Alitalia-Linee Aeree Italiane SPA v Rotunno & Ors

The Alitalia Italian Airlines Pension and Assurance Scheme (“the Scheme”) was established in 1964 by the Italian national airline, Alitalia-Linee Aeree Italiane S.P.A (“Alitalia”), to provide pension benefits for the employees of Alitalia’s UK branch. In its present form, the Scheme is a contracted out defined benefits occupational pension scheme with over 300 members and assets of approximately £55 million. It is currently governed by the Third Definitive Trust Deed and Rules dated 3 June 1997 (“the 1997 Deed” and “the 1997 Rules”), as amended. By a Deed of Alteration dated 17 September 2003 the Scheme was effectively closed to new members, but it continues to operate on an ongoing basis for the existing members. In other words, the existing members have continued to pay contributions to the Scheme and to accrue benefits under it. Alitalia has given active consideration to closing the Scheme to future accrual of benefits, thereby turning it into a closed scheme, but no decision has yet been taken and further consideration of the question has been suspended pending the outcome of the present proceedings.

The Scheme is a balance of cost scheme, under which contributions are made by active members at the rate of 6% of their pensionable pay, or such other rate as Alitalia acting on the advice of the Scheme Actuary may from time to time determine, and the balance of the Scheme’s funding is provided by the employer. Although the 1997 Rules envisage that there may be more than one employer, the only employer under the Scheme has at all times been Alitalia. Accordingly references in the 1997 Rules to “the Employer”, “the Employers” and “the Principal Employer” are in practice all to be read as references to Alitalia.

Rule 9 of the 1997 Rules is headed “Contributions by Employers”, and Rule 9.1 provides as follows:

“Each of the Employers shall make contributions to the Fund at a rate determined from time to time by the Trustees acting on the advice of the Actuary after consultation with the Principal Employer to secure the benefits under the Scheme in respect of Members in or formerly in its Service. The Employer’s contributions shall be paid to the Trustees (or as they direct) at whatever intervals they stipulate.”

The short, but important, question raised in these proceedings concerns the meaning and significance to be attached to the words “to secure the benefits under the Scheme” in Rule 9.1. In general terms, it is clear that the words state the funding objective by reference to which the rate of Alitalia’s contributions is to be determined. What is not clear, and has led to the present dispute, is whether the words require the liabilities of the Scheme to be valued on any particular basis for the purpose of setting the rate of Alitalia’s contributions. The Trustees of the Scheme say that the liabilities of the Scheme have to be valued for the purposes of Rule 9.1 on the so-called buy- out basis, that is to say by reference to the cost of purchasing annuities and deferred annuities which would provide the pension and other benefits payable under the Scheme. Alitalia, however, says that no particular basis of valuation is prescribed by Rule 9.1 and that the choice of an appropriate basis will depend on all the circumstances. The debate turns to a certain extent on the meaning to be attached to the verb “secure” in the phrase “to secure the benefits under the Scheme”. Does it mean, as the Trustees contend, “to make safe”, or does it, as Alitalia submits, have the more neutral meaning “to provide”?

The present proceedings were started by a Part 8 Claim Form issued on 30 October 2006. The Claimant is Alitalia and the Defendants are the Trustees who were in office at that date. It is now common ground that the questions for determination as set out in the Claim Form do not accurately reflect the contentions that each side wishes to advance, and that the appropriate formulation of the questions is set out in a notice under CPR rule 8.3(2)(b) served by the Trustees on 22 November 2006. The crucial question, as formulated in paragraph 1(1) of the notice, is whether on the true construction of Rule 9:

“(a)

the Trustees, acting on the advice of the Actuary (as defined) after consultation with the Claimant are required to determine the rate of contributions to be made by the Employers (as defined) by reference to the cost of securing the pension and other benefit liabilities of the Scheme by the purchase of annuities and deferred annuities; or

(b)

the Trustees, so acting, are required to determine the rate of such contributions on some other and if so what basis.”

The notice goes on to raise a question on the construction of Rule 32.1.4 which I have not, in the event, been asked to determine by either side, although the provisions of Rule 32 (which deals with the winding up of the Scheme) do feature in the arguments on the construction of Rule 9.1 and I will refer to them as appropriate in that context.

Finally, the notice also raises a subsidiary question which is in issue and was argued before me, namely whether the Trustees are entitled to an indemnity from Alitalia in respect of their costs of the present proceedings pursuant to clause 10.2 of the 1997 Deed. This is a separate and self-contained question, which I will deal with at the end of this judgment.

Alitalia was represented before me by Mr Brian Green QC and Mr Paul Newman, instructed by Wragge & Co LLP. The Trustees were represented by Mr Keith Rowley QC and Ms Elizabeth Ovey, instructed by Burges Salmon LLP.

Since the question about the meaning of Rule 9.1 is a pure question of construction, it is unnecessary for me to describe the background to the dispute in any detail. What follows is merely intended to place the question in its factual context.

Clause 9.2 of the 1997 Deed requires the Trustees to arrange for the financial condition of the Scheme to be investigated by the Actuary at intervals of not more than three and a half years. Pursuant to this requirement, actuarial valuations of the Scheme were carried out as at 1 January 1999 (“the 1999 Valuation”), 31 December 2001 (“the 2001 Valuation”) and 31 December 2004 (“the 2004 Valuation”). In the 1999 and 2001 Valuations, the Employer’s contribution rate was calculated by reference to an ongoing funding basis. I will describe the various types of funding basis later in this judgment. At this stage, it is enough to note that by the late 1990s, if not earlier, an ongoing basis of valuation had become considerably cheaper from the employer’s point of view than a buy-out basis. The 2004 Valuation was prepared by a new scheme Actuary, Mr Paul Jayson of Higham Group Plc. His report to the Trustees was dated 30 December 2005. He calculated that on an ongoing (attained age) basis, which was different from the ongoing (projected unit) basis used in the two previous valuations, the Scheme was in deficit as at 31 December 2004 in the sum of £15.117 million. He also calculated that on a buy-out basis the amount of the deficit was £27.5 million, and recommended that the Trustees should request funding from Alitalia on the basis of that figure. He did not, at any rate expressly, base his recommendation upon any particular construction of Rule 9.1, but rather upon his assessment of Alitalia’s financial position and “other uncertainties regarding its covenant”.

In the light of the 2004 Valuation, discussions ensued between Alitalia and the Trustees, which culminated in draft heads of agreement in March 2006 under which Alitalia provisionally agreed to fund the deficit in the Scheme on an ongoing basis by a series of payments up to the end of 2009. However, any agreement by the Trustees was subject to their taking Leading Counsel’s advice. The Trustees consulted Mr Rowley QC, who advised them in March 2006 that he had significant reservations about the proposal, one of his concerns being that in his opinion Rule 9.1 required the Scheme to be funded by reference to the buy-out basis. Alitalia then made a revised offer to pay a total of £15 million into the Scheme by 31 December 2006, but this offer was not accepted by the Trustees. One of their reasons for not accepting the offer was Mr Rowley’s advice on the construction of Rule 9.

Mr Rowley confirmed and expanded his advice in a written Opinion dated 6 April 2006, a redacted version of which was provided to Alitalia on the following day. In paragraph 33 of that Opinion he stated his view

“that the correct construction of Rule 9.1 is that the Trustees should set a contribution rate, over the period of time they consider to be appropriate (which may be immediately), which will produce the result that Members’ benefits are fully funded on the buy-out basis. Unless the Scheme is funded on this basis, I cannot see how some (lesser) rate of contribution will “secure the benefits under the Scheme”.”

Alitalia disagreed with the construction advanced by Mr Rowley and indicated that it would be willing to bring proceedings to have the question determined. It was agreed that the Trustees would set a schedule of contributions, on the footing that they were not required to cost the Scheme’s liabilities on a buy-out basis, pending the outcome of such proceedings, provided that they were issued before 1 November 2006. As I have already said, the Claim was issued on 30 October 2006. A schedule of contributions was duly agreed, without prejudice to the Trustees’ rights under Rule 9, and Alitalia has made all the payments required of it pursuant to that schedule.

There matters have rested, apart from one recent development which I should mention. In November 2007 the Trustees made an immediate demand for payment on Alitalia in the sum of £14.5 million, that sum representing the amount required to bring the funding of the Scheme up to the level recommended by the Actuary on the buy-out basis after taking account of the payments already made by Alitalia. The Trustees made it clear that they regarded this demand as justified whether or not they were right in their view of the construction of Rule 9.1. However, Alitalia wishes to challenge the decision to make this demand on a number of grounds, and has given notice that it intends to take legal action for that purpose. On 11 January 2008, sitting in the applications court, I heard an application by Alitalia to adjourn the present proceedings and combine them with the fresh action that Alitalia wishes to commence. I dismissed the application, partly because it was made barely one week before the date fixed for the trial of the present proceedings, but also because I took the view that the question of construction would need to be determined in any event, and the sooner it was determined the better. I was also influenced by the fact that none of the evidence on the proposed new claim would be admissible on the question of construction, and by the prospect that the issues in any new claim would be more sharply focused once the question of construction had been decided.

The provisions of the Scheme that are relevant to the construction of Rule 9.1 are few in number. Nothing turns on the general nature of the Scheme or the type of benefits for which it provides, apart from the basic point that it is a defined benefit balance of cost scheme, funded by contributions by active members (which are provided for in Rule 8) and contributions by Alitalia (Rule 9). The active members of the Scheme are permanent UK employees of Alitalia, including salaried directors, who have been admitted to membership. The normal retirement date is 60 for both men and women. The pension payable at normal retirement date is based on length of pensionable service (up to a maximum of 40 years) and final pensionable pay (taking the average pay for any 3 consecutive years in the final 10 years of service). The fraction of final pensionable pay which is payable as an annual pension following retirement is n/60ths for members who entered service after 1 January 1990; different fractions apply to other categories of member. There are provisions of a usual nature dealing with early and late retirement, commutation and surrender of pension, lump sum death benefits, pensions for spouses and dependents, payment of additional voluntary contributions, and so forth.

I have already quoted Rule 9.1. The rest of Rule 9 provides as follows:

“9.2

If an Active Member or Death Benefit Only Member is temporarily absent from Service but under Rule 7 he is treated as though he were not, the Employer may with the consent of the Principal Employer during the whole or any part of his absence pay such contributions as the Employer decides. If no contributions or reduced contributions are paid during the absence and they are less than the full amount required to maintain the Active Member’s or Death Benefit Only Member’s level of benefits those benefits shall be reduced as the Trustees decide acting on the advice of the Actuary having regard to the amount of the shortfall.

9.3, 9.3.1 Any Employer may give notice at any time to the Trustees and the Principal Employer to suspend, reduce (with power at a later date to resume payment) or terminate contributions PROVIDED THAT the Employer shall not be relieved of responsibility for payment of any contributions due before the date of expiry of the notice. If contributions are suspended or reduced the Trustees shall then make any modifications and adjustments to the benefits as they think fit acting on the advice of the Actuary. If contributions are terminated or the Trustees subsequently decide it is impracticable to continue the Scheme, Rule 32 shall apply.

9.3.2

…”

Rule 32 is headed “Winding Up and Dissolution”. Rule 32.1 provides that upon the happening of various events, including the Principal Employer going into liquidation or the Employers terminating their liability to pay contributions under the Scheme, the Trustees shall determine the Scheme and wind up the Fund, unless they decide to continue to administer the Scheme as a paid-up scheme. Rule 32.2 then provides for the compulsory termination of the Scheme in certain circumstances. The remainder of Rule 32 provides as follows:

“32.3

As soon as is practicable or desirable after the Dissolution Date [defined as the effective date of winding-up of the Scheme] the Fund shall be converted into money except for investments in annuities or deferred annuities which the Trustees may have power to retain for distribution as provided later in this Rule 32.

32.4

The proceeds of the conversion shall be applied … in the following order:-

[The order of application is then set out]

32.5

The amount allocated to each Member shall be applied to purchase a non-assignable (save as provided below) non-commutable annuity on his life from an Insurer selected by the Trustees. The annuity shall in the case of recipients of existing pensions and Postponed Pensioners be an immediate annuity. In the case of Active Members and Deferred Pensioners it shall be a deferred annuity …

32.6

…

32.7

All or any of the benefits required to be secured may if the Trustees determine be secured by transferring appropriate available assets to an Other Scheme.

32.8

If the assets of the Fund include annuity contracts or annuity policies effected in the names of the Trustees or their nominees with any Insurer the Trustees shall either:-

32.8.1

enter into an arrangement with the Insurer to transfer or secure them in trust for the person or persons entitled to benefit under them, or

32.8.2

assign them into an Other Scheme.

32.9

…”

Clause 9 of the 1997 Deed deals with the appointment of the Scheme Actuary and provides, as I have already said, for a triennial investigation of the financial condition of the Scheme. It is also relevant to note Clause 9.3, which provides as follows:

“The Trustees shall be under no duty to have the Fund valued in accordance with clause 9.2 during any period when all the liabilities of the Scheme are wholly secured under insurance contracts or policies other than managed fund contracts or policies.”

It is common ground that the provisions of previous scheme documents which have been superseded may sometimes throw helpful light on the construction of the current scheme documents: see for example The National Grid Company Plc v Laws and others [1997] PLR 157 (“National Grid”) at paragraphs [69] to [73] per Robert Walker J (as he then was). As the judge said in paragraph [72]:

“The superseded provisions did at one time stand as part of the scheme, and a comparison of the old and the new may sometimes help to explain the purpose and meaning of the new provision.”

However, he went on to sound a salutary note of caution, with which I respectfully agree, in paragraph [73]:

“I conclude that the court can, as an aid to construction, look at provisions of a pension scheme which have been superseded by an amendment. But the court should be slow to do so, both because of the inconvenience involved and because of the uncertainty (apart from exceptional cases) of deriving any useful assistance from the exercise.”

Since Mr Rowley’s argument sought to derive some support from the “archaeology of the Scheme” (see National Grid at [70]), it is appropriate that I should briefly trace its history and refer to the main provisions upon which Mr Rowley relied. The Scheme was originally established by an interim Trust Deed dated 26 March 1964 (“the 1964 Deed”), which recited Alitalia’s desire to establish a fund to provide pensions and other benefits for employees. The final recital said these benefits would be “provided” by contributions from Alitalia and members, by any annuity contracts or policies referable to other retirement benefits arrangements

“which contracts or policies either shall be assigned to the Trustees from such other arrangements or shall secure (inter alia) benefits similar to and in substitution for those secured for such employees under such other arrangements”,

and by any cash sums which might be transferred to the Trustees from such other arrangements

“in substitution for any benefits secured thereunder …”

In the operative clauses of the 1964 Deed Alitalia and the Trustees undertook to execute a Definitive Trust Deed with appended rules within 12 months.

A Definitive Trust Deed was then duly executed on 22 March 1965 (“the 1965 Deed”), in what appears to be a standard pre-printed form provided by an insurance company. It is now common ground that the Scheme was in fact an insured scheme at its inception, and remained insured (at least latterly with Legal & General) until 1987. The contributions provision in the 1965 Deed was clause 5(a), which provided as follows:

“5(a) The Trustees shall on the Commencement Date and subsequently on each Annual Renewal Date … estimate to the best of their ability the total sum (including contributions, if any, of Members) required during the period up to the next Annual Renewal Date for securing such of the Intended Benefits as the Trustees in their sole discretion and without thereby incurring any liability decide to secure during each such period and shall immediately give written notice to the Employers … specifying the instalments (if any) by which and the date or dates within such period on which the Trustees desire the same to be paid …”

The Intended Benefits were defined as the benefits described in the Rules. Unfortunately, however, the 1965 Rules do not appear to survive. Clause 6(a) provided that after payment of expenses the Trustees should apply the capital and income of the fund

“in providing the Intended Benefits as and when the same shall fall due in accordance with the terms and provisions of the Rules”,

while clause 6(b) empowered the Trustees to make provision for the Intended Benefits by investing the fund in annuity contracts or policies with an insurance company.

Clause 19 of the 1965 Deed dealt with the winding-up of the fund, and provided that any uninsured portion of the fund should be applied in “securing” the payment of pensions in a specified order of priority. Proviso (2) to clause 19(a) provided that the pensions in question might either be “secured” by annuities purchased from an insurance company or, in certain specified circumstances, by investing the relevant portion of the fund in appropriate contracts or policies already held by the Trustees.

On 13 August 1975 a second Definitive Deed (“the 1975 Deed”) was executed. It was prepared by solicitors (Messrs Crawley & de Reya), but in general its structure was very similar to the 1965 Deed. There was, however, a significant change in the contributions provision in clause 5(a), which now required the Trustees to estimate each year the total sum required to enable them “to maintain the benefits of the Scheme”, rather than, as before, the total sum required for “securing” benefits. Like the 1965 Rules, the 1975 Rules also no longer survive. However, it is a reasonable inference from the 1986 Rules (mentioned below) that with effect from 6 April 1975 benefits linked to final salary became payable for the first time.

The likely significance of the change to final salary benefits in 1975 was helpfully explained by Alitalia’s expert witness, Mr Ronald Bowie FIA, in his oral evidence. Before 1975 the benefits under the Scheme were probably based on fixed accruals, providing a pension at normal retirement age of a fixed amount for each completed year of pensionable service. Such fixed accruals did not depend on any future variables, and it was therefore possible to match them precisely (and thus make them secure) by means of appropriate insurance policies. The Scheme would therefore have been an “insured scheme” of the type described by Warner J in Mettoy Pension Trustees v Evans [1990] 1WLR 1587 (“Mettoy”) at 1594H and 1600F-G. After the change, however, it would no longer have been possible to match benefits in this way, and although the Scheme remained an insured scheme until 1987, in the sense of being fully invested with Legal & General, the benefits would have been only partially guaranteed under the policy. Payment of the full amount required to fund the benefits would have depended to a considerable extent on the future investment performance of the insurer and the allocation of terminal and other bonuses, typically on a with-profits basis. This method of funding was known as “controlled funding”. It was not capable of guaranteeing a precise final outcome, except to the extent of any fixed endowment element or any truly entrenched and irrevocable bonuses. Accordingly, even if a scheme was fully insured on this basis, it would be right to regard the insurance policy as a form of investment of the fund by the Trustees rather than as a means of securing (in the sense of making safe or impregnable) the benefits under the scheme.

I accept this evidence, which was not controverted by the Trustees’ expert witness, Mr Jonathan Punter FIA, and infer that the reason for the change in the wording of the contributions provision in the 1975 Deed was that the Trustees’ insurance of the Scheme could no longer be relied upon to guarantee the benefits provided under the Scheme, which were now linked to final salary. Whereas the references to “securing” benefits in clause 5(a) of the 1965 Deed might well have been understood as meaning “make safe”, and particularly if (as seems likely) the only benefits then provided were based on fixed accruals, now that final salary benefits were to be provided Alitalia would understandably have wished to make it clear that its funding commitment was only to be on an ongoing basis. This object was unambiguously achieved, as Mr Rowley accepted, by the use of the words “to maintain the benefits of the Scheme” in clause 5(a) of the 1975 Deed.

The next major development was in 1986, when by a Supplemental Deed dated 17 March 1986 various amendments were made to the 1975 Deed and a new set of Rules (“the 1986 Rules”) was adopted. The 1986 Rules were stated to apply with effect from 6 April 1975. Since the 1986 Rules provide for final salary benefits, this back-dating would have made no sense unless the lost 1975 Rules had also provided such benefits. Each of the expert witnesses therefore agreed that it was reasonable to infer that the switch to final salary-linked benefits had indeed been made in 1975.

In 1987 Alitalia decided to convert the Scheme from being insured with Legal & General to being managed by the Trustees. The change was effected by the transfer of assets, in the form of stocks and shares, from Legal & General to the Trustees. Unfortunately, the transfer was effected shortly before the Stock Market crash in October 1987, with the result that there was an immediate loss on the value of the assets previously held by Legal & General. In the light of that unfortunate experience, Alitalia dismissed the firm of consultants who had advised on the form of transfer from Legal & General, and appointed fresh investment advisers. From then onwards the Scheme has not been an insured scheme, although the Trustees still have power to invest in insurance policies if they think fit.

The background to the adoption of the 1997 Deed and Rules was explained as follows by Mr Filippo Rotunno, the first defendant, who has been a Trustee of the Scheme since 1987:

“At a later stage the Trustees were advised to execute a new Deed and Rules by Gissings, who were then the consultants to the Scheme. I cannot remember precisely when this first came up. There had been quite a lot of negotiation and deals with union representatives in 1990 to reach satisfactory arrangements to equalise benefits for men and women, and there were also changes in legislation which affected the Scheme, in particular the Pensions Act 1995. Gissings advised us that [the 1975 Deed and Rules] (as amended) were outdated and needed to be updated to take account of legislation since that time. I remember that I was concerned that the new Deed and Rules should be easier to read as the current Deed and Rules were very difficult to follow for me as a lay person. Eventually [the 1997 Deed and Rules] were executed on 3 June 1997.”

The 1997 Rules are deemed to have come into operation on 1 January 1990: see Rule 2.1. Mr Rotunno’s recollection is that the reason for this element of retrospection was the need to deal with the equalisation of retirement ages, following the decisions of the European Court of Justice in Barber v Guardian Royal Exchange [1991] 1 QB 344 and subsequent cases.

I should mention at this point that Mr Rotunno’s witness statement was produced by the Trustees very much at the last moment, on the morning when the hearing began, with the main object of explaining that the Scheme had indeed been an insured scheme up to 1987. The evidence previously filed on each side had not dealt with this point, although Mr Rowley and Ms Ovey, in their skeleton argument, had correctly deduced that it was an insured scheme in 1965. Mr Rotunno’s evidence was that the Scheme was still insured, with Legal & General, when he first became a Trustee in 1986 or 1987. He said he could not be sure of the exact terms of the arrangements with Legal & General, as he had not retained a copy of the policy, but his recollection was that “member benefits were fully insured and secured” with Legal & General, and Alitalia’s only obligation to members was to meet the payments due under the policy. In the course of his cross-examination by Mr Green it quickly became clear that when Mr Rotunno said the benefits were “secured” he meant only that Legal & General were contractually bound to provide them under the policy, and that the policy benefits matched those promised to members in their members’ booklet. Mr Bowie described this as a typical layman’s perception, but explained (as I have already said) that in reality the benefits were at best only partly guaranteed from 1975 onwards.

I was fortunate to have the assistance of two distinguished and experienced actuaries, Mr Bowie for Alitalia and Mr Punter for the Trustees. However, the areas in which their evidence is admissible and of assistance on a pure question of construction are inevitably limited. There is no doubt, in my judgment, that their evidence is both admissible and helpful in so far as it describes the various ways in which pension schemes may be funded, and the role that is played by the scheme actuary in the funding process. This is all part of the relevant commercial background against which Rule 9.1 has to be construed. Their evidence might also be relevant and helpful if the wording of Rule 9.1 were in a standard form that had a recognised meaning within the pension industry, or at least within the actuarial fraternity. The general practice of actuaries, if it exists, in relation to a clause of a particular type, at the date when it was adopted, would certainly be a relevant factor for the court to take into account when construing the clause. However, the individual views of actuaries on the meaning of particular wording are at best of only peripheral relevance. The meaning of the words is a question of law for the court, and actuaries are not lawyers. The most that can be said is that the court may gain some indirect assistance from learning how a skilled actuary would interpret the words in question, although that assistance is likely to be negated if another equally skilled actuary would interpret them in a different sense.

Furthermore, the court will derive no assistance at all from expert evidence which is directed to irrelevant matters such as the history of the dispute or criticisms of actuarial material relied upon by the other side in some wider context. I mention this point, obvious though it may seem, because Mr Rowley and Ms Ovey rightly complained in their skeleton argument, and it soon became common ground, that a considerable part of Mr Bowie’s two reports, and therefore of Mr Punter’s response to Mr Bowie’s evidence, was devoted to criticisms (or defence) of the 2004 Valuation. This evidence is in my judgment of no conceivable relevance to the question I have to decide, although it may well be relevant to the wider funding dispute between the parties.

Having made these preliminary comments, I can say at once that I do not question in any way the professional competence and expertise of either expert witness, and I am sure that they both did their conscientious best to assist the court in their written and oral evidence.

In his first report Mr Bowie begins by explaining how an actuary sets about performing an actuarial valuation of a defined benefit pension scheme. Having obtained the necessary data about active members who are still in service, deferred members who have left service and are entitled to future benefits, and pensioners and their dependants who are already in receipt of benefits, the actuary first calculates the amount of benefit which the members have already earned (the “accrued benefits”). He then considers whether the accumulated assets in the fund are sufficient to provide for the accrued benefits, and for this purpose places a value on the liability for those accrued benefits. He then considers the contributions required from the employer to cover the value of the liabilities which will build up as further benefits are earned in the future. This requirement is commonly expressed as a percentage of the payroll of the scheme members, and is often described as the “future service contribution rate”. If the actuary feels that the accumulated assets in the fund exceed or fall short of the amount appropriate to cover the value which he has placed on the accrued benefits, some adjustment may be made to the future service contribution rate (normally by way of a reduction in that rate if the scheme has a surplus, or an increase if the scheme has a deficit).

In order to make these assessments the actuary will inevitably have to make assumptions about how the scheme will develop in the future, perhaps for a period of 20 years or more. In order to do this the actuary will project forward the cash flows out of and into the scheme. The principal cash flows out of the scheme are the benefits. The actuary therefore make assumptions about future wage growth, future increases to pensions once in payment, the probability that people will leave by death, early retirement, normal retirement or other means, and so forth. Having projected forward the cash flows arising from expected benefit payments, the actuary then discounts those payments at an assumed rate of interest in order to give a present “capital value”. The capital value of the liabilities earned in respect of service up to the valuation date is commonly called the “value of the accrued benefits”. In considering the asset value of the fund, the actuary will typically take either the market value of the assets (as described by the auditor in the accounts) or an “assessed” or “actuarial value” which takes a longer term view and aims to smooth out the effect of short term fluctuations in market value.

In assessing the future service contribution rate, the actuary will typically adopt one of two methods. The first method, known as the “projected unit” method, is calculated as the value of benefits to be earned in the year immediately following the valuation, and takes that value as a proxy for each subsequent year. The second method, known as the “attained age” method, calculates the average annual cost of providing all future benefits up to retirement. Both methods can be expected to produce a stable contribution rate (as a percentage of salaries) if the membership profile remains stable from year to year, but the former method will result in an increasing rate (applied to a reducing payroll) if a scheme is closed to new members. As I have already mentioned, the former method was used in the 2001 Valuation, and the latter method in the 2004 Valuation (after the Scheme had been closed to new members).

The process described above is generally known as the “ongoing method” of valuation or funding. Its purpose is to value the scheme as a going concern, in the expectation that the scheme will continue broadly in its present form and with broadly the same investment strategy, with the continued support of the employer. Any surpluses or deficits revealed by this method of valuation will typically be run off over a period of ten or more years. However, there are, or have been, other purposes for which it may be necessary to carry out actuarial valuations. These include:

For present purposes, the only measure which is relevant apart from the ongoing basis is the wind-up (or buy-out) method, which Mr Bowie describes as follows in section 2.4 of his first report:

“2.4.2

Guidance Note 9 issued by the Faculty and Institute of Actuaries (“GN9”) requires the Actuary to calculate the position if the scheme had been discontinued at the valuation date. This must be disclosed in the formal report and is intended to provide an indication of the position that would have applied if the scheme had been wound up at the date of valuation. As the valuation report is typically issued almost 12 months after the date of the valuation, this means that unless further explanations are provided by the scheme actuary the wind-up position quoted is of historical interest only as the position will likely have changed over the intervening months and, indeed, could be significantly different.

2.4.3

In calculating the wind-up measure, the actuary will assume that the benefits built up are fully secured by purchase of annuity policies with an insurance company. Due to the significant risks of guaranteeing a benefit which may not commence to be paid for another 20 years and which may continue in payment for a further 20 or more years, insurance companies take a cautious approach in setting annuity rates. These will include reserves for future investment uncertainties and the risk of improved life expectancy, as well as an element to cover expenses and profit for the insurer. A wind-up valuation may be regarded as the most extreme measure for assessing the financial health of a pension scheme in that, it effectively assumes no further support from the employer and that all liabilities are to be secured with annuities.

2.4.4

Whilst the wind-up position needs to be quoted in the formal valuation report, it is intended to provide a measure of the level of security afforded to members’ benefits at the valuation date rather [than] being used as an ongoing funding measure. In practice, the wind-up measure is only used for purposes of determining the level of any shortfall (or, more rarely, surplus) which must be funded when a scheme is actually in wind-up (with no further employer support) or when an employer ceases to participate, in which case its liabilities are crystallised. ”

In a later section of his report (section 4.4) Mr Bowie describes what he calls “the broader consequences of adopting a buy-out basis”. He points out that buy-out terms are set by insurance companies and depend on a number of factors, including the supply and demand in the market place. However, insurance companies will typically take a cautious view, with the result that

“annuity policies are the most expensive form of investment which trustees of a pension scheme could choose and over the longer term such a policy could be expected to lead to an unnecessarily high burden on the sponsoring employer.”

In another section of his first report (section 4.2) Mr Bowie deals with the interaction between the employer and the trustees. He begins by pointing out that, as is common knowledge, the cost to employers of maintaining existing accrued benefits in defined benefit pension schemes has increased substantially in recent years as a result of a number of factors, including low interest rates and increased life expectancy. As a result, many UK schemes now have funding deficiencies. Against this background, the setting of contribution rates and funding plans to make good any deficit will involve detailed negotiation between the trustees, the employer and the actuarial advisers to both parties. In general, however, both parties will have an interest in achieving an outcome which properly balances the need to provide for members’ pensions with the business needs of the employer. The needs of members will generally be best served by the continued support and existence of the employer. These comments apply not only to schemes which are still open to new members, but also to those schemes (now the majority) which are closed to new members but open to future accrual for existing members. The main difference in relation to schemes of the latter type is that both the trustees and the employer will generally have regard to the expected lifetime of the plan, and this may lead to the adoption of an accelerated timetable to repair any deficit. In Mr Bowie’s experience, however, it would not normally lead to a different funding approach. An accelerated funding plan may also be agreed in cases where events are likely to take place which may impact on the employer’s future ability to fund the scheme, or when the employer is experiencing financial difficulties. In such situations the conflicting aims of the trustees and the employer are brought to the fore, and discussions may be protracted, but in general there is still a willingness to compromise on both sides,

“with a view to increasing as much as is reasonable the security of pension scheme members’ rights without tipping the sponsor into insolvency or significantly restricting it in its aim of getting the business back on track.”

As regards Rule 9.1 of the 1997 Rules, Mr Bowie said that the contribution clause was unexceptional in giving the power to set contributions to the trustees, on the advice of the actuary following discussion with the employer, but that the use of the words “to secure the benefits” in the rule was “less common but by no means unique”. Although the effect of that wording “might be to put the clause towards the conservative end of such clauses”, it would be unique in his experience for this to be construed by the scheme actuary as requiring funding on a buy-out basis given the continued support of the employer for the scheme. In cross-examination Mr Bowie said that, in an informal survey of the scheme documents used by approximately 100 clients of his firm, the words “to secure” in the balance of cost contributions clause were used in only two cases. He therefore agreed that Rule 9.1 was unusual, and equivalent wording might be expected to be found in around 2% of cases. In the two instances known to his own firm, the schemes were funded using “a typical prudent ongoing approach”. He was unaware of any scheme where a funding objective had been set by reference to the full costs of buy-out, and the 2004 Valuation was the first valuation he had seen where immediate funding on a buy-out basis was formally recommended.

Mr Punter, in his report, also gave a general account of the role of the scheme actuary in carrying out a valuation of a defined benefit pension scheme. His account did not differ in any essentials from that given in rather more detail by Mr Bowie. However, there is one possible funding objective not mentioned by Mr Bowie to which he attaches considerable importance, namely the “economic objective”. By this he means an objective similar to the “accounting standard” (i.e. the aim of meeting the standard of provision required under either UK or international accounting standards, FRS17 or IAS 19), except that the discount rate employed would be the risk-free rate of yield on British government stocks. His evidence is that this type of objective is generally adopted where a scheme invests its assets predominantly in gilts with a view to minimising the investment risk and thus fluctuations in the funding position over time. In his opinion the range of funding objectives consistent with the wording of Rule 9.1 is relatively narrow, and the economic objective is at the lower end of that range. The cost to the employer of funding on the basis of the economic objective would typically be around 10% to 15% less than the cost of funding on a full buy-out basis, because the economic objective would not need to provide for either the profit margin or the cost of providing solvency reserves which would apply to an insurance company providing annuities on the buy-out basis.

Mr Punter’s view that only a narrow range of funding objective was open to the Trustees was heavily dependent, in my judgment, on the view which he took about the meaning of the words “to secure” in Rule 9.1. He recognised that he was not qualified to give a legal opinion on the meaning of those words, but nevertheless proceeded, as I understand his report, on the basis that the meaning contended for by the Trustees was essentially correct. He accepted, however, that some practitioners might argue that the words “to secure” would allow an element of investment risk to be incorporated in the objective, and in cross-examination he accepted that some actuaries, faced with the wording of Rule 9.1, could reasonably take the same view of what it required as Mr Bowie. His own view was that the words “to secure” put Rule 9.1 at the prudent end of the spectrum of employer contribution clauses, and required a “very strong method” of fulfilling the funding objective. Indeed, he took the view that the wording could legitimately authorise the adoption of funding in excess of the buy-out basis, although he had never taken that step, or recommended it, himself.

Mr Punter summarised his opinion in paragraph 12.1 of his report by saying that in his view Rule 9.1 requires the Trustees to adopt a funding objective that would vary from a percentage of 100% or more of buy-out at one extreme to the economic objective at the other extreme. He expressly accepted in paragraph 12.3 that other actuaries might possibly take a wider view over the setting of an acceptable funding objective, but in both his experience and that of Mr Bowie

“there are relatively few schemes with such wording so it is difficult to form a view of the wider actuarial practice.”

It is no criticism of Mr Punter to say that I have not been able to gain much, if any, assistance from his views about the acceptable range of funding objectives permitted by Rule 9.1. I say this for two main reasons. First, as he frankly acknowledges, the wording of the rule is too unusual for there to be any accepted actuarial practice or consensus about its meaning and the degree of latitude which it affords to trustees. On the evidence before me, that is still the position today. If that is right, still less can there have been any standard practice or consensus when Rule 9.1 was adopted in 1997. Secondly, Mr Punter’s views on the scope of Rule 9.1 are in any event based to a large extent on his own interpretation of its meaning. That is, of course, the very question which I have to decide, and it is a question of law on which Mr Punter is not competent to give evidence.

For similar reasons, I have been unable to derive much assistance from the short joint statement produced by Mr Bowie and Mr Punter on 15 January 2008. In essence, the thrust of this joint statement was that they both agreed that the presence of the word “secure” in Rule 9.1 would lead to the adoption of a funding objective at the “more prudent end” of the range typically acceptable when considering the funding of defined benefit pension schemes in the UK, but they disagreed as to where the lower end of this range should be located.

It was common ground that the principles applicable to the construction of pension scheme provisions are now well-settled, and are helpfully summarised by Arden LJ in British Airways Pension Trustees Limited v British Airways Plc [2002] EWCA Civ 672, [2002] PLR 247 at paragraphs [26] to [32], from which I quote the following extracts:

“26.

There have been several reported cases about the interpretation of provisions of pension schemes in recent years. There are no special rules of construction but pension schemes have certain characteristics which tend to differentiate them from other analogous instruments. I mention some of those characteristics in the following paragraphs.

27.

First, members of a scheme are not volunteers: the benefits which they receive under the scheme are part of the remuneration for their services and this is so whether the scheme is contributory or non-contributory. This means that they are in a different position in some respects from beneficiaries of a private trust. Moreover, the relationship of members to the employer must be seen as running in parallel with their employment relationship. This factor, too, can in appropriate circumstances have an effect on the interpretation of the scheme.

28.

Second, a pension scheme should be construed so [as] to give a reasonable and practical effect to the scheme. … In other words, it is necessary to test competing permissible constructions of a pension scheme against the consequences they produce in practice. Technicality is to be avoided. If the consequences are impractical or over-restrictive or technical in practice, that is an indication that some other interpretation is the appropriate one.

…

29.

Third, in pension schemes, difficulties can arise where different provisions have been amended at different points in time. The effect is that the version of the scheme in issue may represent a “patchwork” of provisions … The general principle is that each new provision should be considered against the circumstances prevailing at the date when it was adopted … Likewise, the meaning of a clause in the scheme must be ascertained by examining the deed as it stood at the time the clause was first introduced.

…

30.

Fourth, as with any other instrument, a provision of a trust deed must be interpreted in the light of the factual situation at the time it was created. This includes the practice and requirements of the Inland Revenue at that time, and may include common practice among practitioners in the field as evidenced by the works of practitioners at that time. It has been submitted to us that the factual background is only relevant if the document is ambiguous. I do not accept this submission, which is inconsistent with the approach laid down by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896.

…

31.

Fifth, at the end of the day, however, the function of the court is to construe the document without any predisposition as to the correct philosophical approach.

…

32.

Sixth, a pension scheme should be interpreted as a whole. The meaning of a particular clause should be considered in conjunction with other relevant clauses. To borrow John Donne’s famous phrase, no clause “is an Island entire of itself ”.”

The speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society is by now too familiar to require citation, but I emphasise, in respectful agreement with Arden LJ, that the principles which he there stated apply to the construction of pension scheme documents no less than they do to other commercial documents.

The case for Alitalia

Mr Green QC began his submissions for Alitalia by pointing out that a defined benefit scheme is created on the basis that the pension and other benefits set out in its rules will be provided out of the fund settled on trust for that purpose, and that this is how it will generally be expected to operate from the date of its constitution and for so long thereafter as it continues to be an ongoing arrangement. While the scheme continues to operate on an ongoing basis, benefits will normally be paid out of the fund and will not be required to be purchased with an insurance company. Thus the essential question for the trustees in administering the fund is whether the fund is, and may be expected to continue to be, sufficient to provide for accrued and accruing benefits by payments out of it, not by the purchase of annuities from insurance companies.

Where members or groups of members move to new pensionable employment, and take transfer values out of the scheme, those transfer values will be calculated on a basis prescribed by statute which is not based on the cost of buying out such benefits with an insurance company. Over the lifetime of a defined benefits scheme, which will in the ordinary course be many decades, many of its members will leave in this way.

It is only if and when a winding up of the scheme becomes a practical possibility, whether because of the financial position of the employer or for any other reason, that the possible need to provide for the benefits of members who remain in the scheme by way of purchase of annuities and deferred annuities will generally displace the assumption that benefits will be provided on an ongoing basis out of the fund. At that point, but not before, it may be appropriate for the employer’s funding of the scheme to be calculated on the buy-out basis. Even then, however, the circumstances may be such that buy-out funding is not required. For example, the scheme may be wound up in connection with a takeover of the employer pursuant to which the liabilities of the scheme will be assumed by another scheme in the purchasing company’s group.

Mr Green went on to submit that funding on a buy-out basis does not give credit for the effect of future salary increases on accrued rights, because it assumes discontinuance of the scheme. Accordingly such a basis does not properly reflect the nature of a final salary benefit in an ongoing context. To fund the scheme on a buy-out basis in such circumstances is not only unrealistic, but also methodologically unsound. In support of this submission Mr Green relied on the judgment of Millett J in Re Courage Pension Schemes [1987] 1 WLR 495 (“Courage”) at 512H to 513B, where the judge held that benefits secured by past contributions include the prospective entitlement to pensions based on final salary.

None of this is to say that the trustees do not have a power to invest in insurance contracts, or to buy out the benefits of individuals or groups of members while the scheme is ongoing. They clearly do have such power, under the very wide investment powers conferred upon them. The point is simply that, while the scheme is operating on an ongoing basis, it will not normally be sensible for the trustees to provide for benefits in this way.

Turning to the literal construction of Rule 9.1, Mr Green pointed out that it does not prescribe any particular basis for the costing of pension benefits. Moreover, the “benefits under the Scheme” referred to in Rule 9.1 are the benefits to be paid by the Trustees out of the fund, and to which members are contractually entitled. It is those benefits which Rule 9.1 is looking to secure, and which have to be costed with a view to their being provided.

Where the draftsman uses the word “secure” in Rule 32, he does so in the sense of “provide”, not as shorthand for “secure by the purchase of annuities and deferred annuities”. This is shown in particular by Rule 32.7, which provides that any benefits required to be “secured” may at the Trustees’ discretion be secured by transferring appropriate available assets to another scheme. By contrast, in Rules 32.4 and 32.5, where benefits are required to be secured by the purchase of annuities, this is expressly provided for. More generally, Rule 9.1, like Rule 32, is concerned with the means by which the benefits under the Scheme are to be provided for. It is perfectly accurate to describe the fund (into which the employer’s contributions are paid) as securing, in the sense of providing for, the benefits under the Scheme, because that it precisely what the trust fund does in a trust scheme: it ring-fences the assets from those of the employer, and provides a dedicated pot from which benefits are to be provided.

Reading Rule 9.1 as a whole requires cognisance to be taken of its last sentence, which enables the Trustees to spread the collection of contributions over whatever period they stipulate. However, submits Mr Green, this makes it all the more obvious that the liabilities of the Scheme are not required to be valued by reference to a buy-out basis, because if that were the position one would expect the Trustees to be under a duty immediately to collect all the contributions that were necessary to enable them to provide for such benefits by the purchase of annuities. Furthermore, if the intention really was to make the Scheme benefits impregnable at all times, one would expect the Trustees’ powers of investment to be similarly circumscribed, whereas in fact they have the widest powers of investment: see clause 5.5 of the 1997 Deed. They may invest in equities or any form of investment. They are not required to invest in gilts, let alone in insurance contracts.

Mr Green also submitted that the Trustees’ construction of Rule 9.1 would emasculate the requirement for consultation with the employer under the rule. If liabilities were required to be costed on a buy-out basis, there would be nothing to consult about in relation to that, and the process of consultation would in practice be limited to the period over which any contributions were to be paid. Had the draftsman intended the process of consultation to be so limited, he would have said so.

Mr Green submitted that further assistance could be obtained from other provisions in the 1997 Deed and the 1997 Rules. In this context he referred to clauses 9.3 and 13.2 of the 1997 Deed and Rule 9.2 of the 1997 Rules.

In clause 9.3, which I have already set out in paragraph 17 above, he submitted that the word “secured” means no more than “provided for”. It is the fact that the Scheme liabilities are provided for under insurance contracts or policies which means that the solvency of the fund (as distinct from the solvency of the insurer) is no longer material, with the consequence that there is no need for an actuarial valuation.

Clause 13.2 of the 1997 Deed provides as follows:

“Any Employer may at any time pay and the Trustees may receive monies for better ensuring the solvency of the Fund and the provision of the then existing benefits under the Scheme, PROVIDED THAT no such payment shall be such as would prejudice Revenue Approval.”

Mr Green had two points about this clause. First, it would have very little scope for operation if the Trustees’ construction of Rule 9.1 were correct, because if the Trustees were required to cost liabilities by reference to a buy-out basis there should be no need for the employer to make additional payments to ensure the solvency of the fund, except perhaps in a case where the Trustees had decided to spread the employer’s contributions. Secondly, the wording of clause 13.2 emphasises that the governing principle is the solvency of the fund with a view to providing (not securing) the benefits under the Scheme.

Similarly, in Rule 9.2, which I have set out in paragraph 15 above, the draftsman refers to “the full amount required to maintain” the relevant benefits, not the full amount required to “secure” them.

Mr Green argued that Alitalia’s reading of Rule 9.1 was not only the correct reading on a literal interpretation, but also the correct reading on a practical and purposive interpretation. In support of this submission he relied on many of the points which I have already recorded. More generally, he submitted that it makes no practical sense to construe Rule 9.1 as requiring pension and other liabilities to be costed on an assumption that an insurance company rather than the Scheme itself will be the source of benefits when they fall into payment. Defined benefit schemes are constituted on the basis that liabilities will be met from the scheme assets, not on the assumption that all such liabilities will be met by an insurance company. The construction of Rule 9.1 must make practical sense in an ongoing environment, and not only in a winding-up environment. Furthermore, by 1997, and in fact for many years previously, the provision of benefits through the Scheme would have been significantly less expensive than the purchase of such benefits from an insurance company. It was not the purpose of Rule 9.1, either express or implicit, to generate surpluses, but a requirement to cost benefits by reference to the buy-out basis, when the Scheme was ongoing, would tend to do just that. A construction of Rule 9.1 which recognised the need for flexibility in the costing basis, depending on the circumstances of the Scheme from time to time, would therefore be practical as well as purposive. The exaggerated costing of liabilities implicit in the Trustees’ construction would potentially impose unduly onerous funding obligations on the employer, and could even weaken its financial state to an extent that would jeopardise its continued viability and the very existence of the jobs of the active members of the Scheme. This would operate to the ultimate detriment of such members. Furthermore, even if the employer were able to meet the obligations, their severity might lead the employer to withdraw its support for the future continuation of the Scheme, thereby depriving members of the opportunity to accrue future benefits.

Mr Green submitted that it was no answer to this point to say that the Trustees could always seek to avoid such consequences by sympathetic spreading of contributions under Rule 9.1. That would be to seek refuge in the spreading provision from the consequences of an impractical construction.

In his oral submissions, Mr Green emphasised that it was no part of Alitalia’s case that Rule 9.1 restricted the Trustees to requiring contributions on the ongoing basis. The correct position was that everything depended on the circumstances from time to time, and the appropriate funding objective to adopt was a matter for the Trustees to determine on the advice of the Scheme Actuary and after consultation with Alitalia. He suggested that if Alitalia were to refuse to provide relevant information, for example on grounds of confidentiality, the Trustees would be entitled to assume the worst; but the possibility of such a refusal was not in itself a reason for giving Rule 9.1 a narrow meaning. He reiterated that the words “to secure” in Rule 9.1 had a neutral connotation, and that the fund itself was the means whereby members’ benefits were secured.

In support of his thesis that the fund was the agent which provided benefits to members, Mr Green referred to the decision of Rimer J in Lloyds Bank Pension Trust Corporation Ltd v Lloyds Bank Plc [1996] PLR 263 (“Lloyds Bank”). The question in that case was whether the trustees could use the power of amendment in the trust deed of the scheme to reduce the future accrual rates of women members. Under the relevant rule, no amendment could be made which would have the effect of “decreasing the pecuniary benefits secured” under the scheme, unless the written sanction of a specified proportion of the members was obtained. One of the questions considered by the judge was whether this wording referred only to benefits payable on the basis of a member’s completed pensionable service up to the date of the proposed alteration and the member’s pensionable salary at that date. In arguing in support of that construction, counsel for the employers (Mr Edward Nugee QC) argued that “secured” in this context meant “made safe” or “put beyond hazard”, with the result that the benefits so secured were those to which the active member would be entitled if he left service on the date when the alteration took effect. If that were right, so the argument ran, any benefits which a member might enjoy by virtue of future service could not be regarded as “secured” to him within the meaning of the rule.

In rejecting this submission, Rimer J reminded himself that the members of a pension scheme are not volunteers, and that the legal structure under which the scheme was established was that of a trust funded on a balance of cost basis. He then continued as follows, in paragraph [42] of the judgment:

“42.

Against that background, I regard it as a fair and natural use of language to describe the scheme under which the promised pension benefits are to be provided as “securing” the benefits, including both those benefits which at any particular moment can be regarded as earned by past service and also those benefits which at the same moment are in the nature of promised future benefits. Moreover, I not only regard such word as a natural one to use in that context, I regard it as probably the most appropriate one. I have referred above to the benefits being “promised” by the employer, and it is his promise which provides the essential commercial substratum to pension schemes such as the present one. But despite the fact that an important element in the trust which establishes the scheme is the employer’s balance of cost promise, I agree with [counsel for the employees] that an English lawyer would ordinarily hesitate before describing the benefits to which a beneficiary is entitled under a trust, even one such as that establishing the Scheme, as being “promised” by it. “Provided by the scheme” is an acceptable alternative, but “secured by the scheme” is in my view even more appropriate. In suggesting this I do not think that I speak with a lone voice.”

Rimer J went on to cite some passages in Mettoy where Warner J had used the words “secure” or “secured” to refer generally to the benefits promised under the relevant schemes, and in paragraph [46] he said that in his view the natural interpretation of the wording of the rule was that it referred both to benefits accrued to date by past service and to all future benefits promised under the scheme. He then supported this conclusion by a grammatical analysis of the language of the rule, pointing out that “secured” was a past participle in the passive voice, which prompted the question “by whom, or by what, have the benefits been secured?” The answer to that question was that the benefits had been secured “under the Scheme”, which in the context meant “by the Scheme”.

The case for the Trustees

In his skeleton argument Mr Rowley QC submitted that there is very little authority on the meaning of the words “secure” and “secured” in the pensions context, but that two broad situations can usefully be distinguished:

I will say at once that this suggested distinction does not in my judgment assist the Trustees, nor does it do justice to the careful reasoning of Rimer J in Lloyds Bank. As I have indicated, it is in fact Alitalia’s case that the reference in Rule 9.1 to securing the benefits under the Scheme requires consideration of the means by which the benefits are to be provided. It does not, however, follow from this that the rule refers to the means by which benefits are “ultimately” to be provided in the form of annuities or deferred annuities. That will only be the position if the Scheme is wound up, or if (unusually) the Trustees decide to invest in the purchase of annuities while the Scheme continues on an ongoing basis. In the normal way, benefits are provided out of the Scheme on an ongoing basis by payments out of the fund, and are not “secured” in any particular way.

Mr Rowley also relied on the history of the Scheme documents, submitting that the references to “secure” and “secured” in the recitals to the 1964 Deed, and to cognate expressions in the contributions clause and clause 19 of the 1965 Deed, referred to the means by which benefits were to be provided and bore the meaning “make safe”. By contrast, the change of language to “maintain” in the contributions provision of the 1975 Deed was clearly deliberate, and provided for funding on an ongoing basis. Against this background, the reversion in 1997 to “secure” in Rule 9.1 could not be dismissed as accidental. The 1997 Deed was very different in structure from its predecessor, and was prepared by different solicitors (Hammond Suddards). It uses “secure” and cognate expressions much less frequently, but where it does, as in clause 9.3 and Rule 9.1, the meaning is “make safe”.

Although there is no judicial authority on the construction of a contributions rule in the terms of Rule 9.1, Mr Rowley sought to derive some support from the decision of the Court of Appeal in Re K & J Holdings Ltd, Capital Cranfield Trustees Ltd v Walsh [2005] EWCA Civ 860, [2004] 4 AER 449, on appeal from the decision of Lindsay J reported at [2005] PLR 251, [2004] EWHC 2874 (Ch) (“Capital Cranfield”). So far as relevant for present purposes, the case concerned a contribution rule requiring employers to pay:

“Such contributions to the Scheme as are determined by the Trustees, having taken advice from the Actuary, to be appropriate but in any event not less than those set out in the schedule of contributions in force from time to time …”

Lindsay J held, in circumstances where the employer had given six months notice to wind up the scheme, that this rule authorised the trustees to require a balance of cost payment on the full buy-out basis. He held that, in such circumstances, there was no reason for not giving the clause its full literal effect, and that before the effective date of the termination notice the trustees had power, having taken advice from the actuary, to demand a contribution to make good any buy-out deficit then obtaining: see his judgment at paragraphs [52] to [55]. This decision was upheld in the Court of Appeal, where the argument that this construction would produce impractical consequences was rejected. The Court also rejected the submission that the rule was only intended to enable the trustees to require regular contributions from the employer to meet the liabilities of the scheme on an ongoing basis. In paragraph [27] of his judgment, Mummery LJ (with whom Smith LJ and Sir William Aldous agreed) said this:

“27.

I agree with the trustee that the judge’s construction … makes good commercial sense in the context of a defined benefit scheme. It carries into effect the object sought to be achieved: that is, to enable the trustee of the scheme to ensure that the benefits promised to members, as part of their deferred remuneration, are funded on a winding up. It gives effect to the plain and unrestricted meaning of the words that the trustees should have power to decide that it was appropriate for the company to make a contribution to the scheme to enable the benefits to the members under the scheme to be funded in practice.”

Mr Rowley relied on Capital Cranfield for the rejection by the Court of Appeal of the submission that the construction adopted by Lindsay J produced impractical consequences. However, I do not consider that it provides any support for his case in the present context, and if anything it seems to me to assist Alitalia. What was “appropriate” within the meaning of the rule would obviously depend on all the circumstances, and in a situation where the employer had already given notice to terminate the scheme it is hardly surprising that a demand on the buy-out basis could reasonably have been considered appropriate. As Smith LJ said in paragraph [33]:

“The Trustees will wish to safeguard the accrued rights of the beneficiaries in the most effective way. To do that, it will wish to consider all the available options, including the possibility of a transfer or “buy-out”.”

Furthermore, the alleged impracticality of the judge’s construction in Capital Cranfield bore no resemblance to the impractical consequences of the Trustees’ construction relied upon by Alitalia in the present case, but rather related to the alleged difficulty of specifying the requisite amount in a short time frame.

Turning to the wording of Rule 9.1, Mr Rowley submitted that the natural and ordinary meaning of the phrase “to secure the benefits under the Scheme” is “to make secure the benefits under the Scheme”, or simply to make them safe. A security for a liability is an asset which ensures, up to the value of the security, that the liability can be met. If benefits are to be made secure, the scheme assets must be such that, at the point when the funding objective has been met, they are sufficient to fund the provision of all the scheme benefits by the purchase of annuities or deferred annuities.

Mr Rowley submitted that the use of the same words in the winding up provisions (Rule 32) is no coincidence. At that point in the life of the Scheme, benefits do indisputably have to be made secure. If the Scheme were to go into winding up with a deficit on the buy-out basis, a well-informed member could call the Trustees’ attention to Rule 9.1 and ask why, in view of its terms, his benefits were not being fully secured. If the Trustees had not exercised their powers by reference to the cost of doing so, they would have no answer.

Mr Rowley emphasised in this connection that the benefits under the Scheme are part of the deferred remuneration of the members. The relevance of this factor is recognised in the authorities, and should encourage the court to adopt a construction of Rule 9.1 which is favourable to the protection of members’ interests. Mr Rowley said that this factor gains added force from the point that in the early history of the Scheme benefits were indeed secured by insurance contracts. The Trustees’ construction is to be preferred to an unconstrained discretion over a range of funding objectives, because of the weight which it gives to the emphasis on security throughout the Scheme’s history, and in particular because it recognises the deliberate change made by the 1997 Rules.

Mr Rowley criticised Alitalia’s construction of Rule 9.1 on the basis that in practice it would only permit the Trustees to require funding on a buy-out basis when there was a real risk that the Scheme was about to be wound up. In such circumstances Alitalia might well be unable to meet the demand, with the result that full buy-out funding could not be achieved just when it was most needed. Alitalia’s construction, he said, would permit the Trustees to lock the stable door after the horse had bolted.

In his oral submissions Mr Rowley emphasised that Rule 9.1 is not a typical balance of cost covenant, and that both the experts agreed in calling it unusual. The importance to a scheme of the rule providing for employer contributions can hardly be over-stated, and it should be construed in the manner best calculated to ensure that members receive the benefits to which they were entitled. The purpose of the rule was to ensure the funding of members’ benefits. The result of Alitalia’s construction would be that on an unforeseen liquidation of Alitalia the Scheme would probably have to be wound up and the assets would be insufficient to provide members with their full benefits.

In evaluating the rival submissions I propose to begin with the language of Rule 9.1 itself, bearing in mind the expert evidence that the general form of the rule is relatively standard, but the use of the verb “secure” is unusual and is to be found in only about 2% of cases. The more usual verb to find in this context would be something like “maintain” or “provide”. One approach to the question which I have to decide is to ask whether the draftsman’s choice of “secure” betokens a significant difference of meaning from the more usual alternatives, or whether it is just another way of expressing the same basic concept.

I entirely agree with Mr Rowley that the employer’s balance of cost covenant in a defined benefits scheme is of central importance to the operation of the scheme. I also bear firmly in mind, as Mummery LJ did in Capital Cranfield at paragraph [27], that the object sought to be achieved by the covenant is to enable the trustees “to ensure that the benefits promised to members, as part of their deferred remuneration, are funded on a winding up”.

However, it is equally important, in my judgment, to have regard to various other features of Rule 9.1.

First, the rate of contributions to be paid by Alitalia may be determined by the Trustees “from time to time”. No minimum period between funding requests is stipulated, and the Trustees are therefore able to keep the situation under constant review, responding to circumstances as they change.

Secondly, the employer’s contributions are to be paid “at whatever intervals [the Trustees] stipulate”. Thus a funding request can be made with immediate effect, or at the other extreme the payments may be spread over a long period, or a timetable of an intermediate nature may be adopted. Again, the Trustees are given the maximum flexibility, so that if, for example, the Trustees fear for the employer’s solvency, an immediate demand can be made, whereas if it is merely a question of eliminating an actuarial deficit at a time when there are no clouds on the financial horizon, a schedule of payments spread over several years may be appropriate.

Thirdly, before reaching any decision, the Trustees are required both to obtain the advice of the Actuary and to consult Alitalia. The advice must of course be properly considered by the Trustees, and the consultation must be genuine, not mere window-dressing. These are important safeguards, which should ensure that any decision reached by the Trustees has a solid actuarial grounding and gives due regard to the interests of Alialia.

Fourthly, as a matter of grammar, the words “to secure the benefits under the Scheme” are in my judgment to be analysed as a final (or purpose) clause, and are equivalent in meaning to “in order to secure” or “so as to secure”. They state the funding objective by reference to which the rate of contributions is to be set. It is debatable whether the antecedent to the final clause is the phrase “shall make contributions to the Fund”, or the phrase “at a rate determined from time to time by the Trustees”, or the whole of the rule down to the words “Principal Employer” immediately before “to secure”. In my view, however, it is unnecessary to resolve this question, because whichever is correct the general sense is the same. The object of the exercise is for the Trustees to set the contributions at a rate which will achieve the objective of securing the benefits under the Scheme, and for them to do having taken advice from the Actuary and after consulting Alitalia.

There may also be room for argument whether the language of the rule requires the consultation with Alitalia to precede the obtaining of advice from the Actuary, or whether the Trustees are at liberty not to follow the advice of the Actuary, but again I am not concerned with either of these questions. In any event, the general message is clear enough. Before reaching a decision, the Trustees are required both to take the advice of the Actuary and to consult with Alitalia; and even if they are not strictly bound to follow the Actuary’s advice, they would in practice need to have good reasons to depart from it.

Fifthly, as a matter of ordinary English usage, the verb “secure”, used transitively, does in my judgment normally have a connotation of making safe or dependable. The relevant meanings to be found in the Shorter Oxford English Dictionary, 6^th edition (2007), are in my view meaning 1a (“Make or keep (a person, a person’s life, oneself, etc) secure or safe from danger or harm; guard, protect”) and 4 (“Make (something) certain or dependable … ensure (a situation, outcome, result, etc”)). These meanings reflect the derivation of the word from the Latin “securus”, which in turn is formed from the prefix “se”, signifying “without”, and “cura”, meaning “care” or “worry”. I do not believe that Rimer J, in paragraph [42] of his judgment in Lloyds Bank, was treating “provided by the scheme” as a synonym for “secured by the scheme”, but rather that he thought “secured by the scheme” better captured the flavour of a contractual promise of benefits under a trust scheme. The element of security, on this view, was provided both by the contractual promise of the employer and by the status of the members as beneficiaries under a trust, safely insulated from the employer’s creditors. Indeed, I think that Mr Green implicitly recognised the normal connotations of “secure” when he submitted that the benefits of members under the Scheme were secured by the fund, and therefore at one remove by the contributions paid by Alitalia into the fund.

I therefore reject Mr Green’s submission that “secure” is used in Rule 9.1 with the neutral meaning of “provide”. In my judgment there is no reason not to give the word its usual meaning as a transitive verb, and the shade of meaning which it conveys is brought out by near synonyms such as “make safe”, “safeguard”, “protect” or “make dependable”.

Sixthly, and still within the confines of Rule 9 itself, Rule 9.3.1 enables Alitalia at any time to give written notice to the Trustees “to suspend, reduce … or terminate contributions”. Such a step may be taken unilaterally by Alitalia, and the only express restriction upon exercise of this power is that Alitalia will not be relieved of responsibility for paying any contributions due before the date of expiry of the notice. The rule goes on to provide that if contributions are suspended or reduced, the Trustees “shall then make any modifications and adjustments to the benefits as they think fit acting on the advice of the Actuary”. The rule therefore expressly envisages that Alitalia may at any time suspend or reduce its contributions, and that benefits under the Scheme may then have to be reduced. It is only if contributions are terminated, or if the Trustees subsequently decide that it is impracticable to continue the Scheme, that the Scheme would go into winding up and Rule 32 will apply.

Seventhly, I agree with Mr Green that the appropriate construction of Rule 9.1 to adopt, if the language permits it, is one which makes good commercial sense both when the Scheme is operating on an ongoing basis, with no financial worries, and when a winding up is either in prospect or imminent. This consideration suggests that the Trustees should be given as much flexibility as possible, consistently with the stated objective of securing (in the sense of making safe or protecting) the benefits under the scheme. I also see considerable force in Mr Green’s submissions, backed by the expert evidence of Mr Bowie, that to require the Trustees to request contributions from Alitalia by reference to the buy-out basis, even when the Scheme is operating on an ongoing basis and there are no doubts about the employer’s solvency, would make no commercial sense, and would also be methodologically unsound.

Taking all these considerations into account, as well as the submissions ably advanced on both sides, I am left in little doubt that Alitalia’s construction of Rule 9.1 is to be preferred, even though I do not accept Mr Green’s submissions about the meaning of “secure” in the rule. The funding objective is not to guarantee the members’ benefits in all circumstances, and still less to do so on the assumption (which may be wholly unrealistic) that a winding up is always imminent, or even that it is likely to occur in the foreseeable future. The objective is rather to safeguard or protect the members’ benefits by adopting whatever funding method is best suited to the changing circumstances of the scheme. It is impossible to be dogmatic in advance about what this method will be, and no particular method is prescribed, either expressly or implicitly, by the rule. The appropriate method will be that which the Trustees, in the light of the Actuary’s advice and their consultation with Alitalia, consider best suited to achieve the stated objective.

It is in my judgment impossible to extract from the single word “secure” in Rule 9.1, even giving it the meaning for which the Trustees contend, the consequence that the Scheme must always be funded by reference to the buy-out basis. That is to confuse a funding objective, which necessarily looks to the expected future lifespan of the Scheme, with the manner in which that objective is best to be promoted in the immediate or short-term circumstances as they exist from time to time. Furthermore, such rigidity would in my view be wholly at odds with all the other elements of flexibility which the draftsman has carefully built into Rule 9.1, and with the freedom given to Alitalia in Rule 9.3.1 to suspend or reduce its contributions, even if that leads to a reduction in members’ benefits.

In reaching this conclusion I derive little, if any, assistance either from the use of “secure” and cognate expressions elsewhere in the 1997 Deed and Rules or from the history of the Scheme documentation. As to the former, it is enough to say that the uses of “secure” etc elsewhere in the 1997 Deed and Rules are in my judgment compatible with either of the rival meanings propounded for that word in Rule 9.1, although (as in Rule 9.1 itself) I can see no good reason to depart from what I regard as the natural and ordinary meaning of the word. As to the history of the Scheme documents, the position before 1975 is in my view too distant in time, and the then nature of the Scheme as (probably) an accrued benefit insured scheme is too different from the defined benefit scheme which it subsequently became, for it to be possible to draw any useful inferences from the language that was then employed. Nor am I prepared to speculate about the reasons which may have prompted the change in language of the employer’s contributions clause in 1997. I would, however, make two brief comments.

First, there is nothing in Mr Rotunno’s account of the background to the adoption of the 1997 Deed and Rules which lends any credence to the notion that anybody intended to make any substantial change to the contributions regime. The driving factors seem rather to have been the need to update the Scheme documents in the light of recent legislation, and a wish to express them in simpler and clearer language.

Secondly, it is in my view improbable in the extreme that Alitalia would have deliberately committed itself in 1997 to a contributions rule which had the extreme meaning for which the Trustees now contend. Mr Rowley suggested that Alitalia might have stumbled into such a situation by accident, and said (rightly) that I should approach the construction of Rule 9.1 without any preconceptions. Nevertheless, it seems to me relevant to bear in mind that the predecessor of Rule 9.1 was on any view apt to permit funding of the Scheme on an ongoing basis, and on what Mr Green aptly termed the balance of improbabilities it seems to me most unlikely that any major change was intended. If it had been, one would expect it to have been the subject of discussion and negotiation beforehand. As it is, the construction which I would place upon Rule 9.1 may represent a slight shift of emphasis in favour of the members, because of the more positive language in which the funding objective is stated, but the general nature of the clause remains in my judgment essentially the same.

For all these reasons, I would answer in the negative the questions raised in subparagraphs 1(1)(a) and (b) of the Trustees’ notice under CPR Rule 8.3(2)(b).

The remaining question which I have to decide is whether the Trustees are entitled to an indemnity from Alitalia in respect of their costs of the present proceedings pursuant to clause 10.2 of the 1997 Deed.

Clause 10.2 is in the following terms:

“Without prejudice to the right to indemnity given by law to trustees and subject as provided in this clause 10.2 the Trustees shall in the absence of fraud or crime (or negligence in the case of a professional trustee or trustees) be indemnified by the Employers against all liabilities and expenses properly incurred by them as Trustees and against all actions, proceedings, costs, expenses, claims and demands relating to the Scheme …”

It will be observed that the Trustees’ right to an indemnity under clause 10.2 is expressed to be “without prejudice to the right to indemnity given by law to trustees”. The right to indemnity which the law gives to trustees is the right to be indemnified out of the trust property against all costs, expenses and liabilities properly incurred in administering the trust: see, for example, Snell’s Equity, 31^st edition, para 7 - 68 and In Re Beddoe [1893] 1 Ch 547 at 558 per Lindley LJ. As Snell says, this has always been the rule of equity; and it is now reflected in section 31(1) of the Trustee Act 2000, and also (in relation to the costs of legal proceedings) in the provisions of CPR Rule 48.4.

At the case management conference held before Master Price on 12 April 2007 a pre-emptive costs order was made by consent, which enabled (but did not oblige) the Trustees to pay from the assets of the Scheme their costs of and incidental to the proceedings, such costs to be subject to detailed assessment on the indemnity basis if not agreed by Alitalia. This order gave effect to the Trustees’ general right to indemnity, but it cannot in my judgment be read (as Mr Green submitted) as precluding the Trustees from seeking an indemnity from Alitalia under clause 10.2. Rather, it ensured that the Trustees would be entitled to their costs out of the fund, whatever the outcome of the proceedings at first instance and subject to one minor saving in paragraph 1 of Master Price’s order, if they were not able to recover their costs from anybody else. Neither expressly nor by necessary implication did the order prevent the Trustees from seeking to lessen the burden on the fund by requiring Alitalia to pay their costs pursuant to clause 10.2. This interpretation of the order also fits with CPR 48.4(2), which says that where a person is a party to any proceedings in the capacity of trustee he is entitled to be paid the costs of those proceedings out of the trust fund “in so far as they are not recovered from or paid by any other person”.

Furthermore, clause 10.2 cannot in my judgment be read as providing that the Trustees’ right to indemnity by Alitalia is merely a fallback or secondary entitlement if, for any reason, they are unable to obtain an indemnity out of the fund. Mr Green argued that this was the position, because the indemnity by Alitalia is given “without prejudice” to the Trustees’ rights of indemnity from the Scheme, rather than “notwithstanding” or “irrespective of” such rights of indemnity. In my judgment, however, this argument misstates the effect of the words “without prejudice”, and treats them as equivalent to “subject to”. The words “without prejudice” mean that the Trustees are to be at liberty to obtain an indemnity from the fund in the usual way, notwithstanding their right to an indemnity by Alitalia. In other words, the latter right is not to be taken as excluding the Trustees’ normal right to an indemnity out of the fund, if for any reason Alitalia is unable to fulfil its obligation to indemnify the Trustees, for example because it is insolvent.

I conclude, therefore, that Mr Green’s submission puts the matter the wrong way round, and that the Trustees’ right of indemnity by Alitalia is the primary right. Such a provision may be unusual in a pension scheme, but I cannot agree that it is in any way anomalous. I agree with Mr Rowley that the point is essentially a timing one, and that clause 10.2 enables the Trustees to obtain an indemnity for their costs of the proceedings with immediate effect, and without having to include it in a request for contributions under Rule 9.1. It does also mean that the Trustees are entitled to an indemnity by Alitalia even if the fund is in surplus and would be able to meet the relevant expenses without the need for any further funding request under Rule 9.1. That is true, but there are ways of dealing with the position where a pension fund is in surplus, and this possibility cannot deflect me from giving effect to what I consider to be the clear language of clause 10.2.

Accordingly, for the reasons which I have given I consider that the Trustees are entitled to an indemnity from Alitalia for their costs of the present proceedings and I will make the declaration sought in paragraph 2 of the Trustees’ notice under CPR Rule 8.3.