Hearn & Ors v Dobson & Anor

This judgment concerns the Construction Confederation Staff Pension Scheme, which is a final salary scheme with some 503 members (“the Scheme”).

The issue which arises concerns the operation or potential operation, in relation to the Scheme, of Part 3 of the Pensions Act 2004 and the Occupational Pension Schemes (Scheme Funding) Regulations 2005.

The Scheme was originally called the BEC Staff Pension Scheme and was established with effect from 1^st July 1992 by an interim trust deed of 18^th June 1992. It was later governed by a definitive trust deed and rules dated 16^th December 1994.

By a trust deed dated 8^th May 2000, made between the Construction Confederation (“CC”), an unincorporated employer’s association, and certain named trustees, the Scheme was directed to be known as the Construction Confederation Staff Pension Scheme and a new set of rules (“the Rules”) attached to the trust deed of 8^th May 2000 were given effect in place of the earlier rules.

The Scheme was a multi-employer scheme. Under the Rules of the Scheme CC is defined as the Principal Employer. There were three other employers who participated in the Scheme. They were Home Builders Federation Limited (“HBF”), Housebuilder Media Limited (“HBM”) and Civil Engineering Contractors Association (“CECA”).

The Rules which came into effect on 8^th May 2000 have since been amended in certain respects. I will first set out the Rules which came into effect in May 2000 and then refer to later amendments.

Rule A1 deals with the interpretation of the Rules. By Rule A1.6, it is provided that headings above or at the beginning of text are for convenience only and should not affect the interpretation of that text. Rule A2 contains a large number of terms which are defined for the purposes of the Rules. I will attempt to summarise these definitions rather than set out their text in full. An Employee is a permanent employee of an Employer. Employers are the Principal Employer and such other firms and companies as become Employers in accordance with Rule L1. The Fund is defined so as to refer to all contribution monies, property, rights and other matters held by the Trustees for the purposes of the Scheme. Identified Beneficiary has the meaning given in Rule M1.4. A Member is a person admitted to membership of the Scheme in accordance with Rule B2. A Member remains a Member of the Scheme for so long as any benefits are or may be payable for him. Normal Retirement Date is, in relation to a Member or Employee, the date on which he reaches age 65. Pensionable Service in relation to a Member is defined, principally, by reference to a period of Service as a Member. Service is any service as an Employee.

Part B of the Rules deals with membership. By Rule B1.1, an Employee is eligible to become a Member if he has reached 21, but is less than 64. By Rule B1.2, an employee or director of an Employer who does not satisfy the normal conditions of eligibility in Rule B1.1 may be eligible for membership if the Trustees and Employer agree, in which case such a person’s membership is subject to such conditions as the Trustees think fit. Rule B2.1 deals with the procedure by which a person becomes a Member. By Rule B5.1, a Member still in Service may terminate his Pensionable Service by giving notice to that effect.

Part C of the Rules deals with contributions. Part C1 deals with Members’ contributions. Part C2 deals with employers’ contributions. Rule C2.1 confers on the Principal Employer power, in the circumstances therein described, to determine the amount of liability of an Employer to pay contributions to the Fund. Rule C2.2 describes the funding targets of the scheme. Rule C2.5 cross refers to the minimum funding requirements in sections 56 to 61 of the Pensions Act 1995.

Part D of the Rules deals with retirement benefits. Part E of the Rules deals with the options available at retirement. Parts F and G deal with death benefits and breaks and absence from service. Part H deals with leaving benefits. Under Rule H1.1, if a Member leaves Service before Normal Retirement Date, and various other provisions do not apply, then he shall be entitled to a deferred pension payable from Normal Retirement Date. By H4, if a Member leaves Pensionable Service, no pension is paid to him while still employed by an Employer until Normal Retirement Date.

Part J of the Rules lays down various detailed provisions as to benefits under the Rules. Part K of the Rules deals with the position of the Trustees of the Scheme.

Part L of the Rules deals with the general operation of the Scheme. By Rule L1.1, provision is made for a company or firm to participate in the Scheme and become an Employer in respect of it. By Rule L1.3, it is provided that the Trustees may release an Employer from its liabilities under the Scheme in certain circumstances.

Part M of the Rules deals with various modes of termination. Under Rule M1.1, an Employer may withdraw and terminate its liability under the Scheme in respect of all its employees by, amongst other things, giving notice to that effect, specifying a Termination Date. By Rule M1.4, on a termination of an Employer’s liability, the Trustees must identify certain persons who are then called “Identified Beneficiaries”. The Identified Beneficiaries include, in particular, Members in Pensionable Service of the Employer on the Termination Date.

Rule M2.1 provides:

“On a termination of an Employer’s liability, the Trustees shall set up a Separate Fund within the Fund in accordance with this Rule M2. Rule M5 shall apply to the Separate Fund, and Identified Beneficiaries shall not benefit from any other part of the Fund (except as mentioned in Rule M5.8) unless they have benefit entitlements which are not included in the Basic Entitlements to which the Separate Fund relates.”

Rule M2.2 deals with the value of the Separate Fund. In summary, the value of the Separate Fund is the value of the Basic Entitlements or the Share of Fund, if that is less than the value of the Basic Entitlements. Basic Entitlements are those set out in Rule M5.2 and their value is to be certified by the Actuary of the Scheme. By Rule M2.5, the Share of Fund is the value of that part of the Fund which relates to benefits for Identified Beneficiaries calculated by the Actuary to the Scheme on a basis which involves certain specified assumptions.

Rule M2.6 deals with the time at which the Separate Fund is to be set up and provides that the Trustees may set up a Separate Fund at any time after the event causing the termination but, if they have not set up the Separate Fund by the Termination Date, then they must do so as soon as reasonably practicable after that date.

Rule M2.7 provides:

“When setting up a Separate Fund as part of the Fund, it shall not be necessary to allocate particular assets to it. Instead, the Trustees may record the value of the Separate Fund and all payments, receipts and other transactions affecting that value. If particular assets are allocated to the Separate Fund, that shall also be recorded and all receipts from and expenditure relating to those assets shall be added to or paid from the Separate Fund which is not so represented by assets allocated to it as they think fit, which may be by addition of interest or by additions or deductions reflecting the total investment performance of all or any part of the Fund.”

Rule M3 deals in detail with the way in which the liability of all Employers in respect of all their Employees may terminate.

By Rule M4.1, any Identified Beneficiary who is a Member in Pensionable Service on the Termination Date is treated as leaving Service on that date, so that he shall not pay contributions for any period after that date.

The relevant part of Rule M4.2 provides:

“An Employers’ liability to make payments under the Scheme (whether by way of contributions, payment of expenses, indemnity of the Trustees or otherwise) shall not terminate in respect of amounts due, expenses incurred or claims made on or before the Termination Date. Interest may continue to accrue under Rule C2.4 despite termination.”

By Rule M4.4, all duties, powers, discretions and options of the Trustees, Employers, Members and other persons are to continue after the Termination Date, except as expressly stated in Rules M1 to M5.

Rule M5 deals with certain matters in respect of the Separate Fund. Rule M5.1 provides for the Separate Fund to be used to repay borrowings and costs and expenses so far as they relate to the Separate Fund or Identified Beneficiaries. Rule M5.2 deals with what was earlier described as Basic Entitlements. Rule M5.2 is subject to Rule M5.1 and to section 73 of the Pensions Act 1995. By Rule M5.2, the Separate Fund is to be used to provide the benefits for Identified Beneficiaries as more particularly set out in Rule M5.2. The benefits included in the list in Rule M5.2 include pensions and other benefits already in payment, various other specified benefits and, finally, all other benefits to which any Identified Beneficiary is prospectively entitled. For this purpose, an Identified Beneficiary in Pensionable Service on the Termination Date is treated as having left Service on that date.

Rule M5.3 deals with the possibility that the Separate Fund is insufficient to provide the Basic Entitlements. Rule M5.3 provides that the Trustees can abate certain of the Basic Entitlements and the Rule introduces an order of priority. Rule M5.3 concludes with this sentence:

“An Employer shall not be obliged to make good a deficiency in the Separate Fund except as mentioned in Rule M4.2 or as required by statute.”

Rule M5.5 deals with any balance of the Separate Fund which is left after applying Rules M5.1 to M5.4. Such a balance is to be paid to such one or more of the Principal Employer and all other Employers and in such shares between them as the Trustees think just and equitable, having consulted the Actuary to the Scheme. Rule M5.5 provides for circumstances in which an Employer’s share should instead remain in the Fund for the general purposes of the Scheme.

Rule M5.6 states that the Trustees are to decide how benefits are to be provided under Rules M5.2 to M5.4 and then states that the Trustees may do one of four things. The fourth of these possibilities is described in Rule M5.6.4 whereby the Trustees may:

“…postpone the winding up of the Separate Fund for so long as they think fit and, until the winding up is completed, pay the benefits from the Separate Fund in accordance with the Rules.”

Rule M5.8 provides:

“The Trustees may, after consulting the Actuary, transfer the whole or any part of the Separate Fund to the remainder of the Fund or to any other Separate Fund (and the Trustees shall have power to set up another Separate Fund for this purpose, whereupon this Rule M5 shall apply to it). All of the benefits which would otherwise have been provided from the Separate Fund or such of them as the Trustees may decide shall then instead be provided from the remainder of the Fund or, as the case may be, from the other Separate Fund.”

Rule M5.9 permits the Trustees to transfer the whole of the Separate Fund, or whatever remains of it, or such part of it as they think fit, to another pension scheme in certain circumstances. The intention is that the transfer to another pension scheme may be made instead of providing all or some of the benefits under Rules M5.2 to M5.4 and the transfer is to discharge the Trustees of all liability to provide those benefits. The other pension scheme must be one which all or some of the Identified Beneficiaries have joined as members.

The Rules continue with parts N and P, to which it is not necessary to refer. Schedule 1 and schedule 2 to the Rules make provision for special cases and again it is not necessary to refer to those provisions.

The Rules which had effect on 8^th May 2000 were amended by a deed dated 24^th December 2002. This deed recited that the Principal Employer with the consent of the Trustees, wished to exercise a power to amend the earlier Rules so as to close the Scheme to new members with effect from 1^st January 2003. To this end, the deed of 24^th December 2002 introduced a replacement Rule B1. By the new Rule B1.1, with effect from 1^st January 2003, the Scheme was closed to new Members. By Rule B1.2, it was provided that any employee or director of an Employer might be eligible for membership if the Trustees, the Principal Employer and the Employer agreed and in such a case, the membership was to be subject to such conditions as the Trustees thought fit.

In around July 2005, HBF gave notice indicating that it sought to withdraw from the Scheme under Rule M1.1 so that its liability under the Scheme in respect of all its employees would be terminated. The notice or notices which HBF served in around July 2005 gave rise to a difference of opinion between HBF and the Principal Employer (CC) and the Trustee. I am asked to proceed, for the purpose of determining the issue with which this judgment deals, on the basis that the actions taken by HBF have resulted in a Termination Date under Rule M1.1 of 4^th August 2005.

Thereafter, HBM gave notice under Rule M1.1 to withdraw from the Scheme and pursuant to that notice the Termination Date for the purpose of Rule M1.1 was 31^st January 2006.

CECA thereafter gave notice under Rule M1.1 and pursuant to that notice, the Termination Date in relation to CECA was 27^th February 2006.

On 27^th April 2006, the Rules of the Scheme were further amended by adding schedule 3 to the Rules. Schedule 3 was designed to deal with the position of HBF in the event that the liability of HBF had not been terminated before 30^th April 2006. As I am asked to proceed, for the purposes of this judgment, on the basis that the liability of HBF had terminated on 4^th August 2005, the provisions of schedule 3, as introduced on 27^th April 2006 do not apply and I need not consider them further,

Also on 27^th April 2006, the Rules were further amended to deal with the position of CC. This deed introduced a new schedule 4 into the Rules and schedule 4 contained modifications of the earlier Rules. One of the modifications involved the introduction of a new Rule B7 which provided, in effect, that no period after 30^th April 2006 should count as Pensionable Service for any Employee of CC. Rule B7.2 provided that an employee of CC who was in Pensionable Service on 30^th April 2006 should become entitled to a deferred pension under Rule H1 on 30^th April 2006.

The Rules were further amended by a deed dated 10^th August 2007. By clause 1.1 of this deed, Rule M5.6.4 was amended by adding at the end of the original text the following:

“(and when winding up commences after such postponement the Basic Entitlements set out in Rule M5.2 shall continue to be determined as at the Termination Date (but the Trustees may at any time after the Termination Date stipulate a date subsequent to the Termination Date.)”

Finally, the Rules were amended by a deed of 21^st November 2007 but it is not necessary to refer to the particular provisions of that deed.

The Claim Form asks the following question:

“…whether the assets and liabilities to be taken into account for the purposes of Part 3 of the Pensions Act 2004 when determining the rates of contribution payable by and on behalf of the employers of the Scheme other than Homebuilders Federation Limited (“HBF”) and Housebuilder Media Limited (“HBM”) should include the assets and liabilities attributable to such Separate Fund as is set up pursuant to Rule M2 of the Rules in respect of employees and ex-employees of HBF and HBM.”

The Claimants are the Trustees of the Scheme and Mr Tidmarsh QC appears on their behalf.

The Defendants have been selected to represent certain interest groups. The issue with which this judgment is concerned was not the only issue argued before me and the scope of the representation order in relation to the Defendants is slightly different in relation to the issue with which this judgment is concerned and other matters. However, in relation to the issue with which this judgment is concerned, the First Defendant represents all those beneficiaries of the HBF and HBM Separate Funds in whose interest it may be to argue that the answer to the issue should be that the assets and liabilities to be taken into account for the purposes of Part 3 of the Pensions Act 2004, when determining rates of contribution payable by employers other than HBF and HBM, should include the assets and liabilities attributable to the HBF and HBM Separate Funds. In relation to the issue with which this judgment is concerned, the Second Defendant represents all the members of CC at the date of the hearing and from time to time thereafter in their capacity as such members and all those interested in the Scheme in whose interests it is to argue that the said assets and liabilities should not include those attributable to the said Separate Funds.

Mr Stallworthy appears on behalf of the First Defendant and Mr Newman appears on behalf of the Second Defendant.

I am grateful to all Counsel for the considerable assistance they have given me.

Strictly speaking, the issue which is the subject of this judgment has not yet arisen. This is because the Trustees have not yet created the Separate Funds in respect of HBF or HBM or, for that matter, CECA under Part M of the Rules of the Scheme. However, under those Rules, the Trustees were obliged to set up a Separate Fund for HBF, for HBM and for CECA as soon as reasonably practicable after the Termination Dates which applied to those three bodies. The Trustees will therefore create the Separate Funds in the near future and at that time the issue will arise.

To answer the question raised in the Claim Form, it is necessary to understand the operation of the provisions of Part 3 of the Pensions Act 2004 and the provisions of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (“the Scheme Funding Regulations”). In particular, the question requires one to consider the provisions of paragraphs 1, 2 and 3 of schedule 2 to the Scheme Funding Regulations, which modify the provisions of Part 3 of the Pensions Act 2004.

Before the coming into force of Part 3 of the Pensions Act 2004, an occupational pension scheme such as the Scheme was subject to the minimum funding requirements in sections 56 to 61 of the Pensions Act 1995. Indeed, those provisions were referred to in Rule C2.5 of the Rules of the Scheme. The minimum funding requirements were replaced by the provisions of Part 3 of the Pensions Act 2004 with effect from the 30^th December 2005. Part 3 of the 2004 Act implemented the funding requirements in European Union Directive 2003/41/EC.

It is not necessary to describe much of the detail of the provisions of Part 3 of the 2004 Act. Section 221 of that Act describes the pension schemes to which Part 3 applies.

Section 222 of the 2004 Act provides:

“ The statutory funding objective

(1)

Every scheme is subject to a requirement ("the statutory funding objective") that it must have sufficient and appropriate assets to cover its technical provisions.

(2)

A scheme's "technical provisions" means the amount required, on an actuarial calculation, to make provision for the scheme's liabilities.

(3)

For the purposes of this Part--

(a)

the assets to be taken into account and their value shall be determined, calculated and verified in a prescribed manner, and

(b)

the liabilities to be taken into account shall be determined in a prescribed manner and the scheme's technical provisions shall be calculated in accordance with any prescribed methods and assumptions.

(4)

Regulations may--

(a)

provide for alternative prescribed methods and assumptions,

(b)

provide that it is for the trustees or managers to determine which methods and assumptions are to be used in calculating a scheme's technical provisions, and

(c)

require the trustees or managers, in making their determination, to take into account prescribed matters and follow prescribed principles.

(5)

Any provision of the scheme rules that limits the amount of the scheme's liabilities by reference to the value of its assets shall be disregarded.”

It can be seen that section 222 refers to the scheme having assets and there being liabilities of the scheme. In the present case, the Scheme is a single scheme and in the absence of any provision which modified the provisions in Part 3 of the 2004 Act, one would apply Part 3 of the 2004 Act to the single scheme and determine the assets of that single scheme and the liabilities of that single scheme.

The requirements of section 222 are supported by further provisions in Part 3 of the 2004 Act. Section 223 refers to a statement of funding principles, section 224 deals with actuarial valuations and reports, section 225 refers to the certification of technical provisions, section 226 refers to a recovery plan and section 227 refers to a schedule of contributions. Under section 228 where, amongst other things, an amount payable in accordance with the schedule of contributions by or on behalf of an employer is not paid on or before the due date, the amount unpaid is treated as a debt which is due from the employer. Further, the Trustees must give notice to the Pensions Regulator if they have reasonable cause to believe that the failure of an employer to pay an amount due in accordance with the schedule of contributions is likely to be of material significance in the exercise by the Pensions Regulator of any of its functions. Section 231 gives the Pensions Regulator a range of powers in support of the provisions of Part 3 of the 2004 Act.

By section 232, it is provided that regulations may modify the provisions of Part 3 of the 2004 Act as they apply in prescribed circumstances. The Scheme Funding Regulations have been made, inter alia, pursuant to this power.

Section 233 of the 2004 Act states that Part 3 of the 2004 Act is to be construed as one with Part 1 of the Pensions Act 1995.

It is also relevant to refer to section 306 of the 2004 Act. Section 306(1) provides that where a provision mentioned in section 306(2) conflicts with the provisions of a relevant pension scheme, then: (a) the provision mentioned in section 306(2), to the extent that it so conflicts, overrides the provisions of the scheme; and (b) the scheme has effect with such modifications as may be required in consequence of this overriding effect. Section 306(2) lists at paragraph (h) the provisions of Part 3 of the 2004 Act and any subordinate legislation made under Part 3.

Section 318 of the 2004 Act defines a number of words or phrases such as active member, employer and member. The definitions of active member and member cross refer to section 124 of the Pensions Act 1995. The definition of “employer” does not cross refer in this way. However, it was submitted that because section 233 of the 2004 Act states that Part 3 thereof is to be construed as one with Part 1 of the Pensions Act 1995, the correct approach is to consider definitions which have effect for the purposes of Part 1 of the Pension Act 1995 rather than the definitions in section 318 of the 2004 Act which have effect for the purposes of the 2004 Act. It does not seem to matter on the facts of this case whether that submission is correct but the submission was accepted by all Counsel before me and I will proceed on that basis.

Section 124 of the Pensions Act 1995 defines a number of words or phrases for the purposes of Part I of the 1995 Act. “Active member” is defined to mean a person who is in pensionable service under the scheme. “Deferred member” means a person (other than an active or pensioner member) who has accrued rights under the scheme. “Pensioner member” means a person who, in respect of his pensionable service under the scheme or by reason of transferred credits, is entitled to the present payment of pension or other benefits. “Pensionable service” means service in any description of employment to which the scheme relates which qualifies the member (on the assumption that it continues for the appropriate period) for pension or other benefits under the scheme. “Member” is defined to include any active, deferred or pensioner member. This definition is subject to section 125(4) of the 1995 Act which provides that regulations may extend or restrict the meaning of member and determine the times at which a person is to be treated as becoming, or as ceasing to be, a member or prospective member. Finally, section 124 defines “employer” to mean the employer of persons in the description of employment to which the scheme in question relates. This is subject to section 125(3) of the 1995 Act which provides that regulations may extend the meaning of “employer” to include persons who have been the employer in relation to the scheme.

Regulation 2(1) of the Scheme Funding Regulations contains a number of defined terms which are not at present material. The Scheme Funding Regulations refer to “employer” and “member” but do not define these terms. However, by reason of section 11 of the Interpretation Act 1978, expressions used in the Scheme Funding Regulations have the same meaning as in the Act which conferred power to make those regulations, unless the contrary intention appears.

By Regulation 2(2) of the Scheme Funding Regulations, the word “scheme” is to be read in accordance with the modifications of Part 3 of the 2004 Act made by paragraphs 1, 4, 5 and 7 of schedule 2 to the Scheme Funding Regulations. Under paragraphs 1, 4, 5 and 7 of schedule 2 to the Scheme Funding Regulations, Part 3 of the 2004 Act is modified so that something which is not a separate scheme is treated as if it were a separate scheme. Regulation 2(2) states that where a reference to a “scheme” is read in that way for those reasons, the words “employer” and “member” are to be construed accordingly. What this means is that where one treats a section of a scheme as a separate scheme under, for example, paragraph 1 of schedule 2 to the Scheme Funding Regulations, Part 3 of the 2004 Act, when it refers to “employer” or “member”, is taken to be referring to the employer or member who is relevant for the section which is treated as a separate scheme.

The Scheme Funding Regulations contain detailed provisions to supplement Part 3 of the 2004 Act. Regulations 3 and 4 deal with the determination of assets and liabilities and the ensuing valuation of assets and determination of the amount of liabilities of the scheme. Further regulations provide for many of the matters identified in Part 3 of the 2004 Act such as the technical provisions, the funding principles, the actuarial valuations and reports, the recovery plan, the schedule of contributions, and so on.

Regulation 17(1)(l) provides that Part 3 of the 2004 Act does not apply to a scheme which is being wound up. On the basis that the scheme there referred to is the single scheme, the Construction Confederation Staff Pension Scheme, that Scheme is not being wound up. If paragraph 1 of schedule 2 to the Regulations, to which I later refer, had the effect that one should treat, for example, a Separate Fund in relation to HBF as a separate scheme, then regulation 17(1)(l) could potentially apply to that deemed separate scheme. Conversely, if one does not treat a Separate Fund in relation to HBF as a separate scheme then regulation 17(1)(l) is not material. Regulation 17(1)(l) is subject to regulation 17(1A) and regulation 18 but it is not necessary for present purposes to refer to those provisions.

Regulation 19 states that schedule 2 to the regulations has effect for the purpose of modifying Part 3 of the 2004 Act and the Scheme Funding Regulations as they apply in the circumstances specified in schedule 2.

The relevant provisions of schedule 2 to the Scheme Funding Regulations are as follows:

In the above quotation, I have set out paragraph 3 of schedule 2 as amended by SI 2008/731, regulation 20 which had effect on 6^th April 2008. Accordingly, paragraph 3, as quoted above, is the provision which will apply on the date, which is still in the future, when the Trustees create Separate Funds under the Rules of the Scheme. For the sake of completeness, I will set out the original paragraph 3 which was in these terms:

“In the application of Part 3 of the 2004 Act and these regulations to a scheme which has no active members, references to the employer have effect as if they were references to the person who was the employer immediately before the occurrence of the event after which the scheme ceased to have any such members.”

The Scheme Funding Regulations came into force on the 30^th December 2005, the same day as the provisions of Part 3 of the 2004 Act themselves came into force.

The essential issue which divides the parties can be described as follows. When the trustees create a Separate Fund under the Rules of the Scheme, for example a fund in relation to HBF, is that fund treated as a separate scheme under paragraph 1 of schedule 2 to the Scheme Funding Regulations? Mr Stallworthy answers that question “No” and Mr Newman answers that question “Yes”.

To answer the question referred to above, it is necessary to work through the provisions of paragraph 1 of schedule 2 to the Scheme Funding Regulations applying, as appropriate, paragraph 3 of schedule 2 to the Scheme Funding Regulations. Paragraph 1(1)(a) uses the phrase: “where… a scheme….”. In that place, the reference to a scheme is a reference to the single scheme, the Construction Confederation Staff Pension Scheme. The paragraph continues by using the phrase: “…in relation to which there is more than one employer is divided into two or more sections…”. It appears to be accepted by all Counsel in this case that when the Trustees create a Separate Fund in relation to HBF and/or a Separate Fund in relation to HBM and/or in relation to CECA, those Separate Funds will be “sections”. Accordingly, when the first of the Separate Funds is created, the Scheme will be divided into two sections and then in turn, as further Separate Funds are created, there will be more than two sections. The language of the paragraph which refers to a case “where…. a scheme…. is divided into two or more sections” suggests that the criterion of division into sections is a continuing criterion for the purposes of paragraph 1. For example, in a case where a scheme was divided into two sections and the sections were then reunited, so that the scheme was no longer divided into sections, it would seem that paragraph 1 would cease to apply at that point.

Paragraph 1 refers to “…a scheme in relation to which there is more than one employer…”. There is an issue between the parties as to whether this phrase identifies a continuing criterion to be satisfied or whether the criterion is satisfied by reason of the fact that there is more than one employer at the moment in time when a single scheme is divided into two or more sections. Because paragraph 1 refers to a case “where” a scheme “is divided” and because that phrase appears to suggest a continuing criterion to be satisfied, the more natural reading of paragraph 1 is that the criterion which refers to there being more than one employer is also a continuing criterion. This reading is supported by the fact that paragraph 1 goes on to identify conditions A and B in terms which suggest that conditions A and B must continue to be satisfied at all relevant times and condition A itself refers to contributions payable to the scheme “by an employer” and to “that employer’s section”. However, strictly speaking, nothing at present turns on the issue whether the reference to there being more than one employer is a criterion to be satisfied at a point in time (the point of division) or at all times on and after the point of division. What undoubtedly does arise in the present case is whether this single scheme is one in relation to which there is more than one employer at the first moment in time, still in the future, when a Separate Fund is created under the Rules of the Scheme.

Mr Stallworthy says that, if matters continue as they are at present, at that future date the scheme will have a single employer, namely, CC. Conversely, Mr Newman says, if things continue as they are, at that point in time, the scheme will have two employers, CC and CECA. It may be that Mr Newman would contend that the scheme would have at least those two employers but if he fails in his submission that CECA would be an employer at that time, then he would equally fail to show that there was any employer other than CC.

Although Mr Stallworthy and Mr Newman agree in the conclusion that CC is an employer in relation to the scheme, they do not agree on the reasons for this conclusion. Mr Stallworthy submits that CC is only an employer at the present time by reason of paragraph 3(1) of schedule 2 to the Regulations. Paragraph 3(1) referred to a scheme “which has no active members”. It is common ground that since 30^th April 2006, which was the Cessation Date under the deed of 27^th April 2006, there has been no one in pensionable service under the Scheme and therefore no active member. However, paragraph 3(1) provides (in effect) that a person who was an employer immediately before 30^th April 2006 comes within references to “the employer” in schedule 2. In this way, Mr Stallworthy says that CC is within the reference to “the employer”. However, he submits that no one else comes within paragraph 3(1). In particular, CECA does not come within paragraph 3(1) because it was not an employer immediately before the 30^th April 2006, because it had independently ceased to be an employer on the 27^th February 2006. If Mr Stallworthy is right to say that the case is governed by paragraph 3(1), then Mr Newman does not challenge that specific reasoning. However, Mr Newman says that the case is not governed by paragraph 3(1), either in relation to CC or CECA. It is convenient to consider his argument in relation to the specific facts of CECA. If he does not succeed in relation to CECA then it is not necessary to apply his argument separately to the case of CC.

The relevant facts in relation to CECA are as follows. At the present time, CECA has eight employees. Six of those eight employees are not members of the Scheme either as active members or deferred members. Two of the eight are deferred members of the Scheme. There are no persons employed by CECA who are active members of the Scheme. No employee of CECA is in pensionable service under the Scheme. No current period of employment results in any employee accruing benefits under the Scheme. CECA gave notice with effect from 27^th February 2006 terminating its liability under the Scheme pursuant to Rule M1.1. In these circumstances, the question arises: is CECA at the present time the employer of persons in the description of employment to which the Scheme in question relates so as to come within the definition of employer in section 124(1) of the Pensions Act 1995? Mr Newman would say that if CECA is an employer under section 124 then it is an employer for the purposes of paragraph 1 of schedule 2 to the Regulations.

Mr Newman makes two submissions, first in relation to the six employees of CECA who are not members of the Scheme and secondly in relation to the two employees of CECA who are deferred members of the Scheme.

In relation to the definition of “employer” in section 124, Mr Newman accepts that there must be a current contract of employment between the employer and the person who is said to be in the description of employment to which the Scheme in question relates. He says that the six non-members have current contracts of employment so the question becomes whether those six non-members are in the description of employment to which the Scheme in question relates. He submits that this Scheme does not distinguish between different descriptions of employment under an employer, for example, it does not distinguish between senior management and other staff. He submits that the scheme relates to all employees of, amongst others, CECA. On his submission, what matters is whether the non-member is eligible under the Rules of the Scheme to become a member. That submission was initially made in Mr Newman’s skeleton argument without regard to the deed of amendment of 24^th December 2002. That deed closed the Scheme to new members with effect from 1^st January 2003. Accordingly, even on Mr Newman’s submissions, it is difficult to see how the six non-members could assert that they are eligible to become members of the Scheme and therefore they are in employment to which the Scheme relates. Mr Newman seeks to meet this difficulty by relying upon Rule B1.2 introduced by the deed of 24^th December 2002. That provides that any employee of an Employer may be eligible for membership if the Trustees, CC and the specific Employer agree. Such a person’s membership may be subject to such conditions as the Trustees think fit. One obvious difficulty with that submission is that CECA gave notice with effect from 27^th February 2006 to terminate its liability to contribute to the Scheme and it is not conceivable that the Trustees, CC and CECA would agree to treat an employee of CECA as eligible for membership to the Scheme unless CECA committed itself again to make contributions under the Scheme. In this state of affairs, in my judgment, it is not possible to say that the six non-members, employed by CECA, are in a description of employment to which the Scheme in question currently relates and so CECA is not an employer under section 124 as a result of its employment of those six persons. Further, on this point, I will explain in the next few paragraphs (when I consider Mr Newman’s submission as to the two deferred members) why I reach the conclusion that a person is only an employer during such time as it employs active members of the Scheme. As the six non-members cannot be said to be active members of the Scheme, CECA cannot be said to be an employer by reason of employing them.

I turn therefore to Mr Newman’s argument that CECA is an employer because it currently employs two persons who are deferred members of the scheme. Mr Newman submits that those two persons are current employees of CECA and the Scheme in question relates to the description of employment in question, because they have rights as deferred members under the Scheme. The contrary argument is that their rights under the Scheme have nothing to do with their current employment but all derive from former employment; the Scheme did relate to their former period of employment but does not currently relate to their continuing employment. Mr Newman submits that if the draftsman of section 124 had wanted to restrict the definition of employer to a person who employs persons in pensionable service or employs active members (these terms being interchangeable) then the draftsman could, and would, have said so. There is some force in this point given that section 124(1) itself defines active members and refers to a person in pensionable service under the Scheme.

If the issue in this case turned on the meaning of “employer” in section 124, then whilst I have considerable doubts about Mr Newman’s submission I would find the question more difficult to answer than it actually is. In my judgment, the answer in the present case does not turn on the meaning of “employer” in section 124 but instead turns on the meaning of “employer” in paragraph 1 of schedule 2 to the Scheme Funding Regulations. The definition of “employer” in section 124 is relevant to, but not decisive of, the meaning of “employer” in paragraph 1 of schedule 2. By virtue of section 11 of the Interpretation Act 1978, the definition of employer in section 124 is taken to be the definition of “employer” in schedule 2 to the Scheme Funding Regulations “unless the contrary intention appears”. At this point, one needs to give attention to paragraph 3 of schedule 2. This deals with a case where one has an employer of active members, who then ceases to employ active members and who would then cease to be an employer, but for the operation of paragraph 3(1). The draftsman of the Scheme Funding Regulations plainly thought that one ceased to be an employer when one ceased to have active members. Mr Newman submitted that the above does not correctly describe the operation of paragraph 3(1). He submits that paragraph 3(1) should be understood as referring to one special case where earlier statutory provisions had been enacted which had treated persons as deferred members even though they were not so treated under the rules of a particular scheme.

In my judgment, the provisions of paragraph 3(1) of schedule 2 are a clear statement that when an employer ceases to employ active members he ceases to be an employer. Paragraph 3 provides a context for the interpretation of “employer” in paragraph 1 of schedule 2. If I had been minded to give a different meaning to the word “employer” in section 124 then I would not apply that different meaning to “employer” in paragraph 1 of schedule 2 because the context provided by paragraph 3 otherwise requires.

Accordingly, CECA has not been an employer within the meaning of paragraph 1 of schedule 2 since 27^th February 2006 and there is no sign that it will be an employer when the Separate Funds are set up under the Rules of the Scheme. Accordingly when the Scheme is divided into two or more sections it will be a Scheme in relation to which there is only one employer, namely, CC. It follows that paragraph 1 of schedule 2 will not apply. The Scheme, although divided into sections, will be a single scheme and the sections will not be treated as separate schemes.

It follows from the above that because paragraph 1 of schedule 2 does not apply to the state of affairs following the creation of a Separate Fund or Separate Funds, the provisions of Part 3 of the 2004 Act apply to the assets of the Scheme and the liabilities of the Scheme on the basis that the Scheme is a single scheme.

The above conclusion provides the answer to the question which I am asked. However, I will go on to make brief comments on the other points that have been argued.

Mr Stallworthy made submissions as to the possible circumstances in the future when a person who was treated as an employer under paragraph 3(1) of schedule 2 would cease to be treated as an employer (by reason of paragraph 3(2) of schedule 2) when he ceases to be treated as a former employer by reason of regulation 9 of the Occupational Pension Schemes (Employer Debt) Regulations 2005. Having answered the question raised in these proceedings, it is not necessary, and does not seem to me to be appropriate, to discuss the further contingencies that might come about which might produce certain results under the Employer Debt Regulations.

The parties made detailed submissions as to the operation of condition A and condition B in paragraph 1 of schedule 2. Paragraph 1(1)(b) of schedule 2 refers to “the provisions of the scheme” meeting conditions A and B. The two conditions must be satisfied at the time at which it is relevant to ask whether each section of the Scheme is to be treated as a separate Scheme under paragraph 1.

The matter was argued before me on the basis that “the provisions of the scheme” were to be found in the original Rules of the Scheme as amended up to the present time. However, Rule L6 allows the Principal Employer, with the consent of the Trustees, to alter any of the Rules. Accordingly, as and when the time comes that a Separate Fund is set up, it would in principle be open to the Principal Employer to amend the Rules and so that from the date of that amendment “the provisions of the scheme” in paragraph 1(1)(b) of schedule 2 would be the Rules as amended. In that case, one would have to ask whether the Rules as amended met conditions A and B rather than asking whether the original Rules did so. Nonetheless, for the purpose of the following discussion, I will address the Rules of the Scheme as amended up to date but without considering any possible further amendments.

The general purpose of condition A and condition B is reasonably clear. Condition A deals with contributions and condition B deals with the assets of the scheme. If the separate sections are to be treated as separate schemes then the separate sections must be ring fenced, as would be the case if there were in fact separate schemes. Condition A speaks of contributions being allocated to a section and condition B speaks of a part or a proportion of the assets being attributable to a section.

Condition A refers to “contributions payable to the scheme by an employer”. At the present time (and this state of affairs is expected to continue into the future) HBF, HBM and CECA have terminated their liability to make contributions to the Scheme. However, CC is an employer and, as I understand it, it has not terminated its liability to make contributions to the Scheme. Accordingly, there could be contributions payable by CC to the Scheme. Having held that paragraph 1 of schedule 2 does not apply to this case, it is a little artificial to discuss condition A. To do so in any useful way I will have to assume that Mr Newman’s submission, that CECA (and possibly HBF and HBM) are employers, is correct.

Mr Newman submits that the words “if any” must be read in to qualify the phrase “contributions payable” and he suggests that if one reads in those words that removes any difficulty about the application of condition A. It may well be that the words “if any” are implicit in a reference to “contributions payable”. For example, if the scheme were in surplus so that a particular employer could not be called upon to make contributions for the time being, that would not prevent condition A being satisfied as condition A focuses on the provisions of the scheme and on the allocation of any contributions under those provisions.

Although Mr Newman would say that the fact that HBF, HBM and CECA cannot be required to make contributions is not a difficulty for his argument, the real difficulty comes because he cannot show that the provisions of the scheme, as they operate in relation to HBF, HBM and CECA at the present time or in the future, provide for contributions to be allocated to the three Separate Funds. The provisions of the scheme do not deal with the question of allocation in relation to the Separate Funds because the Separate Funds only come into being at a time when an employer’s contributions are no longer payable.

In my judgment, the above is not necessarily the end of the debate on condition A. CC is an employer and, as I understand it, it is still possible to refer to contributions payable to the Scheme by CC. If the provisions of the Scheme allocate contributions by CC to “that employer’s section” then condition A would seem to be satisfied. Certainly the concept of ring fencing which is inherent in condition A would appear to be satisfied. Mr Stallworthy says that condition A is not satisfied in that way because the part of the Scheme which relates to CC is not “that employer’s section”. He draws attention to the definitions of Scheme and Fund in the Rules and submits that CC pays into the Fund, which is the Fund for the purposes of the Scheme, and does not pay into a section of the Fund. That strikes me as unrealistic. Paragraph 1 of schedule 2 refers to a scheme being divided into sections. The word “sections” is not defined. In the present case, if the Trustees created a Separate Fund in relation to HBF and that Separate Fund could properly be called a section of the Scheme, it would not be difficult to say that the balance of the Scheme was also a section. When the time comes and Separate Funds exist for HBF, HBM and CECA, it would not be difficult to say that the balance of the Scheme was CC’s section.

Mr Stallworthy drew attention to paragraph 1(4) of schedule 2. That sub-paragraph is not, in itself, unduly difficult to apply. It does not apply in the present case because, by reason of my conclusion that CC is now the only employer in relation to the Scheme, the Scheme will not be one in relation to which paragraph 1(1) of schedule 2 will at one time apply. Mr Stallworthy went further. He suggested that the terms of paragraph 1(4) carried with them implications which assisted in construing condition A. Suffice to say that, at present, I am not persuaded that paragraph 1(4) contradicts a reading of condition A whereby condition A would be met in this case provided that CC’s contributions were allocated by the provisions of the Scheme to the part of the Scheme which was not the three Separate Funds of HBF, HBM and CECA.

Mr Newman had a further argument in relation to condition A. He relied on Rule M4.2, the relevant part of which I have set out above. He submits that this is a provision of the Scheme which would allocate to HBF’s Separate Fund any payment due from HBF under Rule M4.2. It is not altogether easy to get out of the Rules any clear direction that sums payable under Rule M4.2 by HBF are to be allocated to HBF’s Separate Fund. It may be that result is achieved by Rules M2.5, the definition of “Fund” and Rule M2.7. In the event, since the decision in this case actually turns on the meaning of “employer” in paragraph 1(1) of schedule 2 to the Scheme Funding Regulations and, further, since I have already held that Condition A would be satisfied on other grounds, I will not discuss this submission further.

Condition B deals with ring fencing of assets. Mr Stallworthy says there are three provisions which amount to holes in the ring fence as regards the assets of the Scheme. He relies on Rules M2.7, M5.5 and M5.8. Mr Newman says that Rule M2.7 is not a hole in the ring fence required by condition B and whereas Rules M5.5 and M5.8 prima facie are holes in the ring fence, they are disregarded for the purposes of condition B by reason of paragraph 1(7) of schedule 2 to the Scheme Funding Regulations. It will be recalled that paragraph 1(7) provides:

“For the purpose of this paragraph, any provisions of a scheme by virtue of which assets attributable to one section may on the winding up of the scheme or a section be used for the purposes of another section are disregarded.”

Accordingly, the question arises in relation to Rules M2.7, M5.5 and M5.8: are those provisions, prima facie, non compliant with condition B and, if so, are they to be disregarded under paragraph 1(7) of schedule 2? As I have already decided the question in this case on other grounds, I will take these points fairly shortly.

As to Rule M2.7, Mr Stallworthy states that the power of the Trustees to increase or reduce the value of any part of the Separate Fund, which is not represented by actual assets allocated to that Fund, means that the provisions of the Scheme do not meet condition B. I read Rule M2.7 so that the Trustees can only increase or reduce the value of a part of the Separate Fund in one of the ways specified in the last part of the Rule, that is, by addition of interest or by additions or deductions reflecting the investment performance of all or any part of the Fund. The Trustees are not entitled, for example, to reduce the value of the Fund in other ways so as to produce a result that part of the assets of the Separate Fund can be used for a purpose other than the Separate Fund. Read that way, in my judgment, Rule M2.7 does not fail to meet condition B.

Prima facie, Rule M 5.5 does not meet condition B. As regards Rule M5.8 it is conceded by Mr Newman that prima facie Rule M5.8 does not meet condition B.

In relation to both Rule M5.5 and Rule M5.8, Mr Newman says that these are provisions of the Scheme by virtue of which assets attributable to a Separate Fund (a section) may on the winding up of that section be used for the purposes of another section. There was lengthy discussion at the hearing as to the meaning of “winding up” where those words appear in Rule M5.6.4. Is winding up a process or an event? If winding up is a process then it has a commencement, a duration and an end. If winding up is an event, then the event comes about when the Separate Fund ceases to exist and all of its assets are administered and distributed. I can quite see that it is commonplace to regard winding up as a process. The reference to the winding up being completed in M5.6.4 perhaps suggests that winding up was regarded as a process by the draftsmen of the Rules. The reference in Rule M5.6.4 to postponing the winding up either suggests that the winding up is an event or that the draftsmen meant to refer to postponing the completion of the winding up or that the draftsmen meant “suspend” rather than “postpone”. Another possibility is that the winding up of the Separate Fund does not begin automatically on the creation of the Separate Fund and that there is a period of time following the creation of the Separate Fund before the winding up commences. During that period the winding up is “postponed”. If that is the right reading of Rule M5.6.4 then because Rule M5.8 would appear to apply during that period, it could be argued that Rule M5.8, which is a hole in the condition B ring fence, is not restricted to a period which involves the winding up of the Scheme. Reference was also made to the deed of amendment of 10^th August 2007 which amended Rule M5.6.4 and referred to winding up commencing after the period of postponement.

Whilst these linguistic arguments were not without force, it seems to me that I am more concerned to understand and apply paragraph 1(7) of schedule 2 to the Regulations rather than to construe the words used by the Rules of the Scheme. Paragraph 1(7) refers to assets attributable to one section being used for another section “on the winding up” of a section. In my judgment, having regard to the purpose of paragraph 1(7), I hold that Rule M5.5 comes within paragraph 1(7) but Rule M5.8 does not. Rule M5.5 only applies after applying Rules M5.1 to M5.4. The use of a surplus which remains after applying those Rules is a case of assets being used for the purposes of another section “on the winding up of” the Separate Fund, However, in the case of Rule M5.8, it seems to be possible for the Trustees to create a Separate Fund and then before embarking on the distributions required by M5.1 to M5.4 to merge the Separate Fund with the remainder of the Fund or, indeed, with a new Separate Fund. That appears to me to be too large a hole in the ring fence, otherwise required by condition B, to be patched up by the words of paragraph 1(7) of schedule 2. Accordingly, if the answer to the question raised in these proceedings turned on condition B, I would hold that condition B would not be satisfied in this case by reason of Rule M5.8.

It follows from the above that my answer to the question raised in the Claim Form is “Yes”, that is , that the assets and liabilities to be taken into account for the purposes of Part 3 of the Pensions Act 2004 when determining the rates of contribution payable by and on behalf of the employer or employers of the scheme, other than HBF and HBM, should include the assets and liabilities attributable to such Separate Fund as is set up pursuant to Rule M2 of the Rules in respect of employees and ex-employees of HBF and HBM.

In the course of the submissions, Mr Tidmarsh on behalf of the Trustees identified some six questions which he asked the Court to consider. As regards the first five of those questions, I have dealt with those and, indeed, other questions earlier in this judgment. It is not, I think, essential for me to restate the five questions and give my specific answers to them. However, the sixth question raised in the course of submissions does require to be addressed separately.

The essential point raised by the sixth question is: what is to happen if Part 3 of the 2004 Act is operated and results in a substantial payment being made to the Trustees and that payment is enhanced in amount because it reflected the liabilities, of, for example, the HBF Separate Fund? Will part of that payment be allocated to the HBF Separate Fund or will all of the payment be allocated to the remainder of the Fund so that nothing is available to the HBF Separate Fund?

The provisions of Part 3 of the 2004 Act and of the Scheme Funding Regulations do not expressly deal with this possibility. Further, the Rules of the Scheme are not particularly explicit for present purposes. It should be remembered that Part 3 of the 2004 Act did not exist when the Rules were initially drawn up. Nonetheless, it seems to me that there is just sufficient in the Rules, even before any amendment of them, to provide an answer to the question.

The value of the Separate Fund is referred to in Rule M2.2. This refers to the value of the Basic Entitlements and to the fact that the value of the Separate Fund is not to exceed the Share of Fund. Rule M2.5 deals with the Share of Fund which is to be the value of that part of the Fund which related to benefits for Identified Beneficiaries.

Fund is defined by Rule A2 which refers, amongst other things, to all rights held by the Trustees for the purposes of the Scheme. In my judgment, it is possible to hold that the intended operation of Part 3 of the 2004 Act leading potentially to a right in the Trustees to recover a debt from an employer (see section 228) is sufficiently a right which exists when the Separate Fund is set up so that that right, in so far as it relates to benefits for Identified Beneficiaries, can be evaluated and included in the Share of Fund. Rule M2.7 supports this approach. Under that Rule, the Trustees may record the value of the Separate Fund and that value can include the rights potentially accruing under Part 3 of the 2004 Act. It can also record all receipts potentially affecting that value. If the Trustees allocate particular assets to the Separate Fund then any receipt relating to those assets is to be added to the Separate Fund.

For the sake of completeness I should add that the last sentence in Rule M5.3, which was relied on in the submissions, does not in my view directly bear on the question. That contemplates that an employer may be obliged to make good a deficiency in the Separate Fund pursuant to a statutory provision. Rule M5.3 contemplates that the statutory provision will indicate the circumstances in which such a deficiency is to be made good. Rule M5.3 does not itself describe those circumstances.

Mr Stallworthy suggested that the question posed should be answered by the application of section 306 of the 2004 Act. This provides that where a provision of Part 3 of the 2004 Act conflicts with the Rules of the Scheme then the statutory provision overrides the Rules of the Scheme and the Scheme has effect with modifications as required in consequence. If I had felt unable to reach the conclusion which I have done, based on the definition of the Fund and Rules M2.5 and M2.7, I doubt if it would have been right to say that the statutory provisions conflicted with the Scheme so as to bring in the application of section 306.