Railways Pension Trustee Company Limited v ATOS IT Services UK Limited & Anor

Applying the principles set out by Lord Hodge in the Barnardo’s case and reiterated in Britvic, it is important to give proper weight to textual analysis by concentrating on the words which were used and to place less emphasis on the factual matrix. It is also important to keep in mind that there are no special rules for the interpretation of pension schemes. As Lord Hodge pointed out at [16] of the Barnardo’s case, the emphasis on textual analysis does not require literalism but includes a purposive construction when that is appropriate. He expressly approved the dictum of Millett J in In re Courage Group'sPension Schemes[1987] 1 WLR 495, 505 that the provisions of a pension scheme “should wherever possible be construed to give reasonable and practical effect to the scheme”. As Nugee LJ pointed out in the Britvic case, however, that applies only where it is possible.

It is necessary, therefore, to concentrate on Rule 21 in the context of the Atos Section Rules as a whole. Of course, the Pension Trust itself which established the RPS and forms the foundation for the Atos Section Rules is relevant. In addition, given the fact that the RPS was established as a result of privatisation of the railways and the Protection Order applies to the pension rights of Protected Persons who were transferred to the RPS and its many sections, one must also have Schedule 11 to the Railways Act and the RPS Order in mind and, as Mr Green put it, one should have the Protection Order “on the desk”. One must not lose sight, however, of the importance of the words used in Rule 21 itself.

It seems to me, however, that the letter dated 31 March 1994 from Nick Montagu, the Deputy Secretary at the Department of Transport at the time, to Derek Fowler, the Chair of the BRPS Trustee, and its attachments, are of much less significance, if any. The Deputy Secretary sought to consult the Trustee upon the Minister of Transport’s proposals in relation to post-privatisation pension arrangements set out in the letter and to obtain the Trustee’s comments on draft documentation including the Pension Trust, the Rules of the Shared Cost Arrangement, the RPS Order and the Protection Order before they were laid before Parliament. The letter sets out the steps which were intended to be taken and contains the Deputy Secretary’s understanding of what was intended to be achieved by the various draft documents which were attached. Accordingly, it seems to me that little or no weight should be attributed to it: Bennion, Bailey and Norbury on Statutory Interpretation (8^th ed) Section 24.17 at 804-806, R (on the application of East Riding Yorkshire Council) v Joint Committee for the Purpose of making Appointments to the Humberside Police Authority[2001] LGR 292 at [19] – [20] and BBC v Information Commissioner [2009] EWHC 2348 (Admin) at [76]. The letter cannot detract from the emphasis on the words used in Rule 21 and the Orders as made. It follows that, to the extent that Atos contends that the Chancellor erred in failing to place sufficient weight upon the letter when construing Rule 21 and Articles 5 and 7, I disagree. This issue comprises part of Ground 3B of the Grounds of Appeal.

The same is true in relation to Rule 45(5) of the BRPS. Although it is of interest in that it contains similar but different provisions in relation to making good shortfall in that previous scheme, it is of little (if any) assistance when interpreting the words which the drafters chose to use in Rule 21. Rule 45 is of relevance, of course, when considering the effect of references to “the designated scheme” in the Protection Order. It is not in dispute that that is a reference to the BRPS. This addresses Ground 3D of the Grounds of Appeal.

Ground 1 of the Grounds of Appeal is that the Chancellor erred in deciding that Rule 21 does not create an exhaustive and comprehensive regime for the elimination of shortfall. It has four separate aspects comprising Grounds 1A – D. In summary, they are that the Chancellor erred: in construing Rule 21(1), as originally enacted in the Schedule to the RPS Order, as never having been intended to be exhaustive and failed to recognise that it contained a trust power or discretionary trust; in failing to construe Rule 21(1) as providing for any shortfall to be objectively made good; in failing to construe Rules 20 and 21 as requiring the Atos Section to be funded on the basis of the prospective benefits method with the result that a shortfall would be made good by making alterations to future contributions prospectively payable and/or future benefits prospectively payable; and that he erred in his Reasons for refusing permission to appeal.

The Ground as a whole is significant for two reasons. First, it forms the basis for the submissions relating to the textual interpretation of Rule 21 to mean that the shortfall must be eliminated in full by the exercise of the tools in the sub-rules and, in particular, by sub-rules (ii) and (iv). Secondly, the submission that Rule 21 contains such a comprehensive regime is part of the bedrock of Atos’ interpretation of Article 7 which is now referred to as Option A, to which I shall refer below.

I agree with the Chancellor that Rule 21 does not create an exhaustive and comprehensive regime for the elimination of shortfall in the Atos Section of the RPS. First, as the Chancellor pointed out at [92] of his judgment, the rule, as originally drafted, did not contain the equivalent of Rule 21(1)(iii) which places a balance of cost obligation upon the Participating Employers in the event that there are no Active Members left in the Atos Section. It was not until 2006 that such a provision was included. Secondly, it was not until September 1994 that the second limb of Rule 21(1)(iv) was added. Until its introduction it was possible that the Designated Employer and the Trustee might not be able to agree a “reasonable basis” in relation to the reduction of future service benefits. As originally drafted, therefore, Rule 21 did not create a comprehensive regime for complete elimination of a shortfall. This is Ground 1A.

What of the rule in its present form? It seems to me that the reference to “shall be made good” at the end of what has been referred to as the stem of Rule 21(1) cannot bear the weight which Mr Spink would give it. He relies upon that phrase together with the use of “shall” and “shall be increased” in Rule 21(1)(ii) and “shall be reduced” in Rule 21(1)(iv) as the basis for a construction of the rule which, subject to the 130% Cap in (ii), requires the Actuary to calculate contributions which cover the entirety of the shortfall and that once those contributions are calculated, the shortfall is made good there and then. Rule 21(1) must be read and interpreted as a whole, however. It must also be interpreted in the context of the Atos Section Rules as a whole.

The gateway to the sub-provisions of the Rule is set out in the stem. If an actuarial valuation shows that future income and future contributions due under Rules 3 and 4 are unlikely to be sufficient to provide the benefits, Rule 21(1)(i) applies. It is not directly relevant here but it is pertinent to note two things. First, it provides that the Actuary “shall calculate” the proportion of the shortfall that relates to liabilities in respect of “Preserved Benefits”. Secondly, it requires Participating Employers to make payments to “meet in full” the proportion of the shortfall referable to such Preserved Benefits. It is also of note that Rule 18E contains an express reference to meeting the “full cost” of discretionary benefits. Such wording is not found in either Rule 21(1)(ii) or (iv).

Subject to (i), unless the Designated Employer and the Trustee agree within a specified period to make good the shortfall, the mechanism in (ii) – (iv) applies. In my judgment, the words “shall be made good” in the phrase “shall be made good in the following way” at the end of the stem must be read in the context of the phrase as a whole. It must be interpreted, therefore, in the light of the “tools” which (ii) – (iv) provide. As soon as one looks to those sub-rules it is clear that “shall be made good” can only mean whatever can be achieved by means of the tools available to fulfil that requirement.

Before turning on to those sub-rules, I should add that it seems to me that there is nothing in the point that “make good the shortfall” in the stem of Rule 21(1) should be construed as a reference to making good in full. The phrase is used in the context of arrangements which may be agreed between the Designated Employer and the Trustee. As the Chancellor pointed out at [94] of his judgment, when agreeing arrangements, the Trustee is under a fiduciary duty owed to the members of the RPS to have regard to issues including affordability of contributions and the effects of the basis of the reduction in benefits.

Turning on to the “tools” in the sub-rules, it seems to me that it is apparent from the very nature of the words used in sub-rules (ii) and (iv) that it was not envisaged that they would necessarily create a complete regime for the elimination of a deficit. Of course, depending upon numerous factors, including the number of remaining Active Members, their pensionable salaries and the size of the deficit, it was always possible that a shortfall might be met in full by agreement under the stem or under sub-rule (ii), as a result of contributions determined by the Actuary. If one construes Rule 21 as a whole, however, it is clear that the rule itself envisages that it may be necessary to turn on from sub-rule (ii) to what is now sub-rule (iv). Sub-rule (iv) takes effect unless the Actuary determines that “the remaining shortfall” is trivial. It expressly envisages a situation, therefore, in which the increase in contributions has been insufficient for the task.

Further, the fact that the Cap applies to contributions determined by the Actuary under sub-rule (ii) (unless the Designated Employer agrees to a higher rate) is another indicator that the sub-rule itself was not expected necessarily to eradicate the shortfall in its entirety in all circumstances. In addition, both sub-rules (ii) and (iv) are in a different form from sub-rule (i) which makes express reference to meeting the liabilities with which it is concerned “in full”. It is also inherent in the nature of the tool which may be utilised under sub-rule (iv) that it may not be sufficient to meet the full extent of the shortfall.

As I have already mentioned, I do not consider that Rule 45(5) of the BRPS is of assistance when seeking to interpret Rule 21. It is necessary to concentrate on the words which were used in Rule 21 itself. In any event, as an illustration only, the words used in Rule 21 may be contrasted with the use of the phrase “as is necessary to make up the shortfall” in relation to the increase in Member and Employer contributions in Rule 45(5). That wording, which is more consistent with making up a shortfall in full, is absent from Rule 21.

Mr Spink submits, nevertheless, that although there are potential gaps, the regime is exhaustive in the sense that what he calls the “waterfall” is compulsory. He says that one needs to be able to tell objectively whether the shortfall is made good at the time at which the rule is operated in order to move from sub-rule (ii) to (iv). That, he says, is an indicator that the exercise under sub-rule (ii) is a calculation of what is necessary by way of contributions to meet the shortfall, taking account of the Cap, and that the certainty which that calculation provides on paper, enables one, if necessary, to move on to sub-rule (iv). He says that this is underscored by the very circumstances contemplated by Rule 21 which are themselves an indicator that the Actuary should use the prospective benefits method (Grounds 1B and C). He says that that leads to a conclusion that what is necessary is a calculation and determination of the required contributions, there and then. He says that a snapshot approach is necessary.

Mr Spink submits that the Chancellor’s approach at [99] is contrary to that principle. This is a reference to the Chancellor’s reasoning at [95] – [99]. In summary, the Chancellor reasoned that the Actuary has a “discretion” in sub-rule (ii) to determine the level of increase in contributions rather than being required, merely, to carry out a mechanistic calculation, the effect of which, in all probability, would lead to all the Active Members opting out of the Atos Section. The Chancellor concluded that far from eliminating the shortfall, such an exercise would lead to there being no actual reduction in it at all.

At Ground 1B, it is also stated that at [95] of his judgment, the Chancellor proceeded on the basis of a “significant irregularity” in apparently accepting a submission that Atos had agreed that the words “so far as practicable” should be read into the text of the stem of Rule 21 and then went on to use those words when construing the rule. It is submitted that there was no such concession.

As to the “significant irregularity” referred to in Ground 1B, Atos accepts that it did state at paragraph 10(d) of a document referred to as a “Manual” which was in an appendix to its skeleton for the hearing before the Chancellor, that one could read “so far as practicable” into the stem of Rule 21(1) as part of the construction process if those words carried a particular meaning. It was explained in the “Manual” that: “ . . . the words in Rule 21(1) (stem) which read “the shortfall shall be made good in the following way” should be interpreted as meaning “the shortfall shall, so far as practicable, be made good in the following way” but with the understanding that the only way in which practicability could prevent the shortfall being made good in the relevant sense is if, in fact, the present value of benefit reductions taking all Active Members to nil accrual is exceeded by the present value of the Capped Shortfall . . .”

As I have already mentioned, at [95] of his judgment the Chancellor stated that it was accepted by Atos that the words “so far as practicable” were to be read into the closing words of the stem of Rule 21. He went on to state that once they are read in:

“. . . that necessarily involves the conclusion that Rule 21(1) cannot be an exhaustive regime for eliminating the shortfall, since one of the ways in which it will not be “practicable” to do so is if issues arises as to affordability, value for money and collectability which, if ignored, will simply lead to Active Members opting out, so that the shortfall is not addressed at all or only to a limited extent.”

Although the compass of the “concession” was expressed to be limited, I agree with the Chancellor that the effect is to drive a coach and horses through the argument that Rule 21 is a comprehensive code. Paragraph 10(d) was one illustration of the fact that Rule 21 cannot be an exhaustive code for the elimination of shortfall. It seems to me that the Chancellor was entitled to reason from that point and that there was nothing impermissible about doing so. Furthermore, it seems to me that the approach which was taken is part of a proper and permissible approach to the interpretation of the words used in Rule 21.

As to Ground 1C, it seems to me that the Chancellor was never concerned with the actuarial basis for either the actuarial valuation which threw up the likelihood of a Rule 21 shortfall in the first place, or the actuarial methodology used for the purposes of the various determinations by the Actuary. He was concerned with the proper interpretation of Rule 21 and the meaning to be attributed to “determine” and its cognates in that context. I consider, therefore, that this sub-ground of appeal is an entirely artificial construct and has no basis in the judgment at all. I do not propose to deal with it any further.

Ground 1D relates to the Chancellor’s reasons for refusing permission to appeal and not his Order based on the reasons in his judgment. Accordingly, it is not appropriate to address it further. For the sake of completeness, I should also mention that in oral submissions, Mr Spink disavowed the proposition in his Ground 1A that the words “shall be reduced, calculated on such reasonable basis as may be agreed between the Designated Employer and the Trustee” created a trust power or discretionary trust. I will say no more about it.

The question of whether the Actuary has a discretion under sub-rules 21(1)(ii) and (iv) is raised in Ground 2. It is also inherent in Ground 4 which is concerned with whether the Chancellor erred in his understanding of what is entailed in construing pension scheme provisions so as to give “reasonable and practical effect” to a scheme.

For the purposes of Ground 2 the issue arises from the use of the words “determine” and “determined” in sub-rules 21(1) (ii) and (iv). As I have already mentioned, the Chancellor concluded, at [96] – [100] and [102] – [104] respectively, that the Actuary has a “discretion” in relation to the increase in contributions under (ii) and the decrease in future benefits under (iv). It is said that he erred and was over-influenced in relation to the scope of the determinations required to be made by the Actuary by the separate and distinct “discretions” as to the rate and period of increased contributions under Rule 21(1)(ii) and as to the basis upon which benefits should be reduced under Rule 21(1)(iv). This encapsulates Grounds 2A, B and C.

Both Mr Spink and Mr Green used the word “discretion” in their written argument and sporadically in oral submissions. It seemed to me that Mr Spink’s use of the concept was to contrast it with what he submits is the true interpretation of the word “determine” which he says is purely a matter of calculation.

To reiterate, Mr Spink submits that “determine” in sub-rule (ii) merely means decide what increase is necessary up to the Cap as a matter of calculation and has no flexibility which might permit consideration of whether the Members and the Designated Employer could afford those contributions and whether they might be paid. In the same way, he says that sub-rule (iv) mandates benefit reductions, if necessary, down to zero. He emphasises the use of “shall” and says that there is no discretion in that. He says that that is underpinned by the use of the phrase “shall be made good” in the stem of Rule 21.

He accepts, however, that the determination of whether the shortfall is “trivial” in both in sub-rules (ii) and (iv) requires an exercise of actuarial judgment, as does the fixing of the normal long term funding rate (referred to in (ii)), the determination of rate and period in respect of increased contributions in (ii) and the basis of the reduction of benefits in (iv). He maintains, however, that there is no room in the exercise of that professional actuarial judgment for taking into account whether the increased contributions would be unaffordable and therefore, unlikely to be paid. He says that if that were the case, the purpose and plain wording of the rule would be entirely frustrated.

Mr Green accepts that in ordinary language, “determine” means decide, settle, conclude or fix. He submits, nevertheless, that as used in Rule 21, it imports what he describes as a “discretion” involving professional judgment. He referred us to In Re George Newnes Group Pension Fund (1969) [2007] 25 PBLR (ChD), Re Imperial Foods[1986] 1 WLR 717 (ChD), Re Airways Pension Scheme [2001] Pens LR 99 (ChD) and National Grid v Laws [1997] Pens LR 157 which all contain dicta in relation to the role of the actuary in the respective schemes and under the particular rules in question and use the term “discretion”.

He says, therefore, that all of the uses of “determine” and its cognates in Rule 21 import the professional judgment and a “substantive discretion” of the Actuary. Mr Green also pointed to the use of “determines” in Rule 20 which is concerned with surplus. It requires the Actuary to determine whether the surplus is trivial or, if not, whether in any event, it would be “prudent” to retain it within the Atos Section. He says that these decisions import professional judgment in the same way as in Rule 21.

He adds that there is no reason to interpret the use of the word differently within Rule 21. He says that there is no basis for concluding that the exercise in sub-rule (ii) is mechanistic but that professional judgment, including the use of assumptions, is relevant to whether the shortfall is trivial and the rate and period of any increased contributions. The exercise of such a “substantive discretion”, he says, inevitably includes issues such as whether contributions of a particular level will, in fact, be recoverable and therefore, whether the shortfall will be met by means of such contributions.

I agree with Mr Green and with the Chancellor that unless the context otherwise requires, “determine” should be given the same meaning throughout Rule 21. If sub-rules (ii) and (iv) are each read as a whole and interpreted in the light of Rule 21 as a whole, it seems to me that “determine” whenever used connotes an exercise of professional judgment, exercised in the light of all the relevant detailed knowledge the Actuary will have about the Atos Section of the RPS, having applied all relevant actuarial assumptions and methodology and subject to all relevant professional guidance. There is nothing to suggest that the Actuary should exercise professional judgment when determining whether the shortfall is trivial for the purposes of sub-rules (ii) and (iv) but adopt a different approach when determining the increase in contributions under (ii) or the reduction of benefits under (iv). I have already addressed and dismissed Mr Spink’s reliance upon “shall” and “shall be made good” in this regard.

Determining the increase in contributions under sub-rule (ii) will inevitably include the use of assumptions as to the number of Active Members there are likely to be in the future which will include considerations as to mortality and the nature of the cohort as well as the likely level of future opt out, the level of the future pensionable payroll and whether the contributions are likely to be collected. I mention these factors merely by way of illustration and not with an intention to constrain or prescribe the proper exercise of the Actuary’s professional judgment in the circumstances.

Such a construction also takes account of practical consequences. Rather than frustrate the rule as Mr Spink would have it, it seems to me that if matters which go to collectability and collectability itself are not taken into account, the rule is rendered a nonsense. To put the matter another way, if the Actuary is required to carry out a paper exercise and to place numbers in a schedule whether or not there is a likelihood of them being received into the Atos Section in order to “make good” the shortfall, the purpose of the rule is entirely undermined. Such an interpretation is also consistent with a common sense approach to Rule 21. Rather than distort the natural and ordinary meaning of the words used, it seems to me that such an interpretation gives them a proper meaning and function. The fact that the Actuary is required to determine not only the increase in contributions but also the rate and period over which they are to apply is an indication that an exercise of professional judgment is required. It seems to me that an interpretation which required professional judgment to determine the rate and period of an increase but not the increase itself is untenable.

This is not to engage in an impermissible exercise of construction. It is within the four corners of the task envisaged by Lord Hodge in the Barnardo’s case: see, in particular, [16]. It takes account of the practical consequences of the construction and gives proper weight to the words used. In addition, it is consistent with a purposive approach. If one considers his reasoning as a whole, it seems to me that that was what the Chancellor was doing. His references to what would otherwise be a “thoroughly uncommercial result” at [99] and [104] should be understood in that light. He was considering the practical consequences of rival interpretations. He did not purport to find an ambiguity in the language used, and thereafter to apply business common sense. Nor did he misapply the purposive approach first promulgated by Millett J In re CourageGroup’s Pension Schemes[1987] 1 WLR 495, 505 which was approved by Lord Hodge in the Barnardo’s case at [16].

In this regard, I should mention that if a pure calculation is required, the evidence suggests that if the Cap is lifted, the Employee contribution rate would have to be increased from its present level of 11.38% to 74% of pensionable salary and the Employer rate would rise to 111%. If the Cap remains in place, the rates would be 13.36% and 20.05% respectively.

I must add a footnote to this aspect of the appeal. The Chancellor used the word “discretion” in relation to the exercise conducted by the Actuary, no doubt having been encouraged by both Mr Green and Mr Spink to do so. As a result, at [120] he went on to answer questions 1 and 7 by stating that the Actuary does have a discretion in relation to the increase in contributions under (ii) and the reduction of benefits under (iv) and to answer question 2 in terms which might be interpreted to mean that he considered that the Actuary would be acting as a fiduciary when carrying out his task under (ii) and/or (iv).

Although Mr Green and Mr Spink continued to use the term “discretion” they accepted that the Actuary is not a fiduciary in these circumstances. They also accepted that the “discretion” or “substantive discretion”, as Mr Green termed it, was a reference to the choices that an actuary is required to make on the basis of his professional experience and expertise, based upon professional guidance, the application of appropriate assumptions and data and the exercise of professional judgment. I agree. None of this is surprising. The precise nature of what the actuary must do, depends upon the terms of his appointment and the particular rule under which he is required to carry out the particular function. It is not necessary to conduct a detailed analysis of the authorities in relation to the role of an actuary to which Mr Green referred us. They each turn on the particular rule in question.

In this case, it is relevant to note that the definition of “Actuary” in the Pension Trust is concerned with relevant qualifications and professional status and clause 6B makes clear that the Actuary is appointed by the Trustee and the Pensions Committees as a matter of contract. When performing those functions, the Actuary exercises professional skill and judgment. To describe the making of choices inherent in such a process as the exercise of discretion is misleading and liable to confuse. Accordingly, in this context, the language of discretion is better avoided.

Taking all of this into account, it seems to me that the Chancellor’s judgment and his answers to questions 1, 2 and 7 should be read with care and with the gloss that the Actuary, in this case, was required to exercise professional judgment.

The Chancellor’s consideration of the effect of the Protection Order and Article 7, in particular, began at [101] of the judgment. He noted that as originally drafted, if there was no agreement to reduce benefits, the shortfall would remain and stated that this was where Article 7 came into play. He stated that: “it was intended to provide protection to protected persons over and above that provided by the Pension Trust and it was imposing contribution obligations on the Employer beyond those imposed by the RPS itself” [101]; that this intention was supported by the terms of Clause 7H of the Pension Trust [105]; and that: “[n]one of that would have been necessary if the Protection Order was not providing protection in addition to that provided by the Pension Trust and the Rules”. He also pointed out that the Protection Order was the Order contemplated by paragraph 7 of Schedule 11 to the Railways Act which expressly contemplated that the Order could impose on the employer of Protected Persons a duty to make contributions [105].

The Chancellor held that Articles 7(1) and (2) contain a duty beyond that under the RPS itself, and “it is a sufficiency of funding or balance of cost obligation which will be to cover whatever amount in the opinion of the Actuary is sufficient to make provision for those pension rights, having taken account of the resources of the scheme (i.e. the existing shortfall) and any employee contributions . . .” [107]. He went on to note that the obligation is to eliminate the shortfall and it was not qualified in any way. He also stated that it was irrelevant that the effect of the provision might be to provide Members with greater protection than they might have had under the BRPS and that the provision applied to all Members whether protected or unprotected because there was no separate section for protected members [108].

The Chancellor found support for his conclusion that Articles 7(1) and (2) impose a sufficiency of funding or balance of cost obligation from Articles 7(4) and 7(7). He held that Article 7(4) imposes a similar balance of cost obligation on the Employer if the relevant pension rights were transferred from the RPS to another scheme and that Article 7(7) demonstrates that the Article contains a freestanding obligation on the Employer. He held that the mechanism in Article 7(7) is completely inconsistent with the argument that Article 7 only provides limited protection [109]. Further, he considered that Article 7(5) underlines that the Actuary is exercising a discretion or judgment as to whether or not Members’ contributions should be increased or their benefits reduced under Rule 21(1). He stated that:

“The Actuary would not be giving advice as to whether the contributions may or should be increased or the benefits reduced if his determination under Rule 21(1) were the limited one of a mathematical calculation for which Atos contends.” [113]

Although it was not expressly abandoned, Mr Spink did not actively pursue his Option A argument orally. It had been to the effect that Rule 21 is freestanding. Emphasis was placed upon the fact that Rule 21 was promulgated at the same time as the RPS Order and the Protection Order and it was argued that, therefore, it was likely that the Shared Cost Arrangement sections of the RPS were set up in such a way that compliance with Article 7 would not impose material additional burdens. Rule 21 would not have been intended to conflict with Article 7. It was natural that the Article 7 requirements be “baked in” to Rule 21 itself. Further, the Chancellor erred in holding at [107] that the Article 7(1) duty was a balance of cost funding obligation capable of increasing the scope of the Employer’s contribution obligations under Rule 3A by increasing the proportion of the Shared Cost Arrangement sections’ unfunded liabilities that it was bound to fund, rather than requiring only that the proportion of the unfunded liabilities that it was bound to fund under Rule 3A be funded by contributions of a sufficient amount (Grounds 5B and C and 6A).

Attention was drawn to the fact that Article 7 applies where the employer is under “a duty” to contribute to the scheme or section and provides that further contributions shall be made “under that duty”. Accordingly, it was said that Article 7 only applies in relation to the duty to pay contributions created by Rule 3A and Rule 21 because it relates to the amount of the “contributions which [it] shall make under that duty”. Further, “not less than such amount . . .” when applied to the shared cost arrangements contained in Rules 3A, 3B and 21 means that the actuarial assumptions used by the Actuary in performing the Rule 21 valuation must be sufficiently robust that the construct of employer and member contributions in combination will, in the Actuary’s opinion, be sufficient. Article 7, therefore, simply regulates the operation of the machinery for determining contributions under the Rules. It would prevent a scheme from being operated on the basis of excessively optimistic actuarial assumptions and Rule 21 had been drafted substantially to comply with the requirements because of the input required from the Actuary.

It is said that the Chancellor gave Article 7 too much emphasis, therefore failed to take account of the fact that Shared Cost Arrangement sections might not have Protected Persons in them and failed to attach any weight to the inherent unlikelihood that Shared Cost Arrangement sections, while retaining a “shared cost” label, had been designed to incorporate a radically different “balance of cost” funding mechanism (Grounds 3A, B and C).

In this regard, it was also stated in written argument that the requirements in Articles 4, 6 and 11 are relevant and that the Chancellor failed to identify the purpose of the Protection Order as a whole (Ground 5A).

To reiterate, in summary, Article 4 places a requirement on any person who employs a protected employee to provide an occupational pension scheme in which that person may participate and to which the transfer value in respect of his relevant pension rights may be transferred. That scheme shall include provisions under which a protected employee may acquire relevant pension rights which are “no less favourable” than the rights he had under the designated scheme (the BRPS). Under Article 6 any amendment to a scheme which would otherwise have the effect of making the relevant pension rights of a Protected Person less favourable than the relevant pension rights in his designated scheme shall have no effect. Article 11 provides that subject to the further sub-paragraphs of the Article, a Protected Person shall have the right to participate in a joint industry pension scheme.

I should mention that there is no dispute that the effect of having run the Atos Section as an unsegregated section some of the members of which are Protected Persons and others are not, is that the additional funding required by Article 7 cannot be targeted solely at Protected Persons and will apply to everyone within the Atos Section.

It is also common ground that the basis for Article 7 is paragraph 7(1)(f) of Schedule 11 to the Railways Act. It provides, amongst other things, that an order under paragraph 6 may impose a duty to make contributions upon a person within Article 7(2). That includes the employer of a Protected Person.

Article 7 is set out at [17] above. For ease of reference I set out the most important elements of it again here. Where relevant, Article 7(1) provides that where such a person is “under a duty to contribute” to a section of an occupational pension scheme in which a Protected Person has relevant pension rights, the contributions they shall make “under that duty” -

“. . . shall be not less than such amount as, in the opinion of the scheme actuary, shall be sufficient to make provision in respect of the rights specified in paragraph (2) after having taken into account all of the relevant matters, including the resources of the occupational pension scheme or the relevant section of it and any employee contributions ” (emphasis added).

In summary, Article 7(5) contains limits on the Trustee’s powers to increase any contributions or reduce benefits in respect of Protected Persons unless the increase or reduction is made in the circumstances and manner in which it could have been made under the designated scheme (the BRPS) and the Actuary, in the period of six months before the increase or reduction, has advised the Trustee that it “may or should be made”. Article 7(7) provides that where the opinion or advice of the Actuary has been given under Article 7, he shall supply a schedule specifying the contributions which are required and the dates on which they are required in order to meet the liabilities of the scheme or section.

It seems to me that Mr Spink was right not to give this argument prominence. I agree with the Chancellor that clause 7H of the Pension Trust, also promulgated at the same time, would be unnecessary if it had been considered that Rule 21 was all the protection that Protected Persons required. Furthermore, for example, Article 7(5) is clearly intended to operate in addition to the rules of any section of the RPS: see [88] above. The same is true of Article 7(4) which provides additional protection in relation to transfer values. It seems to me that the same is also true of Article 7(1). Although a balance of cost requirement was introduced in 2006 when Rule 21(1)(iii) was added to cover the situation where there are no Active Members, neither Rule 21(1)(ii) nor (iv) are drafted on a balance of cost basis. In my judgment, therefore, it is quite clear that the obligations in Article 7 are freestanding.

In my judgment, there is nothing in Ground 3B of the Grounds of Appeal. It is to the effect that in construing Rule 21(1) the Chancellor failed to attach any weight to the indications that the Shared Cost Arrangement Rules were designed to confer the protection enshrined by the Protection Order in and of themselves. It was said that those indications could be found in: clause 7H of the Pension Trust; the evidence contained in and appended to the letter from the Deputy Secretary of Transport dated 31 March 1994, to which I referred at [40] above; and the Articles of the Protection Order itself.

I also agree with Mr Green that the references to the requirement to provide a scheme with “no less favourable benefits” is a red herring. It is common ground that the benefit structure in the Atos Section of the RPS provides benefits that are no less favourable than those in the BRPS in accordance with Article 4. The wording in Article 7 with which we are concerned, is directed at funding rather than the benefit structure within the Atos Section. Articles 4 and 7 provide separate protections. This is clear, in particular, from paragraphs 6 and 7 of Schedule 11 to the Railways Act which created the power to make the Protection Order and Articles 4, 5, 6 and 11.

What of Option B? This alternative construction of Article 7, raised in Atos’ supplemental skeleton, was the argument which Mr Spink pursued orally. It is inconsistent with Option A and proceeds on the basis that Rule 21 must be read subject to the overlay of Article 7 as a freestanding funding requirement. Under this head, Atos accepts that Article 7 is designed to provide additional funding protection for Protected Persons and that as a result it will come into play to fill the gaps. It says, however, that rather than coming in after the operation of Rule 21(1)(ii), as the Chancellor envisaged, it fits in after both Rule 21(1)(ii) and (iv) have operated to their full extent. In other words, one must increase contributions to maximum levels (subject to the Cap if it is not lifted) whether or not they will be recovered under Rule 21(1)(ii) and, if necessary, reduce future benefit accrual to zero under Rule 21(1)(iv) and take account of both those items when determining the extent of the remaining gap in funding which Article 7 is designed to fill.

Mr Spink submits, therefore, that the Chancellor was wrong to interpose Article 7 after the exercise of Rule 21(1)(ii) rather than after (iv) [107] (Grounds 6B and C). In support of this construction, he relies upon the fact that the contributions under Article 7(1) are not less than such amount as, in the opinion of the Actuary, is sufficient to make provision in respect of the rights in Article 7(2). They include not only pension rights which have accrued but also those which are accruing. Mr Spink submits that it would be contrary to the structure of Article 7(1) to impose the obligation it contains without having operated Rule 21(1)(iv) first. He also points to the use of the phrase “after having taken account of all relevant matters” in Article 7(1) which expressly include “employee contributions” and says that the exercise of Rule 21(1)(iv) is also a relevant matter. The top up is limited to what is left of the shortfall after the Actuary has calculated the necessary increase in contributions pursuant to Rule 21(1)(ii) and has determined the extent of the reduction of benefits under Rule 21(1)(iv). He says this construction is supported by the terms of Articles 7(5) and (7) and does the least damage to Rule 21 itself.

Mr Green was neutral about whether Article 7 fills the gap after Rule 21(1)(ii) or (iv). In part, this is because he considers that it makes little practical difference if one also accepts that the Actuary has professional judgment to exercise under (ii) and (iv) and would be very unlikely to increase contributions to the maximum and reduce the future accrual of benefits to zero. The circumstances in which Atos would “take credit” as Mr Green put it, for the value of those increases and reductions when having to top up the funding of the Atos Section, would not arise in any real way. In fact, it seems to be agreed that the outcome would be “value neutral” either way.

In my judgment, there are various pointers to the way in which the overlay of Article 7 applies. It is concerned with contributions and therefore, one might consider that it most naturally takes effect to make good the shortfall after Rule 21(1)(ii) has taken effect. Furthermore, Article 7(1) makes express reference to taking account of employee contributions. It also requires the Actuary to determine the contributions sufficient to make provision for the rights in Article 7(2) which include not only accrued rights and transferred rights under Article 7(2)(a) but also under (b), rights accruing in respect of current participation in the section.

Having taken all these matters into consideration, I agree with the Chancellor that the most natural place for the Article 7 obligation to take effect is after Rule 21(1)(ii) has operated. The Article 7 obligation itself arises where the employer is under a “duty to contribute” and is concerned expressly with the “contributions which that person shall make under that duty” (emphasis added). It is apparent from its own terms, therefore, that it feeds in to the existing obligation to contribute which in the Atos Section arises under Rules 3A and 3B. Those rules make express reference to Rule 21 and dovetail with it. In turn, Rule 21(1)(ii) makes express reference back to contributions under Rules 3A and B. It is those contributions which are increased under Rule 21(1)(ii). In those circumstances, and given the structure of the Article 7 obligation which requires an increase in contributions under what is Rule 21(1)(ii) in the Atos Section (“that duty”), it seems to me that the obligation takes effect after (ii) has operated.

In my judgment, the fact that the rights for which sufficient provision is to be made include pension rights which are accruing does not have the significance for which Mr Spink contends. His argument is self-fulfilling. It would be surprising if an obligation under Article 7(1) did not extend to such rights. It would be shorn of much of its importance in the post privatisation world of the railways, if it did not. Furthermore, I consider that he seeks to place too much weight upon “having taken into account all of the relevant matters . . .” The argument that this must mean that reductions in benefits under Rule 21(1)(iv) must occur before the Article 7 obligation arises is a non sequitur. Quite clearly, the Actuary must take into account all relevant matters including the resources of the Atos Section (or in this case the lack of them) and employee contributions. That has nothing to do with the application of Article 7 in the light of Rule 21. Article 7 refers expressly to contributions.

It follows that I also reject Mr Spink’s submission that his construction of Article 7 is supported by Article 7(7). It seems to me that, having given advice under the Article, the obligation of the Actuary to produce a schedule of contributions and dates on which they are required, in order to meet the liabilities of the section, is neutral. It supports neither of the rival constructions of the Article 7 obligation.

In the light of what I have already decided, it is not strictly necessary to address Ground 7 of the Grounds of Appeal which is concerned with Article 5 of the Protection Order. Nevertheless, I will consider it very shortly.

The Chancellor held that the prevention from participation of protected employees in the Atos Section which is prohibited under Article 5(a) must encompass not just initial participation in the 1990s but also continued participation for the whole period in which employees have protected status [118]. He also concluded that limb (b) of Article 5 supports that construction because it prevents the employer from sidestepping (a) by making amendments to the Atos Section which obstruct the continuing enjoyment or accrual of no less favourable pension rights than the protected employees had under the BRPS [119].

Mr Spink accepts that Article 5(a) applies not only to initial participation but to continued participation. He submits, however, that the use of “prevent” in Article 5(a) suggests that the action taken must be with “the deliberate object of securing prevention”. He says that it should not cover conduct which, whilst not aimed at producing that result, contributes to circumstances in which it occurs. In other words, he says that it does not cover the situation in which the Cap is lifted and contributions are increased under Rule 21(1)(ii) to such an extent that Active Members make the rational choice to opt out of the Atos Section. Mr Spink says that they do so voluntarily. He goes on to add that even actions by the Employer which could be said to have objectives including causing Active Members to opt out, would not be caught. This is said to be because the voluntary action of opting out cannot be characterised as prevention, unless the Employer has used unlawful means such as a breach of the Imperial Tobacco duty of good faith or the conduct amounts to the tort of harassment.

I agree with Mr Green in this regard. Once it is accepted that Article 5(a) applies to Employer conduct which causes opt-out, there is no room for the construction for which Mr Spink contends. There is nothing in Article 5(a) to support the construction that the Employer must have a deliberate subjective intention to prevent participation by causing opt-out. If that had been intended, Article 5(a) could have included the word “intentionally” but it does not. Such a construction is also contrary to the purpose of Article 5 as a whole. The same is true of Mr Spink’s second submission. There is no room for the inclusion of a gloss to the effect that the conduct which causes the prevention of participation must be unlawful.

For all the reasons set out above, I would dismiss the appeal.

I agree.

I also agree.