)

the entitlement or right cannot be assigned, commuted or surrendered,

(b)

the entitlement or right cannot be charged or a lien exercised in respect of it, and

(c)

no set-off can be exercised in respect of it,

and an agreement to effect any of those things is unenforceable.

[subsections (2),(3) and (4) are omitted as immaterial]

(5)

In the case of a person (‘the person in question’) who is entitled to a pension under an occupational pension scheme, or has a right to a future pension under such a scheme, subsection (1) does not apply to any of the following, or any agreement to effect any of the following-

(a)

[omitted as immaterial]

(b)

a surrender, at the option of the person in question, for the purpose of-

(i)

providing benefits for that person’s widow, widower, surviving civil partner or dependant, or

(ii)

acquiring for the person in question entitlement to further benefits under the scheme…”

Question 6 in the proceedings is whether s91 rendered unenforceable certain agreements with members of the Pensions Plan relied on by the principal employer, International Management Group (UK) Limited (IMG), as binding compromises of genuine past disputes about whether or not a person had an entitlement or right to a pension benefit. Although the agreements were not so described, they were in substance compromises involving purported surrenders of entitlements or accrued rights claimed by the members under the Pension Plan. The judge observed the absence from the 1995 Act of a statutory definition of what constitutes a “surrender”. He concluded that the relevant agreements between IMG and existing members of the Pension Plan constituted “surrenders”, or agreements to effect a “surrender”, of pension entitlements or rights that were rendered unenforceable by s91. He said that under those compromises the members had waived or agreed to waive rights to which, but for the compromise, they would have been entitled. S91 applied even in cases where there was a bona fide dispute about the existence of the entitlement or right.

IMG appeals from that ruling. It submits that s91 does not invalidate a bona fide compromise of a disputed or doubtful claim. If the compromise involves giving up, or an agreement to give up, a claim to an entitlement or right, that is not a “surrender”, or an agreement to effect a surrender, of an entitlement or right rendered inalienable by s91. The judge’s reasoning, if correct, would appear to have a wide application affecting the competence of the parties to enter into, and the power of the court to approve, a proposed compromise of the whole appeal.

A global compromise of this appeal approved by the court would mean that the particular question of past compromises between IMG and the members would not have to be decided in this case. The question in this court is a different one: whether a global compromise of all the issues in the appeal is caught by s91, even if it has been approved by the court. Although the precise issue for this court is not the same as question 6 decided by the judge on past compromises, the judge’s reasoning is nevertheless relevant to the determination of the preliminary point.

In order to avoid any misunderstanding or confusion the court asked the parties to agree upon the formulation of the point for decision. Their agreed formulation is in the following terms-

“Would s91 of the Pensions Act 1995 render unenforceable a court-approved compromise of all the issues in the appeal and the cross-appeal?”

At the time of the hearing before this court the parties (namely, IMG, Mr Peter German, as a representative beneficiary under the Pension Plan, and HR Trustees Limited, the present independent trustee of the Pension Plan) were stuck at the stage of “in principle” discussions on the terms of the compromise. “Core terms” had been agreed, but the parties were not in a position at the hearing to put an agreed draft or a concluded compromise before the court for approval. In those circumstances the court, having given its ruling on the agreed question, adjourned the remainder of the appeal for settlement discussions to continue.

On 23 July 2010 the solicitors for IMG (Macfarlanes) informed the court that it had not been possible for the parties to come back to the court with a joint settlement proposal for approval. In the course of the discussions it became apparent that tax issues present potential difficulties. Guidance from Her Majesty’s Revenue & Customs (HMRC) was desirable. The potential difficulties are said by Macfarlanes to arise from “provisions in the Finance Act 2004, some of which have significant similarities with the language of s91 and as to the construction of which the Court’s interpretation of s91 will probably be relevant.” Accordingly this court’s reasons for its ruling on the construction of s91 will, the parties’ advisers consider, probably be relevant to the Finance Act sections upon which HMRC’s guidance is sought and be of considerable assistance to the parties and HMRC. Inquiries were made as to when this court would be able to hand down written reasons for the preliminary ruling. Unfortunately, it was not possible for me to complete this judgment in the last week of the Trinity Term.

This judgment is solely on the construction of s91. I express no view on the construction of the similar provisions of the Finance Act 2004. They are not in issue in this appeal. The court has heard no arguments on them. HMRC are not even parties to these proceedings. The effect of the sections in the Finance Act on the negotiations for a compromise must be a matter for the parties and their advisers.

Question 6 was formulated for the judge as follows:

“Does any purported compromise and/or waiver of pension entitlements or rights entered into by a Member on or after 6 April 1997 constitute an unenforceable surrender of such entitlements or rights by virtue of section 91 of the Pensions Act 1995?”

The judge gave an affirmative answer to the question, describing it as a “very short point of statutory construction”. On one side, the representative member contended that the compromise agreements relied on by IMG were unenforceable as involving prohibited surrenders of, or agreements to surrender, an entitlement or right. On the other side, IMG contended that s91(1) did not render unenforceable “compromises of genuine disputes as to whether or not a person has an entitlement or right”. The judge cited passages from the report of the Pension Law Committee chaired by Professor Sir Roy Goode (Pension Law Reform - September 1993, “The Goode Report” paragraphs 4.14.3 and 4.14.4) as demonstrating that s91 was intended to make “inalienability a rule of general application, not merely a condition of approval for taxation purposes”, subject to certain specified exceptions. The judge accepted that the purpose behind the section was not merely to protect members of a pension scheme, but also to protect the public purse. The judge also took into consideration the public policy in favour of compromises of disputes and the enforcement of them, which did not feature in the recommendations of The Goode Report.

The judge succinctly stated the following conclusions:-

“231.

Turning to section 91(1)(a), I consider that the word “surrender” encompasses entering into a compromise agreement the effect of which is that a member of a pension scheme waives rights which, but for the compromise agreement, he or she would be entitled to. In such a situation the member has surrendered his or her rights by entering into the agreement even if there was a bona fide dispute as to the existence of those rights at the time of the agreement.

232.

In my view this interpretation is supported by three points. First, the policy enshrined in section 91(1) discussed above [i.e. The Goode Report]. It seems to me that enforcing compromises which have the effect of depriving members of pension rights to which they would otherwise be entitled would run counter to the policy of protecting members against their own improvidence and of protecting the public purse.

233.

Secondly, section 91(5)(b) demonstrates that the legislature addressed its mind to the question of providing exceptions to section 91(1), but did not see fit to provide an exception for compromise agreements.

234.

Thirdly, a contrast may be drawn with section 77 of the Sex Discrimination Act 1975 and section 76 [a mistaken reference to s72] of the Race Relations Act 1976, to which my attention was helpfully drawn by counsel for the Present Trustee. In each section, subsection (3) provides that a term in a contract which purports to exclude or limit any provision of the Act is unenforceable, while subsection (4) contains detailed provisions exempting compromises from subsection (3) if prescribed conditions are satisfied. Provisions corresponding to subsection (4) of those Acts are conspicuously absent from section 91 of the 1995 Act.”

On behalf of IMG Mr Keith Rowley QC puts the case for jurisdiction to approve a compromise in two separate ways: the first is a broad one turning on the construction of s91 and resting on the contention that s91 is not engaged because a bona fide compromise of disputed or doubtful entitlements and rights does not involve a surrender or an agreement to surrender a pension entitlement or right; the second is a narrow, free-standing way outwith the scope of s91 and turns on the power of the court under CPR 19 r7(6) to approve a compromise where representative parties are involved and approval is required to safeguard the interests of the representative class.

Mr Richard Hitchcock for Mr German, as representative deferred member, supports IMG on its narrow ground arguing that s91 does not affect a court- approved compromise, while at the same time making it clear that he does not contend that Arnold J’s answer to question 6 (which accorded with his submissions to him) was wrong.

Mr Nicolas Stallworthy for the independent trustee points to the arguments in support of the conclusion reached by the judge, as well as to those in support of the conclusion that the proposed compromise of the appeal will be binding, if it is approved by the court. He would be content with a ruling that s91 does not apply in such circumstances and that a court-approved compromise is not a “surrender” within the ambit of s91, being an exercise of the court’s power to make an order bringing legal proceedings to an end on terms. The main concern of the independent trustee is to ensure that the trusts of the scheme are clarified by the decision of the court and that there is certainty in their administration.

I will deal with the narrow ground first. It assumes that the proposed compromise of the appeal involves a surrender of, or an agreement to surrender, a pension entitlement or right. The submission is that, even if the judge’s construction of s91 is correct, that section does not impinge on the quite separate power of the court to approve the compromise of this appeal under CPR 19.7(6), because the CPR and s91 are dealing with different problems. The subsequent enactment of s91 was subject to the pre-existing and continuing power of the court to approve the compromise of a dispute where that approval is required, as in the case of representative proceedings.

This point was not considered by Arnold J, as the question for him was only whether past compromises were rendered unenforceable by s91: he was not asked to approve a compromise of this dispute.

CPR19.7(6) derives its authority from the Civil Procedure Act 1997. It replaced RSC Order 15 rule 13(4), which derived its authority from the Supreme (now Senior) Courts Act 1981. Both of those Acts conferred on the relevant rule-making body a very wide power to make rules relating to the practice and procedure to be followed in the Senior Courts (formerly the Supreme Court of Judicature).

Like its predecessor CPR 19.7 applies generally to claims about trust property and the power of the court to approve a compromise on behalf of a representative party. The property in the Pension Plan is subject to a trust. There is nothing in the CPR or in the 1995 Act excluding trusts in pension schemes from the application of the CPR. Section 91 is concerned with the different problem of placing restrictions on alienability of pension entitlements and benefits. It is submitted that, had the pensions legislation been intended to remove or limit the court’s existing power under the rules to approve a compromise relating to trust property, that would have been done expressly in that legislation, as was done, for example, in s91(2) expressly prohibiting the making of an order which would have the effect that a member is restrained from receiving his or her pension. The court ought to apply the general principle of statutory interpretation that, where a generally expressed provision of an Act might be construed as repealing a specific provision, but might also be construed as leaving the specific provision unaffected, the latter construction should be adopted: Bennion on Statutory Interpretation (5^th ed) (2008) pp306-307.

It is also pointed out that the pensions legislation in its present form contemplates the possibility of the compromise of a pensions dispute. Section 146(6)(a)(ii) of the Pension Schemes Act 1993, which was introduced with effect from 1 December 2000, prohibits the Pensions Ombudsman from investigating or determining a complaint or dispute where, inter alia, it has been the subject of legal proceedings and those proceedings have been discontinued on the basis of a settlement or compromise binding on all those making the complaint or reference of the dispute.

The submission was attractively put, but, in my judgment, there is a very short sharp answer to it. This case involves an occupational pension scheme within the meaning of the 1995 Act. If s91 of that Act means what Arnold J said it means, a compromise of disputed or doubtful rights is unenforceable as involving the surrender of an entitlement or right to a pension. It cannot be saved by court approval because, if statute has made the entitlement or right inalienable, the court could not properly approve an agreement involving its alienation by surrender. Nor could the court by order make the agreement enforceable, if Parliament has laid down a general prohibition against its enforcement.

The broad submission of Mr Rowley is that a compromise involving a waiver of a disputed or doubtful entitlement or right under an occupational pension scheme is not rendered unenforceable by s91. It does not involve or encompass a surrender of an entitlement or right, because the essence of a compromise of a dispute is that the dispute about the existence of the entitlement or right will not be determined one way or the other. The effect of a compromise is that it will never be known whether the member of the scheme had an entitlement or right capable of surrender.

I agree with the judge that the point is a short one turning on the construction of a provision framed in general terms. The judge’s reasons and the parties’ submissions fall for discussion under a number of headings.

The statute speaks

The judge did not recognise any relevant distinction in the language of the section between an entitlement or right to a pension, the existence of which is accepted or established, and an entitlement or right to a pension, the existence of which is in dispute or doubt: see paragraph [231] of his judgment set out in paragraph [14] above. Focusing on the word “surrender”, rather than on the words “entitlement” or “right”, he held that, on its true construction, s91 precludes a surrender or agreement to surrender in a compromise of a bona fide dispute or doubt about the existence of an entitlement or right to a pension. He relied on matters of purpose and policy to support his conclusion. They are matters that I will address in due course. For the moment I will stay with the words of the section and their ordinary and natural meaning.

In my view, the language of s91 is clear. What the section makes inalienable is the surrender of “entitlement” and “right”. The section is directed to cases of the deliberate giving up of an actual existing entitlement or an actual existing right. The judge’s focus was on the importance of the nature of a “surrender” rather than on what was being surrendered, whether or not it was a pension entitlement or right.

I reject the contention that it refers to alienating or giving up any right that you may have. It expressly refers to cases in which a person “is entitled” to a pension or “has a right” to a future pension. An established or accepted entitlement or right is clearly within the general language of subsection (1)(a). It implements the statutory objective that a pension entitlement or right, which enjoys favourable tax treatment, cannot be used as an assignable asset.

Section 91 does not expressly refer to cases in which a putative entitlement or right to a pension is claimed, but its existence is doubted or disputed so that it has to be established by a legal determination, unless and until the matter is settled by agreement. The self-evident purpose of a settlement agreement is to avoid the need for the trouble and expense of obtaining a determination in legal proceedings.

On the judge’s view the prohibition against surrender or agreement to surrender applies not only to cases of members aspiring to trade in their pension entitlements and rights, but also to the settlement of claims to a putative entitlement or right. If that is right, it would follow that all disputes about entitlements or rights to such a pension would have to be resolved by legal proceedings and authoritative determination, if there was any risk that a compromise involved a surrender or agreement to surrender. In my judgment, it is most unlikely that any such consequence was intended by the legislation. I do not think that the ordinary meaning of the wording of s91 requires that inconvenient result.

In my view, the judge’s reliance on the absence from subsection (5) of an express exception to the general restraint on alienability of benefits by allowing for compromises is misplaced and no assistance can be obtained from it. There is simply no need for an express exception to be made to a general rule against the surrender of an entitlement or right, if the terms of that rule do not in fact catch a compromise of a claim to a putative entitlement or right.

Policy and purpose factors

The judge relied on the purposive aspects apparent from The Goode Report of protecting the member of the pension scheme against improvidence and protecting the public purse as support for his construction. While not doubting the relevance of those purposes to construction, I do not think that the ordinary and natural meaning of the language of s91 is incompatible with them. In the case of an accepted or established entitlement or right, the unenforceability of its surrender makes good sense, as protecting the members from improvidence and the public from the consequences of their improvidence. It makes much less sense in the case of rendering unenforceable the compromise of a bona fide dispute about the existence of the entitlement or right. The person who enters into a compromise of his claim may be more provident in doing so than one who pursues his claim and loses.

The judge acknowledged the public policy in encouraging, upholding and enforcing compromises. First, the general policy of the law: it loves compromises. It encourages and facilitates them and prevents parties from resiling from them once entered into. In this case I think that it is compatible with the protective purposes which may be better served by not removing from the parties their ability to enter into consensual arrangements for settling bona fide genuine disputes. One would have expected any such removal to be done for a good reason and in clear terms, especially in the case of a compromise that, in order to be binding, has in any event to be approved by the court under the CPR or under its inherent jurisdiction. Those procedures are commonly invoked in order to achieve a binding compromise where there is a need to protect the interests of the incapable, the unascertained or even the unborn. Even in those cases compromise is not precluded altogether if the vulnerable interests can be protected, as they are by requiring the approval of the court.

Thus making it impossible to compromise a dispute about pension entitlements or rights would not promote the self-evident objectives of s91. It would also be very inconvenient for the administration of pension schemes if compromises were not possible and all disputes and uncertainties had to be litigated to judgment. That would not be in the interests of the members or the public.

Other legislation

The judge was referred to instances of legislation expressly restricting the manner in which the parties may contract out of or compromise disputes relating to statutory rights. For example s203 of the Employment Rights Act 1996, s77 of the Sex Discrimination Act 1975 and s72 of the Race Relations Act 1976 render unenforceable a term in a contract which purports to exclude or limit any provision of the relevant legislation. They also contain detailed provisions exempting compromises from that general rule of unenforceability if prescribed conditions are satisfied. Section 91 contains no specific provisions for saving compromises from any of the effects of unenforceability alleged to flow from the general terms of subsection (1).

In my judgment, caution is required when enlisting analogies with legislation on other topics involving the creation of new statutory rights and duties. Section 91 relates to private contractual and equitable rights under the trusts of an occupational pension scheme. One would normally expect it to be legally possible to compromise disputes about contractual and equitable rights, whereas the other legislation cited created new specific statutory rights which would be liable to be nullified by contract, unless there were express provisions limiting the ability of the parties to contract out of them in advance of litigation or in the course of litigation.

The Goode Report

The sections of The Goode Report relied on by the judge for the policy reasons behind the unenforceability of the surrender of an entitlement to or interest in a pension do not, in my view, bear on the bona fide compromise of a dispute. In my judgment, the policy reasons of protection of pension scheme members and the public do not apply to a bona fide compromise under which a putative entitlement or right is waived in order to avoid the need for legal proceedings and for a judicial determination. No sensible paternalistic or public policy would be served by legislation which is construed so as to make it impossible to compromise a dispute unless and until it is determined that the member of the pension scheme had no entitlement or right to surrender. In the real world compromises are negotiated in circumstances in which the parties want to avoid the necessity of legal proceedings to determine the dispute and in which the entitlement or right waived might have turned out not to exist.

There is no real risk of circumvention of the protections conferred by s91.

The authorities

There is no authority directly in point on the construction of s91 and there is no authority on general principles of law indicating that a bona fide compromise of entitlements and rights of the parties under an occupational pension scheme should be unenforceable in the light of a section such as s91.

The judge referred to Binder v. Alachouzos [1972] 2 QB 151 and Attorney-General v. British Museum Trustees [2005] EWHC 1089 (Ch); [2005] Ch 397, which had been cited to him, but did not regard them as of much relevance or assistance. It is true that they are not cases on s91, or on pension entitlements and rights, or on limits on the surrender of rights. Their value is in showing how the law encourages compromise and how far the courts have gone to uphold or approve a compromise involving the waiver of putative rights.

Thus, in Binder the court upheld a compromise by a borrower who had denied liability to repay a loan on the grounds that the claimant was an unlicensed moneylender. The borrower unsuccessfully sought to rely on the same grounds for revisiting enforcement of the compromise. Although the policy of the Moneylenders Acts was to protect borrowers from exploitation, that policy was outweighed by the policy of upholding a bona fide compromise of a claim, even though the party protected by the legislation might have had a complete defence under the legislation. The court enforced the compromise, even if it might not have enforced the contract of loan.

In the case of the British Museum Trustees the legislation expressly prohibited the disposal of objects vested in the trustees as part of the collections of the museum. Sir Andrew Morritt V-C said that the statutory prohibition would not be breached by a bona fide compromise which might recognise that the objects had never been part of the Museum collections and therefore were not subject to the prohibition. He rejected the argument that the power to compromise was an unexpressed exception to the prohibition. Rather than being an exception, compromise would be the consequence of the limited application of the prohibition only to objects that are part of the museum collections. Thus, as indicated earlier, the absence of provisions in the 1995 Act making an exception for compromises is not surprising if, on its true construction, the unenforceability of a surrender or agreement to surrender is limited to entitlements and rights that have been established, or determined, or are admitted.

The above are my reasons for concurring in the ruling that s91 would not render unenforceable a court-approved compromise of this appeal and cross- appeal.

My reasons for having concurred in our ruling are in effect identical to those set out by Mummery LJ. I considered that there was a contradiction in terms in the judge’s statement in his crucial paragraph [231] set out by Mummery LJ at [14] above, that a right was surrendered even if there was a bona fide dispute as to its existence; that the words of s91(1) in no way drove the extraordinary conclusion that issues about the existence of entitlements or rights under occupational pension schemes could be resolved only in litigation prosecuted to the bitter end; and that any such conclusion might, for example, be prejudicial to members to whom offers were made by way of settlement of entitlements or rights which in this arcane field they had bona fide asserted but which in truth did not exist.

I agree.