IMG Pension Plan HR Trustees Ltd v German & Anor

The Claimant (“the Present Trustee”), which is a professional independent trustee, is the sole trustee of the IMG Pension Plan (“the Plan”). The Plan is an occupational pension scheme for employees of companies in the IMG Group, a group of companies founded by the late Mark McCormack in the 1960s (“the Group”). The Plan was established by deed dated 12 October 1977 (“the 1977 Deed”) as a defined benefit or “final salary” scheme, but was purportedly converted into a defined contribution or “money purchase” scheme with effect from 1 January 1992 by a deed dated 3 March 1992 (“the 1992 Deed”). By this claim the Present Trustee seeks the determination of a number of questions pursuant to CPR Part 64 so as to resolve uncertainties about the validity and effect of the conversion and about the validity and effect of compromise provisions in agreements entered into by certain members of the Plan with their employers under which the members waived such defined benefit entitlements as they may have had under the Plan. Questions 1 and 2 are questions about the amendment power under which the 1992 Deed was executed. Question 3 raises some supplemental points in relation to amendment. Question 4 is concerned with the effect of various extrinsic materials on the conversion. Question 5 is about the validity and effect of the trustees’ decision-making in executing the 1992 Deed. Questions 6 and 7 are questions about the enforceability and construction of the compromise provisions.

The Present Trustee is entirely neutral in these proceedings, having been appointed well after the purported conversion. The First Defendant (“Mr German”) is a deferred member of the Plan. He commenced membership on 6 April 1990 and ceased to be an active member on 16 December 2005, although he remains employed by IMG. In 2005 Mr German signed a compromise agreement which IMG contends precludes him retaining any defined benefit entitlements under the Plan. Mr German thus has a direct personal interest in the questions raised by the claim form. During the trial I made a representation order under CPR rule 19.7(2)(d)(ii) appointing Mr German to act as a representative beneficiary under an “issues-based” representation order; i.e. to represent those beneficiaries in whose interests it would be to argue for particular answers to the questions raised. Broadly speaking, these are the existing members of the Plan at the time of the purported conversion (“the Existing Members”). The Second Defendant (“IMG”) is the Plan’s Principal Employer. The representation order which I made appointed IMG to represent (i) all the Plan’s Employers, (ii) in relation to each question, any beneficiaries of the Plan not represented by Mr German in respect of that question and (iii) other companies within the IMG group who, while not being Employers participating in the Plan, are parties to and/or entitled to enforce the compromise provisions which are the subject of questions 6 and 7 (I shall refer to all the parties represented by IMG as “the Employers”).

The proceedings were brought under CPR Part 8. As it has turned out, the questions were not entirely suitable for determination by the Part 8 procedure for two reasons. First, the questions are of some complexity and accordingly it has been necessary for the parties to set out in some detail their respective cases. Secondly, there are certain issues of fact. The parties have, however, co-operated in a sensible way to enable the case to be tried. So far as the first point is concerned, the parties set out their respective cases in advance of trial by witness statement and/or letter. As to the second point, the parties served witness statements from a number of witnesses, some of whom were cross-examined at trial. Although there was no order for disclosure, the parties have voluntarily searched for and disclosed relevant documents.

I am indebted to all counsel and their instructing solicitors for their clear, thorough and helpful presentation of the case.

Steven Ross is the Managing Director of the Present Trustee. He has no personal knowledge of the facts giving rise to the proceedings. He made two witness statements setting out the factual background and the issues arising based on his understanding of the documents which had been provided to the Present Trustee. He was not required to attend for cross-examination.

Arthur Joseph Lafave Jr (known as “Jay”) obtained an LLB from Yale Law School in 1958. In 1960 he joined Arter Hadden Wyckoff & Van Duzen in Cleveland, Ohio, where he met Mr McCormack. Shortly afterwards, he began to work with Mr McCormack. After a few years he and Mr McCormack left to set up what became the Group. Mr McCormack was the principal beneficial owner of the Group, as well as its Chairman and Chief Executive, but Mr Lafave had a minority interest. Mr Lafave was the Chief Financial Officer of the Group from 1980 to 2000. He was also a member of the Corporate Finance Committee (“the CFC”), a body convened by Mr McCormack to advise him on financial matters. From 2000 to November 2004 Mr Lafave was Vice Chairman. In November 2004, following the death of Mr McCormack, the McCormack family and Mr Lafave sold the Group to Forstmann Little. Since then Mr Lafave has remained employed by a company in the Group, but he no longer has significant responsibilities. Understandably, Mr Lafave had no great recollection of the events in question, but he had some and he had refreshed his memory from the documents. He gave evidence by videolink from Cleveland. He was a clear and candid witness.

Ian Todd qualified as a solicitor in 1971, having been an articled clerk with Brian Clark (as to whom, see below). Mr Todd joined IMG in the same year. From 1972 to 1973 he worked for the Group in Cleveland. From 1973 to 1977 he worked in Geneva. In 1977 he returned to London as Senior Vice President Europe Middle East and Africa. By the early 1990s he was head of Europe Middle East and Africa. At that time he was friendly with Peter Kuhn (as to whom, see below). He left the Group in 1998, but returned in 2007. He is now President of IMG International. Mr Todd was a member of the Plan both before and after 1992, but he explained that he paid very little attention to it from that perspective. Mr Todd’s recollection of the events in question was poor, but he did his best to assist me.

Brian Clark obtained a law degree from the London School of Economics in 1958. He was an articled clerk with Goodman Derrick from 1958 to 1961. After qualification he stayed with the firm for eight years, becoming a partner specialising in corporate and intellectual property law. In 1969 he joined IMG as an executive, and was instrumental in setting up the Group’s UK operation, but left after about 18 months. In 1971 he joined Nabarro Nathanson (“NN”) as a corporate partner. From 1975 to 1993 he was the senior corporate partner. During this period he was the client partner for the Group, and NN did a considerable amount of work for the Group. Mr Clark mainly dealt with the Group’s UK executives such as Mr Kuhn, but he also had dealings with Mr Lafave and, to a lesser extent, Mr McCormack. Mr Clark was not a trust lawyer, still less a pensions lawyer. As I shall explain in more detail below, he relied upon his colleagues in NN’s pensions department. On about 1 May 1993 Mr Clark became the IMG Group’s Director of European Legal Affairs. He carried out that role until 2000, when he began to reduce his involvement in the Group. He now acts as an occasional consultant to the Group. Mr Clark also had considerable difficulties in recollecting many of the events in question, but he did remember one matter of some significance. Counsel for the Members did not challenge the honesty of Mr Clark’s evidence, but did question the accuracy of his recollection. I shall return to this below.

Peter Kuhn was employed by a company within the Group from August 1971 to January 2005. In 1988 he gained an MBA from Case Western Reserve University. At that time Mr Kuhn was a sort of protégé of Mr Lafave. Between May 1988 and late 1993 he was Chief Financial and Administrative Officer of the Group in Europe. He was the individual primarily responsible at IMG for effecting the attempted conversion of the Plan to a money purchase plan. Subsequently he became Deputy Chief Financial Officer for the Group. He was not himself a member of the Plan. In his witness statement he said that he had a clear recollection of the strategic issues relating to the conversion, and his memory of the details had been prompted by considering a quantity of documents. He was not required to attend for cross-examination.

Louise Dier read law at Cambridge from 1977 to 1981 and was called to the Bar in 1982, but she never practised. She joined the Group in 1987. In early 1991 she was appointed IMG’s Human Resources Manager despite having no previous experience of human resources. She had some day-to-day involvement with the Plan between about early 1991 and the end of November 1993, when she left. She was a member of the Plan from 5 April 1988, but subsequently transferred out of it. Her husband was also briefly an employee of the Group, and a member of the Plan, but he also transferred out of it. In her witness statement she said that her recollection of events had faded, and had been assisted by considering the documents. She was not required to attend for cross-examination.

Caroline Ward worked for the Group from 1978 to 1980, and has done continuously since February 1987. She has been IMG’s Human Resources Director since Mrs Dier left. Her first involvement with the Plan was before the attempted conversion. She has been a member of the Plan since December 1988. She was not required to attend for cross-examination.

John Loffhagen is IMG’s Director of Legal Services. He had no involvement in the administration of the Plan prior to or after the attempted conversion. He has responsibility for these proceedings within IMG. In his statement he set out an overview of IMG’s legal position in relation to the issues in the claim. He was not required to attend for cross-examination.

As stated above, Mr German is a deferred member of the Plan. He gave a short statement setting out his own personal circumstances. He was not required to attend for cross-examination.

Richard FitzGerald was employed by IMG in a variety of roles from 1988 to 2006, ending as Senior Vice President. He became a member of the Plan in October 1989. In 1990 and 1991 he was IMG’s European Financial Controller and worked with Mr Kuhn. He had responsibility for the administration of the Plan until he handed it over to Mrs Dier in about October 1991. In 2004 he entered into a Sale Bonus Agreement. He ceased to be an active member of the Plan at the end of 2006 and is now a deferred member. He gave a short statement setting out his own personal circumstances. He was not required to attend for cross-examination.

I did not receive any evidence from John Quarrell, Paul Fitzmaurice or Graham Ness of NN’s pensions department, although I was shown a number of documents emanating from NN’s file on the matter. Nor did I receive any evidence from Hyman Wolanski of Wolanski & Co, IMG’s consulting actuaries.

The Group began by representing sportsmen, particularly golfers, in the USA. Subsequently it expanded its field of operations both territorially and in terms of its remit, becoming involved in representing organisers of sporting events, in the sale of television, merchandising rights and sponsorship rights and other activities. At the time of the conversion process, the Group operated in the United Kingdom primarily through IMG, Transworld International (UK) Ltd (“TWI”) and IMG UK Inc. As indicated above, the Group was run by Mr McCormack. He was substantially assisted on the financial side by Mr Lafave with advice from the CFC. Mr McCormack’s global oversight extended to the remuneration arrangements for more senior employees, whose salary was reviewed as part of a global review process intended to produce fair treatment throughout the Group.

The Plan was established by the 1977 Deed with effect from 21 October 1977 as a scheme insured with the Equitable Life Assurance Society (“Equitable”). It is at least possible that the 1977 Deed was in a standard form used by the Equitable at that time. The 1977 Deed provided for the Plan to be administered in accordance with rules to be adopted within two years. In the event that deadline was missed, but nothing turns on that. On 1 July 1981 IMG adopted Rules (”the 1981 Rules”) which were based on a standard Equitable form. Under the 1977 Deed and 1981 Rules IMG was both the Principal Employer and the Trustee.

The Plan was unique among the Group’s pension arrangements in offering “final salary” benefits. It appears that the explanation for this was that the person primarily responsible for its introduction was John Webber, who ran the Group’s UK operation at that time. The Plan was non-contributory for members, although it included a facility for members to pay additional voluntary contributions. The normal retirement date for men was 65 and for women was 60. Although the 1981 Rules provided that all permanent staff over the age of 21 were eligible for membership, in practice the way in which IMG administered the Plan was only to offer membership to its more senior employees, referred to as “executives”.

The Plan was amended in minor respects by deeds of variation dated 3 December 1984, 4 March 1985, 10 June 1987 and 6 September 1990, but nothing turns on these.

In 1988 Mr Kuhn was appointed as Chief Financial and Administrative Officer in Europe by Mr McCormack and Mr Lafave to replace Mr Webber as the most senior financial executive in the UK. When Mr Kuhn took up his post, one of the matters he was asked to look into by Mr McCormack and Mr Lafave was the UK pension scheme. From early May 1988 onwards, Mr Kuhn was contemplating the possibility of replacing the Plan with a money purchase scheme. It is clear from the contemporaneous documents and from Mr Kuhn’s evidence that Mr Kuhn had a number of reasons for wanting to change the Plan from a final salary scheme to a money purchase scheme. The most important reason was that Mr Kuhn was concerned that under the final salary scheme the Group bore the risk that the investments financed by the Group’s contributions would not yield a sufficient return to pay the defined benefits. There were a number of subsidiary reasons, in particular consistency with the Group’s US pension scheme.

By September 1989 the possibility of replacing the final salary scheme with a money purchase scheme was under serious consideration. Mr Kuhn’s evidence, however, is that he does not recall ever reading the 1977 Deed or 1981 Rules during the conversion process. Mrs Dier and Ms Ward say the same thing.

In early September 1989 Mr Kuhn instructed Equitable to prepare a winding-up report valuing the Plan’s assets and liabilities. Equitable duly sent IMG a report dated 12 December 1989 which revealed that the Plan had a surplus of £503,707. It appears that there were then some discussions between IMG and Equitable as to how this surplus could be used. Mr Kuhn’s evidence is that in considering the use of the surplus at this stage he was looking at the matter purely from the perspective of IMG as the Principal Employer, or of the Group as a whole, rather than on the basis of IMG’s position as Trustee of the Plan and that he did not then appreciate the possible conflict of interest to which IMG was subject.

In a memorandum to the CFC dated 21 March 1990 Mr Kuhn strongly recommended that the Group should take advantage of the opportunity provided by the surplus to change the Plan to a defined contribution plan while saving approximately £100,000 from the overall UK budget in 1990. Mr Lafave accepted in cross-examination that the surplus was the catalyst for the conversion.

Mr Lafave’s immediate response to the memo was to ask Mr Kuhn to obtain advice from Mr Clark, then at NN. Accordingly, Mr Kuhn wrote to Mr Clark on 23 March 1990 saying:

“For some time now I have been working with representatives of the Equitable Life Assurance Society concerning a review of the pension plan offered here in the UK. My general view has been that our employees neither understand nor appreciate defined benefit plans. Furthermore, I strongly believe that private companies, such as IMG, should only provide pension benefits on a money purchase basis.

Now I have made a recommendation to the Finance Committee that a change be made. A copy of my memo is attached together with Jay's response. I have also included pertinent correspondence with the Equitable.

Jay has asked for your view, and I would welcome your help in this area ... ”

This letter appears from the evidence before me to constitute NN’s first instructions to advise IMG in relation to the Plan. The documents available to me do not include any formal retainer agreement or letter between IMG and NN. Reading this letter against the background provided by the documents enclosed with it, I interpret the letter as an instruction to advise IMG in its capacity as the Principal Employer (or, which makes no odds, the relevant Group companies as participating Employers). In my view this interpretation is confirmed by the evidence of Mr Kuhn to which I have referred in paragraph 22 above. It is also confirmed by subsequent documents, such as a memo from Mr Kuhn to Mr Webber dated 23 April 1990. In saying this, however, I am not making any finding as to the precise scope of NN’s retainer either at this stage or subsequently.

Mr Kuhn’s letter to Mr Clark was replied to by Mr Quarrell of NN in a letter dated 29 March 1990. Mr Quarrell said that, although he had not seen the Plan’s governing documents, there were a number of potential problems with what was proposed.

This led to a meeting attended by Mr Kuhn and Mr FitzGerald with Mr Fitzmaurice of NN on 10 April 1990. In preparation for the meeting, Mr Fitzmaurice asked Mr Kuhn for sight of “the present Trust Deed and Rules”. In response to this request, it appears that Mr Kuhn sent Mr Fitzmaurice a copy of the 1981 Rules, but not the 1977 Deed. Following the meeting, Mr Fitzmaurice sent Mr Kuhn a letter of advice dated 1 May 1990. At that point, it was contemplated that the Plan might be wound up and a new scheme established, but Mr Fitzmaurice pointed out that he was missing the crucial page from the 1981 Rules dealing with the distribution of surplus on winding up.

After Mr Kuhn had supplied a copy of the missing page, Mr Fitzmaurice wrote a further letter dated 8 May 1990. He began by explaining the operation of rule 23.1 of the 1981 Rules, emphasising the Trustee’s discretion to augment members’ benefits at stages B and C. He then said

“The problem here of course is to what extent does the Trustee exercise its discretion to augment benefits, particularly as IMG is the trustee of the Scheme and stands to benefit as the employer from maximising the exercise of (d) above. Nevertheless cognizance must be taken that IMG is the trustee as well as the employer, and in the exercise of a trustee’s discretion his first duty is to the beneficiaries of that trust.”

Mr Fitzmaurice went on to make a couple of other points before concluding by suggesting that serious consideration should be given to converting the Plan to a money purchase scheme rather than winding it up.

Mr Kuhn’s evidence is that, notwithstanding the passage I have quoted from Mr Fitzmaurice’s letter dated 8 May 1990, he did not think in terms of IMG having to consider the matter from two perspectives.

On 16 January 1991 Equitable wrote to IMG enclosing a triennial review for the period to 4 April 1990. The review showed a current surplus of £640,000. Nevertheless, Equitable recommended an increase in employer’s contributions from 5.5% to 8.2% of pensionable pay with effect from 5 April 1991. This recommendation was made for a number of reasons. These included: (i) the provisions of the Social Security Act 1990 requiring increases in the value of deferred pensions in respect of all pensionable service; (ii) the fact that the salaries of active members had increased during the review period at an average rate of 19% per annum; and (iii) the number of active members had increased from 33 to 67.

In a memorandum for file dated 25 March 1991 Mr Kuhn recorded that for some time he had been trying to formulate recommendations to change the UK pension scheme from a defined benefit plan to a defined contribution plan. His goal was to have a recommendation to the CFC that would achieve 11 objectives. Among these were:

“4.

Fairly treat the members of the existing plan, while taking advantage of the overfunded position of that plan.”

On 26 March 1991 Mr Kuhn, Mr FitzGerald and Mrs Dier met Mr Fitzmaurice again to discuss conversion of the Plan to a money purchase scheme. It was agreed that Mr Fitzmaurice would instruct Mr Wolanski to conduct a review of the scheme with a view to implementing the conversion during the course of that year. Wolanski & Co had had no previous involvement with the Plan and was recommended by Mr Fitzmaurice.

On 29 March 1991 Mr Kuhn sent the CFC a memo about the UK pension plan stating:

“Nearly a year ago, I suggested that the UK pension plan be reviewed because it is significantly overfunded and, in my view, it doesn't provide a clearly understandable benefit to employees. It is also a plan that is not consistent with the pension benefit provided in the US because this plan is based on a final pay (defined benefit) rather than a money purchase (defined contribution). Many UK companies are moving away from final pay plans to money purchase plans. They are doing this to:

1)

Limit their liability for future pension obligations;

2)

avoid the onerous inflation-based index link being imposed by the government on final pay plans, and

3)

take advantage of the same overfunding situation that IMG's plan has.”

He went on to say that he planned to have IMG’s consulting actuary evaluate the existing plan and, together with IMG’s lawyers, prepare a report to the CFC in June with a view to implementing the change in September.

On 3 April 1991 Mr Fitzmaurice sent Mr Wolanski a letter of instruction enclosing a memo from Mr Kuhn, which I infer was probably Mr Kuhn’s memo dated 25 March 1991, and other documentation from his file. It seems clear that Mr Fitzmaurice sent Mr Wolanski a copy of the 1981 Rules, but it appears unlikely that he included a copy of the 1977 Deed.

In a draft memo to the CFC about the UK pension plan dated 16 April 1991 Mr Kuhn enlarged on his reasons for recommending the change:

“For some time now, I have been concerned about this pension plan because of the open-ended nature of the commitment. I have also had several other concerns:

1)

This is a significantly different plan in form and substance from the plan which exists for the bulk of IMG's employees in the United States, all of whom are covered by a so-called ‘money purchase’ or ‘defined contribution’ pension scheme.

….

5)

There is no guarantee that the surplus that’s in place now in the plan will always be there, preserving IMG from excess contributions. The beauty of the money purchase plan is that, once the contribution is made, the Company’s obligation to the pension has ceased. There is a trend in the UK … to move to money purchase pension schemes.

6)

There is an opportunity currently to take a pension holiday while converting the plan to a money purchase plan. That will result in a significant saving to IMG in the year in which the plan conversion is made. There are a couple of concerns that I have about that:

a)

We must be very careful to treat the older members of IMG pension scheme fairly in such a conversion. As a rule-of-thumb anyone who is over 40 years of age and has 10 years of service in the scheme will be hurt by the change from the final salary pension scheme. Younger people or people who have less service will not be hurt.

b)

Any change that we make must be carefully reviewed, to be sure that no additional liability is incurred and that we understand all the implications of making the change. It's a very complicated subject. ”

Both Mr Kuhn and Mr Lafave gave evidence that they appreciated that changing the Plan to a money purchase plan would shift the investment risk from the Group to the members. As Mr Lafave put it in cross-examination:

“I realise that I thought a final salary plan was dangerous for IMG. So in that sense, I suppose I was trying to get rid of that danger and logically it dropped somewhere, of course.”

It appears from a number of documents dating from late April and May 1991 that Mr Wolanski recommended that IMG should make no further contributions to the Plan until further notice and that NN recommended that Mr Kuhn write to Equitable to that effect. It is not clear, however, whether IMG did take a contributions holiday at this point.

On 3 June 1991 Mr Wolanski sent Mr Kuhn a report for discussion at a meeting to be held the following day. In his report Mr Wolanski noted that the Plan had a surplus of £433,200 after allowing for future salary increases. He considered among other things the impact of both the 1990 Act and the decision of the European Court of Justice in Case C-262/88 Barber v Guardian Royal Exchange Assurance Group [1990] ECR I-1889. He recommended inter alia that: (i) IMG should set up a company money purchase scheme; (ii) it should do so by converting the existing final salary scheme rather than establishing a new money purchase scheme; (iii) the normal retirement date should be 60 for both men and women; (iv) deferred members should be encouraged to take a transfer value, failing which a pension should be purchased from a life insurance company; (v) active members should be given details of the money purchase scheme and be invited to join it; (vi) those who did wish to participate should receive an initial transfer value based on their normal leaving service transfer value allowing for increases of 5% per annum up to normal retirement date; (vii) those members should also receive a special contribution individually calculated to top up the initial transfer value to the level it would have been if it had allowed for future salary increases rather than only 5% per annum increases “in order to ensure that those members … are neither advantaged nor disadvantaged by the switch to a money purchase scheme”; (viii) the surplus within the Plan should be held as an unallocated reserve and used to finance future employer contributions for a period; and (ix) IMG should consider improving the death in service benefits and providing linked permanent health insurance.

Mr Wolanski’s report was discussed at a meeting on 4 June 1991 attended by Mr Fitzmaurice, Mr Wolanski, Mr Kuhn, Mr FitzGerald and Mrs Dier. It was agreed that Mr Wolanski would write to Mr Kuhn to provide further details of the proposal. Mr Wolanski duly wrote to Mr Kuhn on 7 June 1991 enclosing an outline of the proposed new plan and illustrative calculations for three employees, Geoffrey Earle, David “Buzz” Hornett and Chuan Teo on three alternative bases. These three employees had been selected by Mr Kuhn because they were over 40 and had more than 10 years’ service.

On 11 June 1991 Mr Kuhn sent a memo to the CFC enclosing a copy of Mr Wolanski’s outline. Mr Kuhn recommended that the proposal should be implemented, save that the employer contributions should be 4% for under 5 year’s service, 6% for 5-10 years’ service and 8% for over 10 years’ service rather than 6%, 8% and 10% as Mr Wolanksi had proposed.

On 21 June 1991 Mr Lafave replied to Mr Kuhn’s memo of 11 June 1991 raising certain queries, including the following:

“I also do not understand exactly what the present pension holders will get when we switch to a money purchase plan. They obviously will not get the ending benefit that they originally anticipated because, if I recall, it is based upon an average of the final year’s salary. But presumably what’s in their account does fund some kind of benefit. Could you explain that? Or on the other hand, are you simply transferring what is in each person’s account to the money purchase scheme?”

Mr Kuhn replied on 29 June 1991:

“The plan is over funded because of its investment performance. At some future date, the plan could be ‘under funded’ because of investment performance. That is what I'm worried about. Money purchase plans can only become over funded if the company pays in more money than it needs to. The investment performance is for the account of the plan participants.

When we switch the present pension holders will get the actuary’s estimate of the present value of their pension entitlement. That is an actuarial calculation that Equitable will prepare and I will ask Wolanski & Co to confirm. The suggestion is that the major part of the over funding be used to step up the money purchase balance for the present members of the plan so that they will be ‘fairly treated’ when we make the switch. The fact is that the new benefit that we are trying to apply is not as beneficial to the pension plan holders as a continuation of the existing plan. Further, if IMG were to take the excess value in the plan, 35% of it would be paid to the UK government in tax thereby providing a direct benefit to no one.”

As a result of this exchange Mr Kuhn wrote to both Mr Wolanski and Mr Fitzmaurice seeking further advice. In the case of Mr Fitzmaurice, Mr Kuhn asked for advice on the employment law aspects of the proposed change, in particular with regard to the proposal that the normal retirement date for both men and women be set at 60.

Mr Fitzmaurice replied on 7 August 1991 that he had not seen the contracts of employment of the affected employees, but would assume that they referred to the pension scheme booklet so that the booklet was incorporated. On that assumption:

“… the booklet states that ‘in any questions of detail the Rules will prevail’, and accordingly it is arguable that the Rules are also incorporated into the employees’ contracts. Rule 27 allows the Principal Employer and the Trustee to amend the Rules from time to time, in which case arguably the employees could be said to have, by entering into their contracts of employment, allowed any amendment to be made to the Scheme including an amendment to their retirement age. Thus, no potential claim would arise from anybody whose retirement age was changed unilaterally by you.”

Mr Fitzmaurice went on to say that affected employees could bring claims, in particular for unfair dismissal. He concluded:

“… the fact remains that you are effectively breaking the contract of employment which you currently have with your male employees which says that all other things being equal they may be employed until they are 65. For this reason it would serve you to think very carefully about the cosmetics of presenting the whole change to the pension arrangements.

I recommend that all employees are given notice of the proposed arrangements and asked to signify their agreement to them. This will have the result of flushing out any resistance, and the resisting employees can then be dealt with individually - if this becomes necessary I will speak with you further regarding the best method to do so.”

Mr Kuhn replied on 13 August 1991, enclosing copies of employment agreements. He commented:

“I agree with your analysis that a careful marketing plan for the new pension arrangements should keep IMG (UK) Inc from any exposure with regard to this issue.”

On 3 September 1991 there was a further meeting attended by Mr Kuhn, Mr Fitzmaurice, Mr Wolanski, Mr Fitzgerald and Mrs Dier at which it was decided to proceed with the proposed change on the basis inter alia that (i) the target date for conversion was 1 January 1992, (ii) an explanatory memorandum would be sent by Mr Kuhn to existing and potential members of the Plan at the beginning of October 1991 and (iii) presentations of the new scheme to employees would take place in November 1991.

In his witness statement Mr Kuhn says in relation to this meeting:

“I do not think that there was ever any discussion of the legal basis of what was being done or of the legal procedural requirements. I remember being told by Nabarro Nathanson that it was possible to amend the existing Plan documents, but I do not remember discussion of any legal constraints or requirements or when I received that advice. My understanding was, however, in the light of the earlier discussions, that we were looking for the consent of all the existing active members, and that is certainly how I wanted to approach matters, whether or not consent was legally required.”

On 5 September 1991 Mr Fitzmaurice wrote to Mr Kuhn enclosing a timetable for the conversion which included the following dates:

“13 December 1991 Deadline for receiving members’ consents/applications to join IMG.

16 December 1991 IMG executes trust documentation.

1 January 1992 Commencement of IMG money purchase scheme.”

In his letter Mr Fitzmaurice raised the question of the trusteeship of the Plan:

“At present IMG itself is the trustee of the Pension Scheme and this seems to have evolved from the standard practice of the Equitable. That being said it is considered good practice that as a pension scheme is a separate legal entity from the employer, then the employer itself should not be the trustee of the pension scheme. This is particular [sic] pertinent in the case of company insolvencies where a receiver/liquidator assumes the role of the employer and may himself have conflicting duties to the employers, creditors and the beneficiaries of the pension scheme.

These considerations are of course more pertinent to defined benefit schemes where rights to service may come into issue.

Nevertheless I do believe you should give this some thought generally and I am more than happy to discuss this further with you. Typically speaking the Trustees would be members of Senior Management such as yourself, together with perhaps [a] ‘member representative’. Insofar as there may perhaps be a little resistance to the proposed changes, the chance for one of the members to become a trustee may go some way to placating that resistance.”

On 18 September 1991 Mr Fitzmaurice sent Mr Kuhn a note by NN outlining the main duties and obligations of trustees, and in particular trustees of a retirement benefits scheme, under English law.

On 15 October 1991 Mr Fitzmaurice and Mr Wolanski met representatives of Equitable to discuss the proposed conversion. On the same day Mr Wolanski sent Mr Kuhn drafts of an announcement and explanatory booklet for the employees.

A file note by Mr Ness of NN dated 22 October 1991 records that he and a colleague had started to prepare the replacement Rules for the Plan, but had discovered that they did not have copies of any the trust instruments on file. He had therefore asked Equitable to supply them.

Mr Fitzmaurice and Mr Wolanski met Mr Kuhn to discuss the draft announcement and explanatory booklet on 28 October 1991. At the meeting Mr Fitzmaurice gave Mr Kuhn a draft of the new Deed and Rules.

On 1 November 1991 Mr Kuhn sent all permanent full-time IMG and TWI staff, and copied to Mr McCormack and Mr Lafave, a memorandum announcing the new pension arrangements (“the November 1991 Memorandum”). The November 1991 Memorandum is in three parts. The first is headed “Background”, the second “Objectives of the New IMG Pension Arrangement” and the third “Outline of the New IMG Pension Arrangement”.

The first section states:

“You will probably be aware from numerous articles and advertisements in the press and on television that the government has made a number of changes to pensions legislation over the last few years.

As a consequence of these changes we have reviewed our own pension arrangements very carefully and have taken professional advice on this from the pension specialists at our solicitors, Nabarro Nathanson, and also from Wolanksi & Co, an independent firm of consulting actuaries.

We have decided that it would be beneficial to change the existing company pension scheme, which provides benefits on a so-called final salary basis, so that in future the benefits are provided on a money purchase basis.

Therefore,with effect from 1 January 1992 the provision of the existing International Management Group (UK) Pension & Life Assurance Scheme (1977) will be amended as explained in this announcement. Also, the name of the scheme will be changed to the IMG Pension Plan.

The IMG Pension Plan will operate on a money purchase basis, which means that the retirement benefits will depend on the contributions paid for each member and the investment returned earned on these contributions.

The following provides an overview of the objectives of the new pension arrangements as well as an outline of the proposed scheme.”

The second section includes the following statements:

“There are five main objectives of this change, as follows;

1.

To ensure that members can know the value of their pension entitlement at any time

…

2.

To provide generous benefits if the member retires, dies or becomes disabled

….

3.

To take advantage of the tax benefits available to approved pension arrangements

…

4.

To enable members to contract out of the State Earnings-Related Pension Scheme if they wish

…

5.

To provide members with the maximum personal control over their pension arrangements

…

As far as members’ accrued rights under the existing final salary provisions are concerned, an initial amount will be allocated to each member's investment account with effect from 1 January 1992. This amount will be determined actuarially as the value of the final salary benefits earned up to 31 December 1991.

Our actuaries will then carry out detailed calculations for each member, and if appropriate, IMG will pay additional special contributions to ensure that the expected retirement benefits under the IMG Pension Plan in respect of service prior to 1 January 1992 are not less than they would have been if the provisions of the plan had not been changed.

An outline of the main provisions of the IMG Pension Plan is attached to this announcement and full details of the plan will shortly be provided in a new explanatory booklet.

Details of presentations to explain the IMG Pension Plan are also attached.”

The third section included the following statements:

“12.

EMPLOYER'S CONTRIBUTION

…

Also, for former members of the final salary scheme IMG will pay an individually-calculated top-up contribution in respect of the benefits which had accrued under that scheme see section 16 below.

…

16.

TRANSFER FROM EXISTING FINAL SALARY SCHEME

An initial amount will be transferred into each member's investment account from the existing final salary scheme calculated as the normal transfer value which is payable in the event of leaving service. If necessary an additional special contribution will be paid by IMG whilst the member remains in service.”

With regard to the reference to “expected retirement benefits” in the second section, Mrs Dier says this in her witness statement:

“If anyone asked me for a fuller explanation of exactly what th[at] statement … meant and how it would operate, I would have referred them to Mr Wolanski, since I would not have regarded myself as competent to explain such a technical matter further. I cannot now recall whether anyone did raise such questions at any time before the documentation was completed in 1992. It is possible that if senior members did so, they raised the questions with Mr Kuhn rather than with me and I cannot say whether he did offer or may have offered reassurances of any kind to a particular individual member or particular members. I can say that I did not regard my husband and myself as being negatively affected and would probably have expressed the view to others that they would not be adversely affected either.”

Also on 1 November 1991 Mrs Dier sent the same recipients a memorandum giving details of eight presentations to explain the new pension arrangements to be made by Mr Wolanski on three dates in late November and early December 1992. Employees were asked to attend one of these presentations.

On 6 November 1991 Mr Ness wrote to Equitable requesting a copy of the Declaration of Trust for the Plan.

On 14 November 1991 Mr Kuhn wrote to Mr Fitzmaurice saying that he was still working on the trustees. Mr Kuhn’s evidence was that Mr Todd was initially a little reluctant to become a trustee, but was persuaded to do so.

On 20 November 1991 Mr Ness made an attendance note of a telephone call from a representative of Equitable, part of which reads:

“Also, they had not been able to provide the establishing Declaration of Trust. Again, this is a bit worrying as I wanted to check the trust provisions we were using in the Rules switching the scheme to money-purchase with effect from 1 January 1992 complied with this trust provisions from inception.

She said she would have a look at the stuff again and see if she could help me further.”

On the same day Equitable sent NN “copies of the Deeds which have amended the original scheme rules”. It is not clear from the documents available to me whether NN ever received a copy of the 1977 Deed prior to the execution of the 1992 Deed. Counsel for the Employers invited me to infer on the balance of probabilities that NN did, but I consider that it is not necessary for me to make a finding on this point and I do not do so.

Even if NN did receive a copy of the 1977 Deed prior to the execution of the 1992 Deed, it does not appear from the evidence before me that NN advised either IMG (whether in its capacity as the Principal Employer or in its capacity as the Trustee) or the New Trustees as to the applicability or effect of the amendment power contained in clause 7(i) of the 1977 Deed (as to which, see below).

Wolanski & Co have disclosed to NN, and NN have disclosed to the parties, copies of Mr Wolanski’s slides for the presentations he gave in late November and early December 1991. These contain relatively little that is relevant to the present issue. The first mentions a “Transfer payment for members of final salary scheme”, while the fourth mentions that IMG will “pay special contributions for transfers from old scheme”. Mrs Dier’s recollection is that about two-thirds of those who attended were potential new members of the Plan.

On 13 December 1991 Mrs Dier sent a further memorandum to existing members of the Plan enclosing a copy of the explanatory booklet for the Plan (“the Booklet”), a membership application form (“the Application Form”) and a death benefit nomination form. On the same date she also sent a memorandum to all other staff in different terms enclosing a copy of the Booklet and slightly differently worded versions of the two forms. The memorandum to existing members read:

“Further to Peter Kuhn’s memo in November and the recent presentations, please find attached your copy of the Explanatory Booklet for the IMG Pension Plan, as revised. These terms take effect from 1^st January 1992.

Could you please ALL complete and return to me, BEFORE CHRISTMAS IF POSSIBLE, the two forms attached?”

The Application Form reads as follows:

“To: INTERNATIONAL MANAGEMENT GROUP

The Trustees of the IMG Pension Plan

This is to confirm that I have received, and read, the IMG Pension Plan Explanatory Booklet.

I wish to participate in the IMG Pension Plan with effect from 1 January 1992:

( ) YES

( ) NO

I wish to pay voluntary contributions to the IMG Pension Plan each month at the rate of ... % of my Pensionable Salary with effect from ... and request that contributions at this rate are deducted from my salary and invested on my behalf in the Plan.

I would like to consider contracting out of the State Earnings-Related Pension Scheme:

( ) NO

( ) YES. Please let me have details of this facility.

FULL NAME ….

SIGNATURE …. DATE …”

The “Introduction” to the Booklet states:

“This booklet has been prepared to explain the main features of the IMG Pension Plan, hereinafter referred to as ‘the Plan’.

The Plan was originally established by IMG on 21 October 1977. It has been substantially amended with effect from 1 January 1992 to provide:

* a pension for you when you retire with the option of taking part of it, on retirement, in the form of a tax-free cash sum; and

* a pension for your spouse on your death in service or after retirement; and

* a lump sum for your family if you die in service.

In addition, under a separate permanent health insurance scheme an income benefit will be paid to you if you are unable to work because of long-term illness or disability.

The Plan covers UK-based employees of International Management Group.

Every attempt has been made to make this booklet as accurate and complete as possible. However, it cannot cover all circumstances and the Plan is governed by its Trust Deed and Rules.

The trustees of the Plan are:

Mark H. McCormack

Arthur J. Lafave Jr

Ian T. Todd

Brian Clark

If you have any questions relating to your own situation please contact Louise Dier at the following address:… ”

Under the heading “General Points” the Booklet states:

“AMENDMENT OF THE PLAN:

The Plan can be amended or discontinued at any time. If, for any reason, the Plan is discontinued then your benefits will be determined in accordance with the appropriate provisions of the Trust Deed and Rules.”

The Booklet does not contain any reference to the final salary scheme or to benefits resulting from service while that scheme was in operation.

On 16 December 1991 Mr Fitzmaurice sent Mr Kuhn a fax reminding him that he had recommended that full definitive documentation be executed prior to 1 January 1992, but he had not been informed of the identities of the new trustees or the other participating employees. Mr Kuhn replied by fax the same day that the new trustees were Mr McCormack, Mr Lafave, Mr Todd and Mr Clark (“the New Trustees”) and referring to an earlier letter with regard to the participating employees.

On 19 December 1991 Mr Fitzmaurice met Mr Kuhn and gave him two engrossments of each of a Deed of Retirement and Appointment of Trustees in which IMG appointed the New Trustees and retired as Trustee itself (“the Deed of Appointment”) and a Deed of Adherence of another Employer. On 23 December 1991 Mr Ness sent Mr Kuhn by hand two engrossments of the 1992 Deed asking Mr Kuhn to arrange for these to be executed by IMG and by Messrs McCormack, Lafave and Todd after the Deed of Appointment and Deed of Adherence.

On 30 December 1991 Mr Kuhn sent the New Trustees a memorandum, enclosing a copy of the NN note on trustees’ obligations, in which he stated:

“Some time ago, I asked Nabarro Nathanson to prepare for me a listing of the responsibilities of a Trustee. You have all graciously agreed to serve as Trustees of the International Management Group Money Purchase Pension Plan. It's my belief that this type of plan helps Trustees because it is easily understood. In any event, we have retained a first-rate actuary in Hyman Wolanski and have used Nabarro Nathanson’s first- rate pension plan attorney, Paul Fitzmaurice, in the drafting of documents. It is our plan to continue to use the Equitable Life Assurance Society as the Plan’s fund manager. All of you will be copied on every major transaction for the Plan and, shortly, you will be receiving, copies of the plan documents themselves to sign.

I stand ready to answer any questions that you may have concerning these documents, but I thought you should have for your file the ‘Obligations and Duties of Trustees’.

...

I personally want to thank each of you for agreeing to serve as a Trustee of this Plan. Your presence as Trustees, I believe, gives great confidence to the employees who are participating in this Plan that it will be professionally run and will, ultimately, provide a firm basis for their retirement.”

As at 1 January 1992 there were 85 active members of the Plan. Only 72 Application Forms have been found, but I am satisfied on the balance of probabilities that all of the active members had returned signed Application Forms by about mid January 1992. I am also satisfied on the balance of probabilities that all of the active members either indicated that they wished to participate in the Plan from 1 January 1992 or were treated as having done so. I put it in that way because it turns out that Mr German ticked the no box, but he intended to tick the yes box and was treated as if he had done so.

Ms Ward says in her witness statement:

“Although Ms. Dier asked in her memorandum that all existing members should return the attached forms before Christmas if possible, as far as I knew that was not a necessary step to be taken before the conversion could proceed. In fact, I returned my own application on 7 January 1992, which slightly surprises me. I would certainly have returned it before Christmas if I thought it was important to do so.”

On 2 March 1992 Mr Kuhn sent Mr Clark by courier the Deeds for his signature, the documents having been executed by IMG and signed by the other New Trustees. In his covering letter he said that he had been “the cause of the bottleneck” with the documents. Mr Clark replied on 3 March 1992 saying that he had signed the documents and passed them to Mr Fitzmaurice. The Deed of Appointment was dated 2 March 1992 and the 1992 Deed was dated 3 March 1992.

I shall consider the evidence regarding the appointment of the New Trustees, and the execution of the 1992 Deed by the New Trustees, below.

On 10 March 1992 Mr Wolanksi wrote to Mr Hornett about his pension situation following a meeting some weeks before. In this letter Mr Wolanksi said:

“As you know, with effect from 1 January 1992 the existing IMG pension scheme has been converted from a ‘final salary’ scheme to a ‘money purchase’ scheme, which means that your retirement benefits will depend on:

- how much is invested for you in your personal investment account;

- how much this will accumulate to by the time you retire;

- the pension options you select at retirement; and

- annuity rates when you retire.

In order to carry out our calculations of your projected benefits we first need to know how much will be transferred into your personal investment account with effect from 1 January 1992. This amount has not yet been determined but we have estimated that it will be around £70,000 - this figure is subject to confirmation.

We next need to assess what level of contributions will be paid into your personal investment account every year and this falls into the following three components:

(1)

IMG's regular contributions ...

(2)

Your personal contributions ...

(3)

IMG's matching contributions ... ”

I note that no reference was made to IMG’s special contributions. Mr Wolanksi went on to set out some assumptions used in his calculations and continued:

“It is important to emphasise that the level of your retirement benefits depends very much on future experience - the resulting benefit could, therefore, be considerably greater, or smaller, than shown below depending on the actual investment performance, etc.”

Mr Wolanksi then set out projections for Mr Hornett’s fund, earnings and pension at retirement aged 60.

On 29 May 1992 Mr Wolanksi wrote to Mr Kuhn enclosing his calculations of the recommended transfer values as at 1 July 1992 and the additional special contributions payable from 1 January 1992 in respect of the employees who transferred from the final salary to the money purchase section of the Plan. The transfer values ranged from £220 to £63,930 and the special contributions ranged from 0.06% to 2.70% of salary. Mr Wolanksi also enclosed a sample calculation for Mr Earle to show how these figures had been calculated.

The transfer value was calculated by taking Mr Earle’s Pensionable Service to 31 December 1991, calculating his pension as at 1 January 1992 on the basis that his Final Pensionable Pay was his then salary (giving £6,036 per annum), revaluing the pension by 5% per annum until his Normal Retirement Date (giving £13,069 per annum) and then calculating the present value of that pension as at 1 July 1992 based on an interest rate of 9.5% per annum (giving £25,614).

The additional special contributions were calculated in two stages. First, Mr Wolanksi calculated the pension to which Mr Earle would have been entitled under the final salary scheme in respect of his service to 31 December 1991 on the assumption that his salary increased by 7.5% per annum (namely £17,680 per annum) and compared this to the pension to which he was entitled under the money purchase after revaluation (£13,069). The difference was £4,791 per annum. Secondly, Mr Wolanksi calculated the additional special contributions required to fund a pension of £4,791 per annum upon various assumptions, including that Mr Earle’s salary would increase at 7.5% per annum, arriving at a figure of 2.48% of salary.

On 9 June 1992 Mr Kuhn wrote to Equitable to say that he was in agreement with Mr Wolanksi’s calculations of the additional employer contributions, which should be rounded up to the nearest tenth of a percent.

On 22 July 1992 Mrs Dier sent a memorandum to each of the active members of the Plan as at 1 January 1992 stating:

“On 1 January 1992 the IMG Pension Plan ceased to be a ‘Final Salary Scheme’ and became a ‘Money Purchase Scheme’.

You were a member of the Plan before this change and were promised additional employer contributions to ensure that your pension status is not adversely affected.

The attached letter to you from Hyman Wolanski sets out these contributions.

If you have any questions relating to these would you please address them to me and I will refer you to Mr Wolanski if necessary. ”

Enclosed with the memorandum was an individualised standard form letter dated 21 July 1992 from Mr Wolanski to the member which stated:

“As you may recall from Peter Kuhn’s memorandum ‘New Pension Arrangements’, dated 1 November 1991, when the pension plan was amended at the beginning of the year a promise was made to all existing members that:

1.

an initial amount would be allocated to each member's investment account and that this would be determined actuarially as the value of the final salary benefits earned up to 31 December 1991; and

2.

we would carry out detailed calculations for each member and, if appropriate, IMG would pay additional special contributions to ensure that the expected retirement benefits under the IMG Pension Plan in respect of service prior to 1 January 1992 are not less than they would have been if the provisions of the plan had not changed.

We have now completed all the necessary calculations and pleased to advise you as follows.”

The letter then set out the initial amount and the additional special contributions for the recipient, but did not explain how these had been calculated.

Mr FitzGerald says in his witness statement:

“My understanding from the information given to Plan members by IMG, including me, at the time was that we would be ‘no worse off’ as a result of the changes to the Plan. I took this to mean that when I retired my position would be no worse off than it would have been if the Plan had continued to provide benefits on a final salary basis.”

Mr FitzGerald says that he recalls a memorandum containing such a statement, but neither he nor anyone else has been able to find such a statement, and so I conclude his recollection is in error. The same goes for Mr Hornett’s statement in his 21 July 1999 memorandum discussed below. Mr FitzGerald also says, however, that he believes that his recollection is supported by Mrs Dier’s 22 July 1992 memorandum. I can understand that Plan members might have interpreted the memorandum in that way, as suggested not only by Mr FitzGerald’s evidence and Mr Hornett’s memorandum, but also by Mrs Dier’s evidence quoted in paragraph 58 above.

On 28 July 1992 Mrs Dier wrote to Equitable to instruct it to hold any surplus monies after distribution to the members’ individual accounts in the Equitable’s With Profits Fund. On 28 August 1992 Equitable wrote to Mrs Dier to confirm that internal transfers of funds to the active members’ individual accounts had taken place and the remaining surplus of £917,770 had been transferred to a With Profit Trustee Investment Policy. On 28 September 1992 Mrs Dier wrote to Equitable to say that IMG would like to use this fund for employer pension contributions under the money purchase scheme. Equitable replied on 26 October 1992 asking for a letter of authority from the trustees of the Plan.

On 2 November 1992 Mr Kuhn met Mr Wolanksi and a representative of Equitable. In Mr Kuhn’s note of the meeting dated 4 November 1992 he recorded that £682,000 had been transferred into the individual accounts of the active members as at 1 January 1992. Of the surplus of £917,770 Mr Wolanksi estimated that deferred pensions and voluntary contributions as yet unallocated might amount to £200,000, leaving £717,000 which could be used to meet IMG’s contributions for the coming months. A letter from Mr Wolanksi to Mr Kuhn dated 23 November 1992 records that it was agreed that IMG would take a contributions holiday from 1 January 1993.

Mr Kuhn also recorded in his note of 4 November 1992 that it had been agreed that IMG would try to persuade all the deferred pensioners as at 1 January 1992 (“the 1992 Deferreds”) to agree the transfer of a capital sum to a personal pension so as to eliminate IMG’s liability for defined benefit payments. This proposal was revived a number of times over the succeeding years, as was an alternative proposal to buy out the liability by means of a life company policy. Nothing ever came of either proposal. As a result it is common ground that the Plan remains a defined benefit plan with respect to the 1992 Deferreds. It is thus a hybrid scheme.

On 8 March 1993 Mrs Dier sent each member of the Plan a memorandum attaching his or her benefit statement from Equitable. The memorandum and statement are both headed “Money Purchase Pension Scheme Benefit Statement”. The statement sets out the member’s total fund value as at 1 January 1993, contributions received and projected retirement benefits calculated on the basis that contributions are paid at the current rate to normal retirement date assuming future rates of return of 8.5% per annum and 13% per annum. Similar statements were sent to members in succeeding years.

On 22 March 1993 Mr Kuhn sent Mr Clark a fax stating:

“First of all, I wanted to thank you for your note to me concerning the Pension Plan. I would prefer it if you would continue as a Trustee of the Plan. You are greatly respected by all of us here and your continued involvement is desired and appreciated.

Secondly, with regard to the Plan, I am in the process of organising a pension holiday for IMG, using an amazing accumulated surplus from the old plan to meet current funding obligations. In that regard, I have clearance from all of your fellow trustees (Mark, Ian and Jay) to do this in as much as it will be a saving for the company and will not in anyway harm the plan participants. Therefore, Louise Dier will be writing to you to ask you to write to the Equitable Life Assurance Society, transferring money from the surplus account to pay the current company obligation.

I would appreciate it if you would send this letter along to the Equitable and, of course, would expect you to call me if you have any questions about this.”

The note referred to in the first paragraph has not survived, but it appears that Mr Clark had asked to resign as a Trustee of the Plan.

On the same date Mrs Dier sent Mr Clark a draft letter to Equitable asking him to send the letter as soon as possible. On 23 March 1993 Mr Clark sent a memo to Mr Fitzmaurice enclosing a copy of Mrs Dier’s letter and draft letter, asking Mr Fitzmaurice to find out exactly what was proposed and advising him whether it was appropriate to sign the letter. Mr Fitzmaurice replied on 26 March 1993:

“Just to explain the background very briefly the IMG Pension Plan was converted from a final salary to a money purchase arrangement with effect from the 1st January 1992. At that time a significant surplus existed under the plan and this was placed under a separate trustee investment policy with the Scheme’s investment manager, Equitable. This effectively acts as a reserve to meet the future employer's contributions.

I have spoken to Louise Dier about this and she is more than happy that I amend your letter to Equitable so that the sense is clearer. I accordingly enclose the letter for your signature with a copy for you to pass on to Louise.”

Mr Clark duly signed and sent the amended letter.

The evidence of Mr Kuhn and Mr Lafave is that, after the conversion of the Plan, IMG agreed salary increases and bonuses for its employees upon the footing that their pension entitlement was governed by the 1992 Deed (supplemented by the November 1991 Memorandum with regard to the Existing Members), that is to say, a defined contribution entitlement rather than a defined benefit entitlement. It is probable that IMG would have agreed less generous increases and bonuses if that had not been the case.

Subsequently, concerns were expressed by male members of the Plan about the effect of the reduction of the normal retirement age from 65 to 60 as a result of conversion. Those concerns were addressed by a series of letters from Mr Kuhn to the individual members affected informing them that in their particular case their normal retirement age would remain at 65 and by a Deed of Amendment dated 1 June 1994.

Thereafter, no questions were raised about the terms of the conversion until 21 July 1999, when Mr Hornett wrote a memorandum claiming that he recollected having been informed at the time of the conversion that he “would not be worse off”. Ms Ward wrote to Mr Wolanksi on 24 August 1999 stating that this was inaccurate, and Mr Kuhn sent her an email on 26 August 1999 agreeing with this.

Mr Wolanksi replied to Ms Ward on 23 November 1999 saying:

“As we have discussed, the intention at the time the plan was changed from final salary to money purchase (at the beginning of 1992) was that the transfer value for each member, plus any special company contributions, would be sufficient to provide the final salary benefits which the member had accrued up to that time (referred to below as his ‘alternative final salary benefit’). There was no commitment that the benefits in respect of future contributions would match the final salary benefits which would have been earned after January 1992 if the plan had not been changed.”

Mr Wolanksi then set out his original calculations in respect of Mr Hornett and the assumptions on which they were based, and Mr Hornett’s current fund value reported by Equitable. He continued:

“The investment side of the original calculations, therefore, appears to be on target. However, Buzz’s salary has increased by some 10% pa over the period since 1 January 1992, which is significantly more than the rate of increase assumed in our original calculations, so, overall, Buzz will be behind target in relation to his ‘alternative final salary benefits’.

If the experience of the past continues, i.e. Buzz’s salary continues to increase at about the same rate as the investment return on the fund, then there will be a significant shortfall in his ‘alternative final salary benefit’ by his 65th birthday. On the other hand, if the investment return exceeds his salary increases then he could well move back on target.

...

Having said all this, there are two particular points of principle which do need to be addressed and these are that

a)

the original ‘commitment’ was, I believe, intended to cover only the final salary benefit accrued up to 1 January 1992, whereas Buzz appears to be looking at the comparison in relation to the benefit for total service; and

b)

the original ‘commitment’ was intended to cover retirement at age 65, whereas Buzz's letter looks at the position at ages 55 and 60, which is a very different matter.”

Ms Ward subsequently put the contents of Mr Wolanksi’s letter into a memorandum to Mr Hornett dated 24 November 1999. Mr Hornett replied the same day saying that “the undertaking at the time of change ‘you will be no worse off’ was a very bald and very exact and very clear statement’. Thereafter, there was further correspondence between Ms Ward and Mr Hornett and between Ms Ward and Mr Wolanksi, which fizzled out in mid 2000. Mr Hornett has not chosen to participate in these proceedings, nor has any evidence from him been adduced by the Existing Members.

Subsequently, four members raised similar concerns in 2003 and one in 2006. The last of these consulted the Pensions Advisory Service. To date, however, no member of the Plan has asserted that the conversion of the Plan was invalid. Nor has any member made a complaint to the Pensions Ombudsman.

The 1992 Deed was replaced by a new Definitive Deed and Rules dated 30 December 2004 (“the 2004 Deed”). This remains the Plan’s governing document.

The Present Trustee was appointed by deed dated 24 July 2006 with effect from 31 March 2006. The remaining individual trustees resigned by deed dated 19 December 2006, since when the Present Trustee has been the sole trustee of the Plan. After its appointment, the Present Trustee became concerned about the validity of the conversion of the Plan in 1992. It therefore commended these proceedings on 10 September 2008.

The 1977 Deed is a declaration of trust by IMG (then called International Financial Management (UK) Ltd), defined as “the Principal Employer”. It includes the following provisions:

“1.

The Principal Employer hereby establishes a trust (‘the Trust’) for the purpose of providing relevant benefits (as defined in Section 26(1) Finance Act 1970) under a scheme known as International Financial Management (U.K.) Ltd Pension and Life Assurance Scheme (1977) (‘the Scheme’) for such directors and employees of the Principal Employer and of any other company organisation or firm which shall participate in the Scheme in accordance with clause 10 hereof (with the Principal Employer called ‘the Employers’) as shall become eligible to participate and are admitted to membership therein (‘the Members’) and in certain circumstances for their dependents

2.

The moneys necessary for the purpose of the Scheme shall be furnished by contributions to be made by the Employers and if the Employers shall so require by the Members and the benefits to be provided by the Scheme shall be secured by the purchase of policies initially from the Equitable Life Assurance Society and such contributions shall begin to be payable on 21 October 1977 which shall be the Commencement Date of the Scheme

3.

The Principal Employer hereby declares itself to be the Trustee of the Scheme (‘the Trustee’) which shall be administered in accordance with rules (‘the Rules’) which shall be adopted by the Trustee by written instrument under hand and published within 24 months after the date hereof

4.(i) The Rules shall be drawn in such a way as to confirm the establishment of the Scheme as a scheme capable of (a) approval by the Commissioners of Inland Revenue as an exempt approved scheme for the purposes of Chapter II of Part II Finance Act 1970 ... (‘Chapter II’) …

5.

The trusts hereby declared shall be irrevocable and the Scheme shall continue until (i) the expiration of the period of 80 years from the date hereof (or such longer period as may then be lawful) which period shall be the perpetuity period applicable to this Declaration or (ii) earlier termination under the provisions of the Rules

6.

Upon termination of the Scheme the assets (after allowing for the expenses of termination) shall be applied to provide benefits for the members and other persons entitled to benefits under the Scheme in respect of the membership of deceased Members in accordance with the Rules up to the limit allowed by the Commissioners of Inland Revenue in the exercise of their powers under Chapter II and any surplus monies shall thereafter be paid to the Employers

7.(i) At any time the Trustee may by declaration under hand and seal or by written instrument under hand cancel alter or add to any of the provisions of this Declaration or of the Rules but no amendment shall have the effect of reducing the value of benefits secured by contributions already made

(ii)

The Trustee may by Resolution at its discretion and subject to payment of such additional contributions as may be required augment any benefits under the Rules or may increase the amount of any pension in course of payment PROVIDED ALWAYS that no such augmentation in entitlement or in pension payment shall be permitted which would prejudice the approval of the Scheme under Chapter II

...

9.

Until the adoption of the Rules:-

(i)

any benefit in the form of a lump sum arising under the Scheme upon the death of a Member may at the absolute discretion of the Trustee be applied within a period of twelve months after the date of the member’s death to any one or more of a class consisting of (a) the Member’s spouse children parents and grandparents (b) the issue of any such persons and (c) any other individual(s) (nominated by the Member by notice in writing …

(ii)

the Trustee will administer the Scheme in accordance with Announcements issued to employees ... ”

Although clause 9(ii) refers to “Announcements issued to employees”, no such announcements have been found.

The 1981 Rules take the form of a document with a cover page bearing the title “INTERNATIONAL FINANCIAL MANAGEMENT (U.K.) LTD PENSION AND LIFE ASSURANCE SCHEME (1977)” and the statement “ADOPTED 1^st July 1981 [illegible signature] CHAIRMAN”. It is common ground that the signature is that of Mr Webber. It is also common ground that the 1981 Rules are almost entirely based on an Equitable standard form.

On page 3 of the 1981 Rules there is an introduction which includes the statements:

“The Principal Employer as defined in the within Schedule (page 4 Section 1) has established a Pension and Life Assurance Scheme for the purpose of providing relevant benefits as defined in Section 26(1) of the Finance Act 1970 ….

It is intended that the said Declaration of Trust and the Rules set out below will together constitute a retirement benefits scheme acceptable by the Commissioners of Inland Revenue as an exempt approved scheme for the purposes of Chapter II …”

The 1981 Rules include the following provisions:

“1.

Definitions

1.1

This schedule of salient definitions is referred to as the ‘THE SCHEDULE’ throughout the accompanying Rules of which it forms part. Other different definitions appear in Rule 1.2. The benefits are subject to Inland Revenue limits (Rule 14).

1.

Principal Employer: International Financial Management (U.K.) Limited

2.

Trustee: The Principal Employer

3.

Commencement Date: 21st day of October 1977

4.

Anniversary Date: 5th day of April in any year subsequent to Commencement Date

5.

Membership: All Permanent Staff

Minimum Age Attained: 21

Maximum Age Attained: Males 64, Females 59

Probationary Period: 12 months

6.

Contributions: Member: Normal: Nil

Voluntary allowed

Employer: Whole of the cost

7.

Normal Retirement Date: Male: 65th Birthday Female: 60th Birthday

8.

Pension at Normal Retirement Date: 1/60th of Final Pensionable Pay for each year of Pensionable Service PLUS the pension purchased by any Voluntary Contributions and any Transfer Payments

9.

Pensionable Pay: The annual rate of pay on each Anniversary Date plus commission, bonuses, overtime payments and other fluctuating emoluments received in the previous twelve months

10.

Final Pensionable Pay: the highest annual average of three consecutive years’ total earnings in the ten years before retirement (or date of leaving Service, if earlier)

11.

Pensionable Service: Service with the Employer (in years and completed months) whilst a Member of this Scheme and the previous Scheme of the Employer

12.

Commutation Option: Revenue Maximum

13.

Rate of Pension Increase: Not applicable

14.

DEATH BENEFITS

(a)

Before Retirement

1.

A cash sum equal to two times Pensionable Pay (Rule 9.1)

PLUS

2.

A refund of Member’s Contributions (if any) with Interest

PLUS

3.

A widow’s pension of Nil

…

23.

Termination of the Scheme

23.1

If at any time the Principal Employer shall terminate the Scheme in whole or in part or if the Principal Employer or any other Employer shall go into liquidation or dissolution and in accordance with Rule 24 the Scheme is terminated in whole or in part the Trustee shall give notice to each Member at that time or formerly employed by the Employer whose part of the Scheme has been terminated and out of the assets of the Scheme or the appropriate part thereof (after payment of all costs, charges and expenses which may then be owing) the Trustee shall make provision for:

A benefits then due or being paid out of the Scheme to or in respect of any persons and any benefits then contingently payable on the death of any such persons but so that no further increase (if any) under Rule 12 shall take effect after termination.

B benefits (immediate or deferred) for persons prospectively entitled to benefit out of the Scheme (or out of that part of the Scheme) for whom provision has not already been made on the basis that all Members in Service on the date of termination shall be treated as if they had left Service on that date entitled to a deferred pension subject to the provisions of the Rules but so that no increase or further increases under Rule 12 shall take effect after the date of termination.

but if, after costs charges and expenses payable out of the Scheme have been paid or provided for, the Scheme is insufficient to provide all such benefits in full or if the Scheme is determined partially and the Trustee after consulting the Actuary is satisfied that had the Scheme been wholly determined the Scheme would, after providing for all such costs charges or expenses, have been insufficient to provide the benefits in A and B above for all persons affected by such a total determination, the Trustee may, after consulting the Actuary, abate such of the benefits under A or B in such manner as it considers equitable save that:

(i)

none of the benefits arising from Members’ voluntary contributions, if any, under A above shall be abated until all the benefits arising from the normal contributions under A and B have been completely abated and

(ii)

none of the benefits under A above shall be abated until all of the benefits (excluding those attributable to any voluntary contributions) under B have been completely abated.

C subject as aforesaid and at the Trustee’s discretion increases in accordance with Rule 12 in the pensions payable under the preceding provisions of this Rule

D subject to the provision of the aforesaid benefits, and at the discretion of the Trustee augmentation of the benefits payable under the preceding provisions of this rule in such manner (if any) as the Trustee shall in its discretion after consultation with the Actuary decide but subject always to Approval of the scheme not being prejudiced;

23.2

If the scheme shall be wholly determined, the Trustee shall pay any balance of the Scheme remaining after providing for benefits under 23.1A and 23.1B and any benefits which in its discretion it decides to provide under 23.1C and 23.1D to the Employers in such shares as the Trustee after consultation with the Actuary shall decide to be just and equitable.

…

25.

Surplus Money

If at any time by the operation of these Rules there is a surplus available it shall be retained in the Scheme to be applied at the next following Anniversary Date to provide the benefits under the Rules (or additional benefits subject to Rule 14) for the Members, their widows, their financial dependants and/or to reduce the amount of contributions payable by the Employer on such Anniversary Date as the Actuary shall advise.

….

27.

Amendments

The Principal Employer and the Trustee may at any time by Deed or by Declaration duly minuted, alter or add to the clauses of the Declaration of Trust or of the Rules except that no such alteration or addition shall operate so as to prejudice approval. ”

The parties to the 1992 Deed are IMG (defined as “the Founder”) and the New Trustees. The first recital states that the 1992 Deed is supplemental to the 1977 Deed, the 1981 Rules and the subsequent deeds of variation. The third recital is in the following terms:

“The Founder is desirous of amending the Plan in accordance with the powers conferred on it by clause 7(i) of the [1977 Deed] by adopting the attached Rules (‘the Replacement Rules’) to be the new governing rules of the Plan and is also desirous of amending the name of the Plan”.

The principal operative provisions of the 1992 Deed are as follows:

“1.

The Founder and the Trustees hereby adopt the attached as the Replacement Rules of the Plan with effect from 1 January 1992

2.

The Trustees shall continue to hold the fund consisting of the assets and monies of the Plan (hereinafter called ‘the Fund’) upon irrevocable trust, in accordance with the provisions of this Deed and of the Rules scheduled to this Deed (as amended from time to time)

…

6.

The trusts hereby declared shall be irrevocable and the Scheme shall continue until (i) the expiration of the period of 80 years from the date hereof (or such longer period as may then be lawful) which period shall be the perpetuity period applicable to this trust or (ii) earlier termination under the provisions of Schedule L of the rules scheduled to this Deed”.

The Rules scheduled to the 1992 Deed are quite extensive, and are divided into Schedules A-L. Schedule C rule 21 provides:

“(1)

The Trustees may, having considered the advice of the Actuary and obtained the consent of the Founder, do one or both of the following:

(a)

augment the benefits of any person (or class of persons) entitled under the Plan; or

(b)

provide benefits from the Fund for persons not otherwise entitled under the Plan;

but in neither case may benefits be provided which would prejudice Revenue Approval

(2)

Where the Trustees exercise their powers under this Rule the Employers (or one or more of them as appropriate) shall pay any further contributions into the Fund which the Actuary recommends as necessary to provide the additional benefits”.

Schedule L rule 3 deals with winding up. Paragraph (b) provides:

“The Plan Reserve may be used to provide equitable increase in benefits under the Plan (or benefits for persons not otherwise entitled under the Plan) not exceeding Inland Revenue Limits as the Trustees with the consent of the Founder (or, if the Founder is in receivership or liquidation, the Trustees) may direct.”

The 1992 Deed contains no provisions dealing with the 1992 Deferreds (this omission has been rectified in the 2004 Deed). Nor does it provide for the additional special contributions which IMG agreed to pay Existing Members to reflect their Service prior to 1 January 1992.

The correct approach to the interpretation of pension schemes was described by Arden LJ in British Airways Pension Trustees v British Airways plc (a.k.a Stevens v Bell) [2002] EWCA Civ 672, [2002] PLR 247 as follows:

“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 to give a reasonable and practical effect to the scheme. The administration of a pension fund is a complex matter and it seems to me that it would be crying for the moon to expect the draftsman to have legislated exhaustively for every eventuality. As Millett J said in Re Courage Group’s Pension Schemes [1987] 1 WLR 495 at 505:

‘[its] provisions should wherever possible be construed so as to give reasonable and practical effect to the scheme, bearing in mind that it has to be operated against a constantly changing commercial background. It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life.’

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. Thus in the National Grid case, to which I refer below, where there was a choice of possible constructions, Lord Hoffmann held that the correct choice depended ‘upon the language of the scheme and the practical consequences of choosing one construction rather than the other.’ (see [2001] 1 WLR 864 at 887, paragraph 53).

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: see per Robert Walker J in the National Grid case. Pension schemes are often subject to considerable amendment over time. The general principle is that each new provision should be considered against the circumstances prevailing at the date when it was adopted rather than as at the date of the original trust deed: see per Millett J in Re Courage Group’s Pension Schemes, above, at 505 – 506. 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 v West Bromwich Building Society[1998] 1 WLR 896. In Lord Hoffmann’s words ‘[i]nterpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background that would reasonably have been available to the parties in the situation in which they were at the time of the contract’ (912H). Lord Hoffmann also distinguished the meaning of the words to be found in dictionaries from the meaning of documents:

‘(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749.’

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. Both sides urged on us their respective philosophical approaches. Mr Inglis-Jones submitted that the overall approach of the APS Trust Deed was favourable to the members. BA submitted that it should be remembered that this was a balance of cost scheme and so the fact that there was a surplus meant that the employer had paid too much. As Brooke LJ, giving the judgment of this Court (Nourse, Schiemann, Brooke LJJ), said in the National Grid case [2000] ICR 174, 193

‘The solution to the [problem of construction in that case] lies within the terms of the scheme itself, and not within a world populated by competing philosophies as to the true nature and ownership of an actuarial surplus.’

In the same case, in the House of Lords, the beneficiaries of the scheme argued that the surplus represented their contributions or their deferred remuneration. Lord Hoffmann rejected this approach. He expressed the view that, once it was established that the employer could exercise powers conferred by a scheme in its own interests, ‘I do not see the relevance of the way in which the surplus was funded’ (page 869G). I discuss the National Grid case in detail below.

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.’”

Question 1 arises out of the fact that the 1977 Deed, in clause 7(i), and the 1981 Rules, in clause 27, contain two different, and inconsistent, amendment powers. The Existing Members’ position is that the operative provision was clause 7(i) of the 1977 Deed. The Employers’ primary position is that the operative provision was rule 27 of the 1981 Rules.

The Employer’s first argument is that the 1977 Deed was an interim trust deed pending the adoption of detailed rules pursuant to clause 3 of the 1977 Deed, and that the 1981 Rules amounted to the definitive trust deed which replaced any inconsistent provisions in the 1977 Deed. Thus, so the Employers contend, when the Trustee adopted the 1981 Rules, rule 27 replaced clause 7(i).

In support of this argument the Employers rely upon the decision of Walton J in Imperial Foods Ltd v Jeeves (27 January 1986) [2007] 08 PBLR. In that case a pension scheme had been established by an interim deed dated 29 October 1976 and a further interim deed had been executed on 3 November 1977. Neither contained a trustee exoneration clause. The definitive deed was executed on 5 June 1980 and did contain such a clause. Walton J held that the trustees were entitled to rely on the exoneration clause in respect of alleged breaches of duty which occurred before the definitive deed had been executed:

“22.

Nobody has been able to adduce any authority on this matter. But, on principle, I think it must be that the definitive trust deed governs the situation from the commencement. There are a number of occasions in law in which a fund is held on trust, but at the particular point there is no final definitive trust deed. At that stage the trusts have not been finally defined, particularly, one may say, in relation to administrative matters such as [the exoneration clause] …

23.

What, after all, is the purpose of an interim trust deed and pension scheme? It is by its very nature not clearly to define fully the trust upon which the fund is to be held, but to get the fund started. The analogy with the situation in Attorney-General v Mathieson appears to me to be very close. Of course, the machinery for the drafting of the final trust deed is quite different, and it may very well be that in both cases a person who had contributed to the fund in question would be in a position to object to some provision which was never contemplated, but which was put or attempted to be put into the final trust deed. For example, provision for a different charity or, in our particular case, for the payment of pensions to totally different classes of person. That situation can be met when it arises. But in a case where it does not, it appears to me that the obvious intention of all parties from start to finish is that the pension fund should throughout be held upon the same trusts and that those trusts should be the trusts as defined in the definitive trust deed. After all, is it not definitive and intended to be definitive of the trust? If not, why is it so called?”

In my judgment the reasoning of Walton J in Imperial Foods is not applicable to the present case. First, the 1977 Deed did not purport to be an interim deed which was to be replaced by a definitive deed at a later date. On the contrary, the 1977 Deed was a definitive deed which was to be supplemented by detailed rules. The 1977 Deed made provision for the position pending adoption of those rules in clause 9, and so the trust was adequately defined without those rules. The 1981 Rules did not purport to replace, but rather to supplement, the 1977 Deed. Secondly, the 1977 Deed contained provisions which applied both to the 1977 Deed itself and to the rules to be adopted under clause 3. One of these was clause 7(i) itself. It follows that those provisions in particular cannot be regarded as interim provisions pending the adoption of the rules. This is particularly so given the contrast between clause 7(i), which expressly applies to the rules when adopted, and clause 9, which expressly applies pending the adoption of the rules. Thirdly, since amendment was specifically dealt with by clause 7(i) of the 1977 Deed, it would not be right to interpret the general power of adoption of rules conferred by clause 3 to extend to the adoption of a different and inconsistent amendment provision: compare National Grid Co plc v Mayes [2001] UKHL 20, [2001] 1 WLR 864 at [35]-[36] (Lord Hoffmann), [72] (Lord Clyde) and [76] (Lord Scott of Foscote).

The Employers’ second argument is that, in adopting rule 27 of the 1981 Rules, the Trustee exercised the power of amendment conferred by clause 7(i) to amend clause 7(i) itself. It is common ground that the procedural requirements of clause 7(i) were satisfied, since the 1981 Rules were adopted by the Trustee by a written instrument under hand.

As I understand the arguments of counsel, it is also common ground that the validity of this amendment depends on two questions. First, was the amendment within the scope of the power of amendment upon its true construction? Secondly, was the amendment a proper exercise of the power of amendment? The Employers contend that both questions should be answered in the affirmative, while the Existing Members contend that they should both be answered in the negative.

The scope of the power of amendment. The correct approach to interpreting powers of amendment was stated by Lord Tomlin in Hole v Garnsey [1930] AC 472 at 500:

“In considering such a power as this, it must, I think, be confined to such amendments as can reasonably be considered to have been within the contemplation of the parties when the contract was made, having regard to the nature and circumstances of the contract. I do not base this conclusion upon any narrow construction of the word ‘amend’ in Rule 64, but upon a broad general principle applicable to all such powers.”

Clause 7(i) permitted the Trustee to “alter or add to any of the provisions of this Declaration [emphasis added]”. Taken literally, this wording includes clause 7(i) itself. Furthermore, clause 7(i) does not contain any explicit prohibition on amendments to clause 7(i). The Employers contend that no such prohibition is implied. In support of this contention the Employers rely upon the statement of principle of Millett J (as he then was) in Re Courage Group’s Pension Schemes [1987] 1 WLR 495 which was cited with approval by Arden LJ in British Airways at [28]. Accordingly, the Employers contend that clause 7(i) empowered the Trustee to amend clause 7(i) by replacing it with rule 27 either with effect from 21 October 1977 or with effect from 1 July 1981.

The Existing Members contend that clause 7(i) cannot be construed as permitting an amendment to remove the proviso or fetter “but no amendment shall have the effect of reducing the value of benefits secured by contributions already made” (“the Fetter”), since otherwise the Trustee could circumvent the Fetter by first amending clause 7(i) to delete the Fetter and then exercising the amended clause 7(i) in a manner precluded by the Fetter. The Existing Members also contend that clause 7(i) cannot be construed as permitting an amendment to replace a unilateral power of the Trustee by one requiring the consent of the Principal Employer.

The Existing Members’ first contention receives considerable support from three authorities. In UEB Industries Ltd v W S Brabant [1992] 1 NZLR 294, the original trust deed establishing the pension scheme in 1972 contained a permanent alienation clause (clause 13) which included the proviso “and notwithstanding anything herein contained no amendment or alteration of this Deed shall be made or permitted the effect of which would authorise any such payment or reversion”. In 1978 the trustee exercised its power of amendment under clause 10 of the 1972 deed to rescind that deed and replace it with a new deed and rules containing a permanent alienation clause without that proviso. In 1980 the trustee purported to introduce a power to refund surplus to the employers in the event of a winding up of the scheme and a corresponding exception to the permanent alienation clause. When the scheme was wound up, the New Zealand Court of Appeal held that the amendment to the permanent alienation clause in 1978 was ultra vires. The leading judgment was given by Cooke P (as he then was), who said at 301:

“As to the main point, it is evident that the introduction in 1980 of provision for payment to the employer … was beyond the power of the trustees unless the limitation on their amending power contained in the last limb of clause 13 of the original 1972 deed, in the words beginning ‘and notwithstanding’, had in some way been removed. The discarding of that limb in clause 13 of the deed of 22 May 1978 might be alleged to have the effect of enlarging the scope of the amendment powers in clause 10. But patently the trustees could not enlarge their own powers so as to remove a restriction to which they were subject from the very foundation of the trust. The power of amendment conferred on the trustees when the fund was established did not extend to an amendment the effect of which would be to permit or authorise in some circumstances a payment or reversion to the company. It seems inescapable that, if on its true construction the deed of 22 May 1978 authorised the introduction into the rules of a provision for payment or reversion to the employers (such as was introduced in 1980), to that extent the deed of 1978 was beyond the powers of the trustees. It is a simple case of ultra vires or acting outside power. In some of the argument the expression ‘fraud on a power’ has been used but it need not be invoked and seems to me not altogether appropriate. Certainly the motives for the change in 1978 do not require examination. It is simply that, whether or not dropping the restriction on the power of amendment was deliberate, it was not something which the trustees had power to do.”

In Air Jamaica Ltd v Charlton [1999] 1 WLR 1399, the original trust deed establishing the scheme in 1969 contained a clause (clause 4) which provided that “No moneys which at any time have been contributed by the company under the terms hereof shall in any circumstances be repayable to the company”. Section 13.1 of the plan authorised the company to amend the plan and section 13.2 authorised the company to discontinue the plan, but not so as to enable any part of the trust fund to be used otherwise than for the exclusive benefit of the members or other persons entitled to benefits under the plan. In 1994 the trust deed and plan were amended by deleting the fetters from the amendment and discontinuance provisions and inserting a power to return surplus to the company. The Privy Council held that the purported amendment to delete the fetter was invalid. The judgment of the Privy Council was delivered by Lord Millett, who said at 1411G:

“… their Lordships are satisfied that [the plan] could not be amended in order to confer any interest in the trust fund on the company. This was expressly prohibited by clause 4 of the trust deed. The 1994 amendments included a purported amendment to the trust deed to remove this limitation, but this was plainly invalid. The trustees could not achieve by two steps what they could not achieve by one.”

In BHLSPF Pty Ltd v Brashs Pty Ltd [2001] VSC 512 the original trust deed included provisions (rules 15 and 18) which gave the trustees discretion to apply any unallocated part of the scheme assets in augmenting members’ benefits, or in providing assistance to any member or ex member in case of need, sickness or hardship, and to apply any ultimate surplus on winding up by dividing it amongst all remaining members in such proportions as the trustees saw fit. Rule 9 permitted the trustees to modify etc the trust deed “provided that no such modification rescission alteration or addition shall operate so as to detract from the benefits secured to a member by the contributions paid by him and by the Company in respect of him prior to the date of such modification rescission alteration or addition”. In 1974 the trustees replaced the original trust deed with a deed which contained no provisions corresponding to rules 15 or 18. Warren J in the Supreme Court of Victoria held that the deletion of rules 15 and 18 was ultra vires rule 9.

Counsel for the Employers argued that these authorities should be distinguished from the present case on the ground that the relevant provisions in those cases contained restrictions that were clearly intended to be permanent, whereas clause 7(i) of the 1977 Deed did not. I do not accept this argument. Clause 7(i) of the 1977 Deed was plainly intended to protect the interests of the members by preventing amendments which had an effect detrimental to their interests. In my judgment it cannot have been the draftsman’s intention to permit such amendments by an indirect route when he had prohibited them directly. Accordingly, I consider that the reasoning in UEB, Air Jamaica and BHLSPF is applicable to the present case.

Counsel for the Employers also argued that the restriction in clause 7(i) of the 1977 was not nugatory if it could be dispensed with by amendment, since it would have effect prior to any such amendment. In support of this argument counsel relied upon the reasoning of Ferris J in Aitken v Christy Hunt plc [1991] PLR 1, holding that the exercise by trustees of a power of amendment so as to remove a requirement that the employer should consent to benefit augmentations did not render the requirement pointless since it applied down to the date of its removal. I have some doubt as to whether this reasoning can be reconciled with that in UEB, Air Jamaica and BHLSPF. In any event, the decision appears to me to be one that depends on the precise terms of the provisions in issue in that case.

I therefore conclude that the introduction of rule 27 was outside the scope of the power of amendment conferred by clause 7(i) for the first reason given by the Existing Members. In those circumstances it is not necessary to consider the Existing Members’ second reason. In my judgment the consequence of this is that rule 27 is invalid in its entirety. This is not a situation like that considered by Neuberger J (as he then was) in Bestrustees v Stuart [2001] PLR 283 where the amendment is partially valid because it is possible to distinguish conceptually between the valid part of the exercise of the power and the invalid part.

The exercise of the power. My conclusion on the first question makes it unnecessary for me to consider the Existing Members’ argument that the exercise of the power conferred by clause 7(i) of the 1977 Deed to amend it to rule 27 was invalid as a “fraud on the power” in the sense explained by Lord Parker in Vatcher v Paull [1915] AC 372 at 378.

For the reasons given above I conclude that the answer to question 1 is that the operative provision was clause 7(i) of the 1977 Deed. Although I have not relied upon the 1992 Deed in reaching this conclusion, it may be noted that this conclusion in accordance with what the third recital to the 1992 Deed says.

be effective (even absent payment of special employer contributions) to amend a Member’s accrued “final salary” rights so as to convert such rights into an actuarially determined sum in an exclusively “money purchase” Individual Member’s Account:

be effective, in conjunction with IMG’s statement in the Memorandum dated 1 November 1991 that it would pay any special employer contributions while that Member remained in Pensionable Service, to amend a Member’s accrued “final salary” rights so as to convert such rights into an actuarially determined sum in an exclusively “money purchase” Individual Member’s Account:

be effective to amend a Member’s accrued “final salary” rights so as to convert such rights into a sum within a “money purchase” Individual Member’s Account, but subject to an underpin whereby the value of benefits ultimately secured by funds derived from that sum should not be less than the value of those accrued “final salary” rights:

be wholly ineffective to amend a Member’s accrued “final salary” rights:

In essence, question 2 asks to what extent the defined benefit entitlements accrued in the Plan prior to conversion could validly be converted into defined contribution entitlements as a matter of the construction of the power of amendment identified in answer to question 1. Given that I have identified clause 7(i) of the 1977 Deed as the operative provision, question 2 involves two main issues: (i) the effect of the Fetter; and (ii) whether clause 7(i) permitted retrospective amendments.

The Fetter provides that “no amendment shall have the effect of reducing the value of benefits secured by contributions already made”. The Existing Members contend that the effect of the Fetter was that, although the 1992 Deed was effective to convert active members’ final salary rights into money purchase rights, this was subject to an underpin whereby the value of a member’s benefits ultimately secured by those rights would not be less than the value of the accrued final salary rights calculated by reference to the member’s Final Pensionable Pay at the date of his or her death in Service, leaving Service or retirement (whichever occurred first). The Employers contend that the effect of the Fetter was that the conversion should not reduce the actuarially-assessed value of the active members’ final salary rights as at the date of the amendment to the Plan and that that value was to be determined as if the Plan were terminated on that day.

There have been a number of cases in which courts have interpreted similarly, but not identically, worded fetters. These include Re Alfred Herbert Ltd Pension & Life Assurance Scheme [1960] 1 WLR 271, Courage, Gas & Fuel Corp of Victoria v Fitzmaurice [1991] PLR 137, Lloyds Bank Pension Trust Corp Ltd v Lloyds Bank [1996] PLR 263, Asea Brown Boveri Superannuation Fund v Asea Brown Boveri [1999] 1 VR 144 and BHLSPF. In each of these cases the court construed such fetters as precluding amendments which were prejudicial to members’ interests. Of these authorities, the one that is of most assistance, because it is closest to the present case, is Courage. The decision in BHLSPF is the next most helpful.

In Courage the Retail Managers’ Scheme contained a power of amendment which was subject to the fetter that “no such alteration ... shall ... vary or effect any benefits already secured by past contributions in respect of any member without his consent in writing”. Millett J held at 513A:

“There was some dispute whether ‘benefits already secured by past contributions’ means the same thing, or includes the prospective entitlement to pensions based on final salary. In the absence of express definition, I see no reason to exclude any benefit to which a member is prospectively entitled if he continues in the same employment and which has been acquired by past contributions, and no reason to assume that he has retired from such employment on the date of the employer's secession when he has not. The contrary argument places a meaning on ‘secured’ [and ‘accrued’] which is not justified.”

(I have put “and ‘accrued’” in square brackets because these words do not appear in the report at [1987] 1 All ER 528. It seems likely that the All ER report is correct and that the WLR report is incorrect, because the meaning of “accrued” was expressly defined by the rules of the Staff Scheme and the Employees’ Scheme and so was not in dispute; the dispute was only as to the meaning to be placed on the words “already secured by past contributions” in the Retail Managers’ Scheme.)

In BHLSPF the power of amendment was subject to the fetter that “no such ... alteration ... shall operate so as to detract from the benefits secured to a member by the contributions paid by him and by the Company in respect of him prior to the date of such ... alteration”. As discussed above, the trust deed was amended so as to delete rules 15 and 18. Warren J held that this was precluded by the fetter, saying at [35]:

“There is a line of authority to the effect that provisions such as the first proviso to clause 9 are to be construed broadly so as to protect the interests of the members of the fund concerned. It seems to be accepted as a proposition that where a power of amendment is expressed so as not to prejudice benefits to members already secured or provided for, those benefits (which may not be prejudiced) include future or contingent benefits such as those which may arise under provisions such as Rule 18, or Rule 15.”

Among the authorities cited in support of this proposition by Warren J are Gas Fuel and Asea Brown Boveri. Reference is also made to UEB.

Save for Gas & Fuel, each of the six authorities listed above concerned a fetter expressed by reference to “benefits” “secured”. As Rimer J (as he then was) pointed out in Lloyds Bank Pension Trust Corp Ltd v Lloyds Bank plc [1996] PLR 263 at [45], the word “secured” is one which is perfectly capable of bearing a wide meaning. These authorities may therefore be contrasted with an authority on which the Employers relied, namely Canadian Association of Smelter and Allied Workers, Local 1 v Alcan Smelters & Chemical Ltd (2001) 198 DLR (4^th) 504. That case concerned a power of amendment which contained the fetter “shall not adversely affect any right with respect to benefits which have accrued”. The British Columbia Court of Appeal held that this fetter gave the members no right to benefits resulting from anything that occurred after that date. The reasoning depends on the words “which have accrued”, which no doubt explains why none of the six authorities listed above are considered in the Court’s judgments.

The Employers contend that the present case is to be distinguished from the six authorities listed above, and in particular Courage, because none of the earlier authorities concerned fetters which included the words “the value of”. The Employers also contend, if necessary, that Courage was wrongly decided.

So far as the latter point is concerned, on ordinary principles I should follow Courage unless convinced that it is wrong. I am far from convinced that it is wrong, however, and it has been followed in subsequent authorities. Furthermore, I note that in Walker Morris Trustees Ltd v Masterson [2009] EWHC 1955 (Ch) Peter Smith J rejected an argument that he should decline to follow Courage, although in the end he did not base his decision upon it. He described the reasoning in Courage at [64] as “compelling”. He went on at [65]:

“The First Defendant referred me to criticism of the decision of Courage in Sweet & Maxwell's Law of Pension Schemes at paragraphs 7-37 to 7-38. In my view the criticism there is based on a hope that the Trust Deeds in the future would be construed to give flexibility to an amendment clause as opposed to protection of rights of members. ….”

As to the former point, I am not persuaded that the inclusion of the words “the value of” makes a fundamental difference to the construction of the Fetter. On the other hand, it is correct to say that the wording of the Fetter is different to those considered in earlier cases and must be construed on its own terms in its context in the 1977 Deed. Accordingly, it is to that task that I now turn.

The starting point is that, as I have already said, it is clear that the purpose of the Fetter is to protect the interests of members against amendments to the Plan which might prejudice those interests. The Fetter must be construed so to give proper effect to that purpose.

Although the Fetter must be construed as a whole, it is convenient to consider some of the individual elements of it before doing so. First, “benefits”. The 1977 Deed used the words “benefit” and “benefits” in a number of places. The benefits provided to members under the Plan were not defined in the 1977 Deed itself, although they may have been set out in the Announcements referred to in clause 9(ii). Nevertheless, it seems probable that the benefits were always intended to be final salary benefits. Furthermore, once the 1981 Rules were adopted, the 1977 Deed was to be read together with the 1981 Rules. Under the 1981 Rules members were provided with a scale benefit of 1/60 of Final Pensionable Pay for each year of Service. The Employers rely on the fact that the 1977 Deed made no provision for the members to share in any surplus on winding up, and on the contrary clause 6 provided for any surplus after payment of benefits in accordance with the Rules to be paid to the Employers. The Existing Members rely upon the fact that clause 7(ii) gave the Trustee a unilateral fiduciary power to augment any benefits under the Rules. In view of the latter, and given that clause 7(i) refers to “benefits” and not “benefits under the Rules”, it seems to me that “benefits” extends wider than the scale benefit, but not so far as an interest in any surplus on winding up. Most importantly, I see no reason to construe “benefits” as excluding future or contingent benefits. On the contrary, considering the Fetter in the light of the authorities discussed above, I consider that “benefits” should be construed as including future and contingent benefits under the Plan.

Secondly, “secured by contributions already made”. No one has contended that “secured” has any technical meaning, such as “backed by the purchase of an annuity matching the liability”. In addition to the reasoning of Millett J in Courage, some assistance may be gained in interpreting this element of the Fetter from the observation of Rimer J in Lloyds Bank at [39] that the author of the fetter on the amendment power in Courage (which referred to “benefits already secured by past contributions”) “went to modest trouble to leave no doubt that he was focusing exclusively on accrued rights”. He proceeded to contrast that with the fetter with which he was concerned, which prohibited “decreasing pecuniary benefits secured to or in respect of a Member under the Scheme”, and held that the latter referred both to benefits accrued to date by past service and to all future benefits promised under the Scheme. As the Existing Members accept, the Fetter, like that in Courage, is concerned exclusively with rights secured by past events. On the other hand, I do not think it would be right to place too much emphasis on the words “contributions … made”. In a final salary scheme, the contributions reflect the member’s service. Thus what matters is the extent of the member’s Service at the date of the amendment.

Thirdly, “the value of”. I agree with the Employers that the inclusion of these words must be given effect to. I also agree with the Employers that they focus attention on the monetary value of the benefits, as opposed to the form or method of calculation of those benefits. It follows in my view that clause 7(i) does not prevent the conversion of final salary benefits to money purchase benefits provided that the value of the benefits is not reduced. On the other hand, I agree with the Existing Members that it is significant that, in contrast to clauses 8 and 9(i) of the 1977 Deed, clause 7(i) provides no mechanism for assessing the value of the benefits, whether by an actuary or by an exercise of discretion on the part of the Trustee or otherwise. On the contrary, the Fetter contains an absolute prohibition on reducing the objective value of the benefits. Accordingly, I see no basis for reading the Fetter as merely preventing reduction of an actuarially-assessed value of the benefits, still less one predicated upon the false basis that the Plan has been terminated, or the member has left Service, on the date of the amendment. It is true that this means that the value of a member’s benefits could not be determined at the date of the amendment, but in my view that is the inevitable consequence of protecting the value of a benefit, such as a final salary benefit, which is inherently prospective in nature.

Drawing these threads together, I conclude that the effect of the Fetter is to render ineffective amendments which reduce the value of benefits, and in particular the future final salary benefits, which have accrued to members by virtue of their Service down to the date of the amendment. An amendment to convert such benefits from a final salary entitlement to a money purchase entitlement is permissible, but only subject to an underpin which preserves the future monetary value of the proportion of Final Pensionable Pay which the member has accrued in respect of pre-amendment Service.

For the avoidance of doubt, for the reasons given above I do not accept the Employers’ first fall-back argument that, if clause 7(i) is to be construed as protecting members’ rights in respect of final salary linkage, then the value of that linkage was properly assessed and protected by the actuarial process undertaken by Mr Wolanski in 1992, and in particular by the additional special contributions which he calculated. I should make it clear that this is not a criticism of Mr Wolanski’s actuarial methodology. Nor do I accept the Employers’ second fall-back argument that, if clause 7(i) is to be construed as requiring an underpin, the underpin should be calculated by (1) working out what the member’s transfer value at the time of conversion would have been if it had been calculated using the member’s Final Pensionable Salary and (2) working out what amount that would have produced as at the member’s retirement date if it had invested with the same investment return as the actual transfer value.

The Employers also argue that the position is affected by the extrinsic documents such as the November 1991 Memorandum and the Application Forms. In my view this argument properly falls to be considered in relation to question 4 and not in relation to question 2.

This aspect of question 2 arises because the 1992 Deed was executed on 3 March 1992, but clause 1 of the 1992 Deed provided that the Replacement Rules were adopted with effect from 1 January 1992.

The starting point is that clause 7(i) of the 1977 Deed neither expressly permits nor expressly prohibits amendments with retrospective effect. The question therefore is whether clause 7(i) should be interpreted as permitting the amendments made by the 1992 Deed with effect from an earlier date.

It is common ground that the correct approach to answering this question is that laid down by Lord Walker of Gestingthorpe giving the judgment of the Privy Council in Bank of New Zealand v Board of Management of the Bank ofNew Zealand Officers’ Provident Association [2003] UKPC 59, [2003] OPLR 281 at [26]:

“In the courts below the Board of Management's power to make a retrospective amendment was dealt with as a separate topic. But before their Lordships it was rightly conceded that this topic is merely a reflection of, or another (and possibly less helpful) way of putting, what is essentially the same point as to the scope of the power of amendment. Modern authority (as reviewed and summarised by Lord Mustill in L'Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486, 524-525) has recognised that when the law raises a presumption against the retrospective operation of an enactment or a disposition (including a rule change), it is concerned with fairness in the circumstances of the particular case, rather than with the application of some general formula. In the amendment of pension scheme rules, back-dating (that is, deeming a change of the rules to have been made at a date earlier than the date of the actual change) cannot be used as a device so as to rewrite history or validate an amendment which would otherwise be beyond the scope of the power of amendment. But if the substance of what is proposed is within the power, back-dating will not by itself lead to invalidity (whether it will be more or less helpful, simply as a matter of drafting technique, will depend on the circumstances).”

The Employers contend that the touchstone identified by Lord Walker is that of fairness, and that there is nothing unfair about the 1992 Deed having effect from 1 January 1992 since that is what all concerned expected to happen and thought had happened, and it was only a result of an administrative delay in executing the documents that the 1992 Deed was not executed until after 1 January 1992.

While I have some sympathy with that argument, I find myself unable to accept it. It is clear from Lord Walker’s reasoning that the mere fact that an amendment is back-dated is not objectionable. In the present case, however, the amendment is not merely back-dated, it has truly retrospective effect. Thus the active members’ defined benefit rights which accrued between 1 January 1992 and 3 March 1992 were not even converted into defined contribution rights. Instead the Plan proceeded as if the members’ entitlement during that period had accrued on a defined contribution basis. In my judgment that is outside the power conferred by clause 7(i) for two reasons. First, it amounts to an attempt to re-write history. Secondly, it is barred by the Fetter.

For the reasons given above I conclude that the answer to question 2 is that the effect of the Fetter is to render ineffective the amendments made by the 1992 Deed in so far as they reduced the value of benefits, and in particular the future final salary benefits, which had accrued to members by virtue of their Service down to 3 March 1992. The 1992 Deed was effective to convert such benefits from a final salary entitlement to a money purchase entitlement, but subject to an underpin which preserved the future monetary value of the proportion of Final Pensionable Pay which the member had accrued in respect of Service prior to 3 March 1992.

were a Member’s accrued “final salary” rights validly and effectively converted by the 1992 Deed into an actuarially determined “money purchase” sum in an Individual Member’s Account given that:

can, and (if so) to what extent should, that conversion sum representing accrued “final salary” rights now be adjusted by the Claimant on account of the factors at (a) above (or on account of any other, and if so what, factors)?

There is little or no dispute between the parties with regard to question 3. It is common ground that none of the four matters listed in question 3(a) affect the validity of the conversion. As to item (i), in answering question 2 I have held that the retrospective amendment was ineffective. As I understand it, it is common ground that that could be dealt with by an adjustment to the conversion sum. With regard to items (ii) and (iv), it is common ground that any necessary equalisation could be achieved by an appropriate adjustment to the conversion sum, but that I am not in a position to make any determination in that respect. As to item (iii), I have already held in connection with question 2 that the Employers cannot rely upon Mr Wolanski’s calculations as an assessment of the value of the members’ rights as a matter of the construction of clause 7(i). I shall consider the Employers’ case in relation to the effect of such extrinsic materials otherwise than as a matter of construction of clause 7(i) in relation to question 4.

in relation to such of those Members who on the Application Form indicated their acceptance of the statement “I wish to participate in the IMG Pension Plan …”, by any consent given by that Application Form ?

by:

by any other consent, estoppel, waiver or other legal principle ?

On its face, this is a very open-ended question. In argument, however, attention was focussed on three contentions advanced by the Employers to the effect that, by reason of the extrinsic materials referred to, the Existing Members are prevented from claiming benefits under the Plan otherwise than on the basis that they ceased to be entitled to final salary benefits with effect from 1 January 1992, and those benefits were converted into money purchase benefits by means of the initial transfer value and additional special contributions calculated by Mr Wolanski, even if they would otherwise be entitled to different benefits as a result of the answers to questions 1 and 2. Those three contentions are that (1) binding contracts were formed which had that effect, (2) the Existing Members are subject to an estoppel by representation from claiming benefits on a different basis and (3) the Existing Members are subject to an estoppel by convention from claiming benefits on a different basis.

Before considering these arguments, it is worth noting that, unlike some of the fetters in amendment powers which have been considered in previous cases, clause 7(i) of the 1977 Deed does not contain a provision permitting amendments contrary to the Fetter with the affected members’ consent in writing. Furthermore, counsel for the Employers expressly disclaimed any reliance upon consent as such.

This argument is founded upon the decision of Neuberger J (as he then was) in South West Trains Ltd v Wightman [1998] PLR 113. That case arose out of the privatisation of British Rail. As part of the privatisation process a new pension scheme was established under which each railway business could establish its own shared cost section. One of the new businesses, SWT, duly set up a section. It also re-negotiated the terms and conditions of employment for certain categories of staff, in particular drivers. The new terms and conditions were negotiated by a working group consisting of three representatives of SWT and three representatives of the drivers’ trade union ASLEF. The new terms and conditions were accepted by the union’s Executive Committee and in a ballot a majority of the drivers voted in favour of them. SWT then implemented the new terms and conditions in reliance upon clause 16 of the drivers’ contracts of employment, which provided that the contract was subject to terms and conditions settled from time to time under agreed collective bargaining procedures with a recognised trade union. One of the key features of the new terms and conditions was that drivers would be paid £25,000 per annum instead of £11,950 plus allowances amounting to a further £11,000, but pensionable pay would be only £18,000. The trustee of the SWT section proposed to amend the rules of the section to give effect to this. The amendment was opposed by the drivers, who contended in essence that under the existing rules they were entitled to a pension based on the salary of £25,000 and that entitlement should not be removed by amendment. The trustee therefore applied to the court for authorisation to execute the amending deed.

The application gave rise to five main issues, amongst which were whether there was a binding agreement between each driver and SWT as a result of the process by which the new terms and conditions were adopted and, if so, whether the agreement could be enforced to prevent the drivers from claiming pensions on a different basis. Neuberger J answered both of these questions in the affirmative. So far as the first point is concerned, he held at [81]-[93] that the new terms and conditions, including the changes to pension rights, were within the scope of clause 16 and not excluded by a particular sentence of that clause relied on by the drivers. As to the second point, he held at [94]-[102] that it was an implied term of the agreement enforceable at the suit of SWT that the drivers would not claim pensions at a higher level than that agreed. At [103]-[109] he said that it was well arguable for each of three reasons that, as a result of the contract, the trustee could refuse to pay the drivers a pension at a rate higher than that agreed even in the absence of an amendment to the rules, but did not decide the point. At [118]-[120] he held that the trustee could and should execute the amending deed.

Counsel for the Existing Members did not take issue with Neuberger J’s contractual analysis, but pointed out that in [118] the judge said this:

“… Clause 13 of the RPS permits the Trustee to ‘change any of the Trust's powers and provisions of the [RPS] ... and of the Rules of any Section’, and specifically permits any amendment to have retrospective effect. The Deed would of course have retrospective effect to the date upon which the restructuring agreement took effect, 19 January 1997. It has not been suggested that its execution would be a breach of any of the terms of the RPS (including the Section), would have been a breach of the BRPS, or would in any way constitute a breach of the Trustee’s fiduciary or other obligations, always assuming that my conclusion on the four questions which I have been considering are correct. Nor, on that assumption, has it been suggested that either SWT or the Pensions Committee ... would be acting unlawfully in requesting the Trustee to execute the Deed.”

Turning to the present case, the Employers contend that by ticking the yes box and signing the Applications, each of the Existing Members entered into a binding contract with IMG under which he or she consented to the changes to the Plan set out in the November 1991 Memorandum and Mr Wolanski’s presentations and impliedly agreed not to claim benefits from the trustee(s) of the Plan on a different basis to that set out in those documents.

I have set out the relevant facts in detail above, but for convenience I shall summarise the key points here:

It should be noted that the Employers contend that the contract was complete when the Existing Members returned their signed Application Forms. Accordingly, the Employers do not rely upon any subsequent documents to support the contract case. Equally, the Employers submit that the later documents referred to in question 4 cannot contradict or vary that contract.

The Existing Members dispute that any such contract was formed on a number of grounds. First, the Existing Members contend that there was no intention to create legal relations. This contention gives rise to a number of preliminary points. The first is the incidence of the burden of proof. This is not an ordinary commercial contract. I consider that the position is analogous to an allegation that a contract should be inferred from conduct, and accordingly the burden of proof of intent to create legal relations is upon the proponent of the contract: see Chitty on Contracts (30^th ed) at 2-60.

The second question is how intention should be judged. As to this, I see no reason not to adopt the normal objective test: see Chitty at 2-161.

The third point is that, upon an objective assessment, both parties must intend to create legal relations. It is not enough to negative intent that one party subjectively does not intend to enter into a binding contract, nor is it enough to establish intent that one party subjectively intends to create a binding contract: see Chitty at 2-161 and 2-188. It follows in my view that little weight can be placed upon the evidence as to IMG’s intentions in seeking consent from the Plan members, and in particular Mr Fitzmaurice’s letter dated 7 August 1991 (see paragraph 44 above) and Mr Kuhn’s letter dated 13 August 1991 (see paragraph 45 above). The Existing Members were not privy to the contents of those documents, and so the documents only bear upon IMG’s subjective intentions.

The fourth point is that I am not concerned with a social or domestic agreement of the kind discussed in Chitty at 2-169 to 2-174. Nor is this a collective bargaining agreement, as to which see Chitty at 2-177. The alleged contract is one which arises out of, and must be viewed against the backdrop provided by, an employment relationship.

The final preliminary point is that, in the circumstances of the present case, I consider that the Employers must establish not merely that there was an intention to create legal relations, but specifically an intention to create contractual relations. The reason why I say this is that the parties may have intended to create legal relations to be regulated by the applicable trust documents. What the Employers must establish is an intent to create contractual relations, so that the contract is binding even if its terms differ from those of the applicable trust documents.

Turning to the main question, I am not persuaded that both IMG and the Existing Members did intend to create contractual relations. The principal foundation for the Employers’ contract case is the November 1991 Memorandum. This is an announcement by IMG and TWI to their employees of what the employers have unilaterally decided to do. It is presented to the employees as a fait accompli (or, more accurately, as a fait shortly to be accomplished). There is not the slightest suggestion in the document that this is dependent upon the agreement of the employees. Furthermore, the document states that “full details of the plan will shortly be provided in a new explanatory booklet”. Accordingly, it would be to the Booklet that the employees would have looked to ascertain the details of the changes.

As for the presentations, there is no suggestion that these were represented to be a comprehensive statement of what was proposed. Employees would still have been left with the understanding that they should look to the forthcoming booklet.

Turning to the Application Form, this requests employees to confirm that they have read and understood the Booklet, not the November 1991 Memorandum. Again, therefore, this directs attention to the Booklet. So does the 13 December 1991 memorandum. It is true that the latter document begins with the words “Further to Peter Kuhn’s memo in November”, but in my view this simply means “Following on from”. It does not detract from the message that the important document is the Booklet.

Both the 13 December 1991 memorandum (“These terms take effect from 1^st January”) and the Booklet (the Plan “has been … amended with effect from 1 January 1992”) present the change as already have been made. Thus they even more clearly present the employees with a fait accompli.

Furthermore, the Booklet clearly states that it is not comprehensive and that “the Plan is governed by its Trust Deed and Rules”. In the light of this statement, I cannot see that the parties can have intended to enter into contractual relations governed by the extrinsic documents as opposed to legal relations governed by the trust documents of the Plan. Still less can the Existing Members have intended to enter into a contract which involved giving up final salary rights to which they would otherwise have been entitled, and in particular rights protected by clause 7(i) of the 1977 Deed, when the Booklet contains no reference to those rights.

It is true to say that the Application Form did require the Existing Members to state whether or not they wished to “participate in the IMG Pension Plan with effect from 1 January 1992”. There is nothing in the wording of the Application Form to indicate to Existing Members, however, that they were being asked to consent to conversion of the Plan from a final salary scheme to a money purchase scheme, still less that they were being asked to consent to giving up final salary rights to which they would otherwise have been entitled and in particular those protected by clause 7(i). Indeed, it is not clear from the documentation what would be the position if an Existing Member elected not to participate. The result would seem to be that the Member would cease to be a member of the Plan at all, and become a deferred pensioner even if he or she continued in Service.

The Existing Members’ second argument is that there was no consensus ad idem. In my view this argument adds nothing to the first argument. If I am wrong about intent to create contractual relations, then it seems to me that there was sufficient consensus to create a contract because there was an offer by IMG which was accepted by the Existing Members when they returned the signed Application Forms.

The Existing Members’ third argument is that there was no consideration moving from IMG. I do not accept this. If I am wrong about intent to create contractual relations, then it seems to me that IMG promised to pay into Existing Members’ accounts an initial transfer value and annual additional special contributions in place of their final salary rights. That promise is good consideration.

The Existing Members’ final argument is that an extrinsic contract of the kind propounded by the Employers cannot override clause 7(i) of the 1977 Deed, and so neither IMG as Trustee nor its successors could enforce the contract, at least in so far as it was adverse to the interests of the beneficiaries, without acting in breach of trust. Accordingly, the Existing Members contend that there is a fundamental distinction between the present case and South West Trains, where as noted above it was not suggested that enforcing the contract would be contrary to the terms of the trust. On the contrary, Neuberger J was inclined to accept that the trustee could and should give effect to the contract even without the amendment. One of his reasons for inclining to that view was that the extrinsic contract in that case only affected the salary to which the drivers were to be treated as entitled for the purposes of calculating their pensions, which the trustee would have had to look outside the rules of the section for anyway: see South West Trains at [108].

In support of this argument, the Existing Members contend that there was no informed consent on the part of the Existing Members which would preclude the Existing Members from asserting a breach of trust applying the principles laid down by Wilberforce J in Re Pauling’s Settlement Trusts [1962] 1 WLR 86 at 108:

“the court has to consider all the circumstances in which the concurrence of the cestui que trust was given with a view to seeing whether it is fair and equitable that, having given his concurrence, he should afterwards turn round and sue the trustees: that, subject to this, it is not necessary that he should know that what he is concurring in is a breach of trust, provided that he fully understands what he is concurring in, and that it is not necessary that he should himself have directly benefited by the breach of trust.”

I accept these arguments. It is one thing to hold that an extrinsic contract may be enforced to supplement a trust deed where the deed does not contain any contrary provisions. It is quite another to say that an extrinsic contract may override contrary provisions in a trust deed unless the extrinsic contract amounts to consent on the part of the beneficiaries. In the present case I am not satisfied that the beneficiaries did consent for the following reasons: (i) they were unaware of the terms of clause 7(i) of the 1977 Deed; (ii) they received no advice in relation to it; (iii) it was not clearly explained to them what was happening to their final salary benefits; in particular (iv) they were not told how Mr Wolanski was going to calculate the transfer value and additional special contributions, and in particular the assumptions he would employ; (v) they were not given any real choice as to whether or not to consent; and (vi) at least in the case of some Existing Members, they received the impression that they would not be adversely affected by the change.

It is common ground that the requirements for an estoppel by representation were accurately stated by Neuberger LJ (as he then was) in Steria Ltd v Hutchison [2006] EWCA Civ 1551, [2007] ICR 445 as follows:

“91.

A claim is normally made in estoppel because it is impossible, for one reason or another, to make it in contract, as some feature required by statute or common law for there to be an enforceable agreement is lacking. If one had to identify a single factor which a claimant in an estoppel case has to establish in order to obtain some relief from the court it would be unconscionability – see per Robert Walker LJ in Gillett v Holt [2000] Ch 198 especially at 225 and 232.

…

93.

When it comes to estoppel by representation or promissory estoppel, it seems to me very unlikely that a claimant would be able to satisfy the test of unconscionability unless he could also satisfy the three classic requirements. They are (a) a clear representation or promise made by the defendant upon which it is reasonably foreseeable that the claimant will act, (b) an act on the part of the claimant which was reasonably taken in reliance upon the representation or promise, and (c) after the act has been taken, the claimant being able to show that he will suffer detriment if the defendant is not held to the representation or promise. Even this formulation is relatively broad brush, and it should be emphasised that there are many qualifications or refinements which can be made toit.”

The Employers contend that:

The Existing Members contend that this case falls at the first hurdle. I agree, for a number of reasons. First, to found an estoppel the representation must be clear and unequivocal. As Ralph Gibson LJ explained in Troop v Gibson [1986] 1 EGLR 1 at 6:

“…where both parties have engaged upon a course of negotiation or transactions representing mutually the one to the other that a certain state of affairs is accepted regarding their conduct, then the necessity of proof of some clear and unequivocal statement becomes of less importance. The court must determine what the state of affairs is which the parties have accepted and decide whether there is sufficient certainty and clarity in the terms of the convention to give rise to any enforceable equity. For my part I think that the extent to which the importance of clear and unequivocal statements is reduced in cases of estoppel by convention is probably small. In all cases the representation or statement must be sufficiently clear; and, since the doctrine of estoppel, when applied deprives a party of the ability to enforce a legal right for the period of time and to the extent required by equity which the estoppel has raised, the clarity required will seldom fall below what is unequivocal for the relevant purpose.”

I do not consider that the Application Forms contained a clear and unequivocal representation as claimed by the Employers. My reasons are similar to those I have given for concluding that there was no intent to create contractual relations: the Application Forms do not refer to the November 1991 Memorandum, but to the Booklet; the Booklet makes no reference to the position regarding final salary benefits; the Application Form does not state that the signatory consents to the conversion of the Plan from a defined benefits scheme to a defined contribution scheme, particularly when viewed in the context that the change was being presented as a fait accompli; still less does the Application Form state that the signatory consents to giving up final salary rights to which they were otherwise entitled and in particular rights protected by clause 7(i) of the 1977 Deed.

Secondly, there are a number of authorities which indicate that passive acceptance by employees is not sufficient to give rise to an estoppel. I will refer to three of these. The first is Redrow plc v Pedley [2002] EWHC PLR 339, [2002] PLR 339, from which I quote below.

The second is Hodgson v Toray Textiles Europe Ltd [2006] EWHC 2612 (Ch), [2006] PLR 253 at [98]-[99], where Lewison J applied to the pensions context the observations of Browne-Wilkinson J (as he then was) delivering the judgment of Employment Appeal Tribunal in Jones v Associated Tunnelling Co Ltd [1981] IRLR 477:

“In our view, to imply an agreement to vary or to raise an estoppel against the employee on the grounds that he has not objected to a false record by the employers of the terms actually agreed is a course which should be adopted with great caution. If the variation relates to a matter which has immediate practical application (e.g. the rate of pay) and the employee continues to work without objection after effect has been given to the variation (e.g. his pay packet has been reduced) then obviously he may well be taken to have impliedly agreed. But where, as in the present case, the variation has no immediate practical effect the position is not the same. It is…asking too much of the ordinary employee to require him either to object to an erroneous statement of his terms of employment having no immediate impact upon him or be taken to have assented to the variation. So to hold would involve an unrealistic view of the inclination and ability of the ordinary employee to read and fully understand such statements.

Even if he does read the statement and can understand it, it would be unrealistic of the law to require him to risk a confrontation with his employer on a matter which has no immediate practical impact upon the employee. For those reasons, as at present advised, we would not be inclined to imply any assent to a variation from a mere failure by the employee to object to the unilateral alteration by the employer of the terms of employment contained in a statutory statement.”

The third is Foster Wheeler Ltd v Hanley[2008] EWHC (Ch), [2009] PLR 39, in which Patten J (as he then was) said at [90]:

“…my principal reason for rejecting the Company's estoppel argument does not ultimately depend on how successful or not this circulation exercise proved to be or on its precise timing. It seems to me that none of the evidence relied on by the Company amounts to more than the passive acceptance of the information which the booklet contained.Even assuming that the booklet reached members before 1st June, there is nothing in the material distributed to indicate that the changes to NRD were not to be introduced via a rule change in accordance with the procedure and safeguards prescribed by clause 9 of the Trust Deed or that the members, by their lack of complaint, can be taken effectively to have waived reliance upon those contractual rights. …”

It is true that in the present case the Existing Members did take the step of signing and returning the Application Forms. But as I have pointed out, all that signified was a desire to participate in the Plan, as opposed to a desire not to participate in the Plan. So far as the question of the conversion of their final salary rights is concerned, and in particular what was said on that subject in the November 1991 Memorandum, it seems to me that there was no more than passive acceptance of the fait accompli presented by IMG. Moreover, that fait accompli was presented on the basis that IMG had amended the Trust Deed and Rules, and thus could be presumed to have done so in accordance with the applicable procedure and safeguards.

Thirdly, there is the statement in the Booklet that the Plan is governed by the Trust Deed and Rules. The effect of a “disclaimer” in a pension scheme explanatory booklet was considered by Neuberger LJ in Steria as follows:

“102.

Those words in the 1991 booklet bring me conveniently to the third problem faced by Mr Hutchinson, which raises a point of more general application and interest in the field of employee pension schemes. The issue arises in these circumstances. The 1991 booklet was produced by an employer for the purpose of assisting its employees to understand the essential elements of the employee pension scheme, and it contains: (i) information which is inaccurate, in that it does not correctly reflect the terms and effect of the deeds and rules governing the scheme; and (ii) a statement that the provisions of those deeds and rules ‘prevail over this booklet on any question of interpretation’. The question which arises is whether an employee can successfully contend that he or she has relied on the provisions of the booklet so as to raise an estoppel against the employer and/or the trustees of the scheme.

103.

Whether or not an estoppel can be raised, and, if so, whether and how it should be satisfied, in a particular case are classically questions which fall to be determined by reference to the specific facts and circumstances of that particular case. Accordingly, as Pumfrey J recognised at paragraph 51 in Hoover Ltd v Hetherington [2002] PLR 297, it may be dangerous to lay down an immutable rule applicable to every case in which an estoppel is sought to be raised by an employee in relation to an inaccurate statement as to the effect of his pension scheme in a booklet, which also contains the statement that the terms of the deed and the rules are to prevail. Having said that, provided that the latter statement is clear, both in its terms (i.e. in the way in which it is expressed) and in its location (i.e. not tucked away in tiny print in a footnote), I find it very hard to conceive of a case where an employee could rely simply on the terms of the booklet as founding a sufficient representation upon which to base an estoppel.

104.

As Etherton J said in Hearn v Younger [2005] PLR 49 at [111], the ‘explanatory pension scheme booklet… is expressed in general terms and is manifestly not intended to override the trust deed and rules.’ In Trustee Solutions –v- Dubery [2006] PLR 177, handed down after the decision of Peter Smith J in this case, Lewison J said this to much the same effect, at [52]:

‘[I]n the majority of cases that have considered whether estoppels have arisen because of what has been said in booklets summarising a pension scheme, the overwhelming majority of judges have said that explanatory booklets containing statements to the effect that in case of doubt or conflict the rules or trust deed will prevail do not on their own give rise to estoppels. To hold otherwise would mean that a booklet of that kind would override the rules, when the booklet itself says the contrary.’

105.

The two exceptions he mentioned were a short and unreasoned decision of Aldous J on this point in Icarus (Hertford) Ltd v Driscoll [1990] 1 PLR 1, which was a decision in the relatively early days of pension scheme litigation, and the decision of Peter Smith J in this case, where the estoppel was described by Lewison J as ‘as a result of a combination of both the booklet and a letter addressed to him personally’.

106.

In my judgment, Laddie J was right when he said this in ITN Plc v Ward [1997] PLR 131 at [23]:

‘[S]uch booklets are usually deliberately framed in general terms in an attempt to make them more readily intelligible to those members who read them. They are a précis of some, but by no means all, of the important features of the scheme. It must be borne in mind that any précis of long and complicated documents will lose some of the detail (unless discarded matter is mere surplusage). To that extent any précis can be said to be inaccurate, and there will be some who will be adversely affected by the inaccuracy, assuming, of course, that they take the précis to be definitive on the points it deals with rather than a basic introduction.’

107.

There is, of course, a substantial difference between an inaccuracy which arises from the omission of a detail or qualification, and an inaccuracy which is simply a mistake. However, it seems to me that those observations do serve to undermine an attempt to base a case which relies on any of the contents of a booklet, at least if it contains a disclaimer of the sort the 1991 booklet contained in this case, and which, as I understand it, almost all booklets of this sort include.

108.

The notion that only one or some of the members of a pension scheme could rely on an estoppel based on a statement in an explanatory booklet is unattractive, and there is considerable force in the point made by Pumfrey J in the Hoover case at [52]:

‘In this context, any estoppel should be capable of benefiting all the Members. The problems otherwise become impossible. When general representations made to the body of employees are relied on, they must be representations by the employer as against the body of employees which make it inequitable as against the body of employees as a whole to insist upon the strict terms of the Rules.’

He went on to say that it was ‘conceivable that special circumstances may affect particular employees’. It is worth mentioning that the estoppel found in the Icarus case was one which benefited the employees as a whole.

109.

An additional reason why the court should lean against an estoppel in favour of one, or only some, of the members of a pension scheme, is that it involves favouring only one or some of the members of the scheme over the other members of the scheme. As was pointed out by Lewison J in the Trustees Solution case at [51], this could in some cases put the trustees of the scheme in a position where they might be in breach of their statutory duties (in that case, which would not apply in this case, the duty in question would have been that contained in section 62 of the Pensions Act 1995). However, if it is argued that the estoppel extends to all members of the scheme, then the problems identified by Sir Andrew Morritt V-C in Redrow plc v Pedley [2002] PLR 339 at [60] would arise.”

Neuberger LJ’s conclusion applying this reasoning to the facts of that case was that there was no reliance. In my judgment the same conclusion follows here. But in the present case I consider that the point goes further. Given that the Booklet states that the Trust Deed and Rules govern entitlement, I am unable to see how the Existing Members can have represented, by signing the Application Form confirming that they had read the Booklet, that they agreed to claim benefits on a basis other than that provided for by the Trust Deed and Rules. (Incidentally, it should be noted that at the time the Booklet was circulated and the Application Forms signed and returned, the 1992 Deed had not been executed. Counsel for the Employers submitted that the intended reference was to the 1992 Deed, but I did not understand him to suggest that this made any difference if, as I have held, the 1992 Deed was ineffective to extinguish the Existing Members’ accrued final salary rights under the 1977 Deed and the 1981 Rules.)

The application of estoppel by convention in the pension scheme context was considered by the Chancellor of the High Court in Redrow as follows:

“59.

The principle upon which Redrow relies was that formulated by Lord Denning in Amalgamated Investment and Property Co Ltd. v. Texas Commerce International Bank Ltd. [1982] 1 QB 84, 121, namely:

‘If the parties to a contract, by their course of dealing, put a particular interpretation on the terms of it – on the faith of which each of them – to the knowledge of the other – acts and conducts their mutual affairs – they are bound by that interpretation just as much as if they had written it down as being a variation of the contract. There is no need to inquire whether their particular interpretation is correct or not – or whether they were mistaken or not – or whether they had in mind the original terms or not. Suffice it that they have, by their course of dealing, put their own interpretation on their contract and cannot be allowed to go back on it.’

60.

Eveleigh and Brandon LJJ adopted the statement of principle contained in Spencer Bower and Turner, Estoppel by Representation 3^rd ed p.157 that:

‘When the parties have acted in their transaction upon the agreed assumption that a given state of facts is to be accepted between them as true, then as regards that transaction each will be estopped against the other from questioning the truth of the statement of facts so assumed.’

61.

These principles have been considered in the context of a pension scheme by Aldous J in Icarus (Hertford) Ltd v Driscoll [1990] PLR 1, Laddie J in ITN v Ward [1997] PLR 131 and Rimer J in Lansing Linde v Alber [2000] PLR 15. I do not doubt that the principle is capable of applying to dealings between the trustees of a pension scheme and a member in relation to the contract between them. But, I suggest, the principle must be applied with caution when seeking to establish an estoppel between the trustees and the general body of members so as to bind them all to an interpretation of the trust deed which it does not bear.

62.

First, the pension scheme embodies not only the terms of a contract between individual members and the trustees but also a trust applicable to the fund comprising the contributions of members and surpluses derived from the past in which present and future members may be interested. Such trusts cannot be altered by estoppel because there can be no such estoppel binding future members.

63.

Second, it is necessary to show that the principle is applicable to all existing members. I agree with Laddie J in ITN v Ward [1997] PLR 131 that it is not necessary for that purpose to call evidence relating to each and every member’s intention. But that will not absolve a claimant from adducing evidence to show that the principle must be applicable to the general body of members as such.

64.

Third, as the formulation of the principle shows, what must be proved is that each and every member has by his ‘course of dealing put a particular interpretation on the terms of’ the rules or ‘acted upon the agreed assumption that a given state of facts is to be accepted between them as true.’ This involves more than merely passive acceptance. The administration of a pension scheme on a particular assumption as to the yardstick by which contributions or benefits are to be calculated may well give rise to a relevant assumption on the part of the trustees. I suggest that it requires clear evidence of intention or positive conduct to bind the general body of members to such an assumption. I doubt whether receipt of the benefit or payment of the contribution, without more, can be enough. It must not be overlooked that if the principle is applicable it may be used to increase the liability or reduce the benefit of a member.

65.

The extra ingredients in this case relied on by Redrow are the explanatory booklets and the form of payslip. Had it been necessary to decide the issue I would not have considered that either ingredient was enough. None of the booklets was clear enough and each of them contained passages clearly indicating that nothing contained therein could override the meaning and effect of the deeds and rules. With regard to the payslips it could be deduced from those for a pay period in which the member had enjoyed a benefit in kind that it was not taken into account in computing the amount of that employee’s contribution. The employee paid that contribution by deduction from his gross pay. But a member not receiving a benefit in kind would be none the wiser andthere is nothing comparable in relation to the computation of benefits.”

This passage has been cited and applied in a number of subsequent authorities. Part of it was referred to with evident approval by Neuberger LJ in Steria at the end of the passage quoted above.

The Employers contend that, even if there was no representation by the Existing Members, there was a common understanding or agreed assumption on the part of IMG and the Existing Members as a class that the Existing Members would receive money purchase benefits in accordance with the 1992 Deed and that they would receive the initial transfer value and additional special contributions in lieu of their final salary rights.

In support of this argument, the Employers point out that there is no difficulty with regard to the future members who all joined the Plan on the basis that it was a money purchase scheme. Nor is there any difficulty in holding that the estoppel applies to the Existing Members as a class. Counsel for the Employers sought to distinguish Redrow on the basis that the Employers did not rely upon the Booklet nor upon deductions from payslips, but upon what the Existing Members were told in the November 1991 Memorandum and the presentations, their acceptance of it as signalled by the signing of the Application Forms and the fact that thereafter all sides behaved on that basis for a decade and a half, as shown for example by (i) Mrs Dier’s 22 July 1992 memorandum and the enclosed letters from Mr Wolanski dated 21 July 1992 (see paragraphs 82-83 above), (ii) the benefit statements subsequently sent to the Existing Members (see paragraph 88 above) and (iii) the fact that some of the Existing Members elected to pay, and did pay, additional voluntary contributions which the Employers matched up to the level of 3%.

In my judgment this is probably the Employers’ strongest case on question 4, but it stills fails for similar reasons to those I have given in relation to the contract and estoppel by representation cases. I am prepared to accept that IMG and the New Trustees assumed that the Existing Members’ benefits were governed by the 1992 Deed and administered the Plan in accordance with the 1992 Deed supplemented by the November 1991 Memorandum and the 22 July 1992 memorandum and enclosures. I am also prepared to accept that IMG and the New Trustees assumed that the Existing Members accepted this. What I am unable to accept is that the Existing Members “put a particular interpretation on” the Plan’s governing documents or “acted upon the agreed assumption that” they had given up rights to which they were entitled under those documents. On the contrary, I consider that the Existing Members did no more than passively accept the fait accompli presented by IMG on the basis that the Trust Deed and Rules had been amended. Furthermore, they did so on the basis set out in the Booklet, which as discussed above made it clear that the Plan was governed by its Trust Deed and Rules. Still further, as I have pointed out, the evidence shows that at least some of the Existing Members thought that they would not be adversely affected by the change.

Finally, I should deal with the position of the position of members who joined the Plan between 1 January and 3 March 1992. I have concluded above that the back-dating of the 1992 Deed was ineffective. Accordingly, at the time those members joined the Plan was governed by the 1977 Deed and 1981 Rules. Those members received the alternative version of Mrs Dier’s memorandum dated 13 December 1991 and completed a slightly differently-worded application form. Nevertheless, I consider that the most of reasoning set above applies equally to them. Accordingly, they stand in the same position as those who were already members on 1 January 1992.

For the reasons given above I conclude that the answer to question 4 is that the Existing Members’ benefits in accordance with the answers I have given to questions 1-3 are not modified as a result of an extrinsic contract, an estoppel by representation or an estoppel by convention as contended for by the Employers.

generally to amend or consent to the amendment of the Plan provisions purportedly effected by the execution of the 1992 Deed; or

(without prejudice to the generality of question 5(a) above) to amend or consent to the amendment of the Plan provisions so as to surrender those unilateral augmentation powers in Rules 21 of Schedule C and/or (upon termination of the Plan) Rule 3 of Schedule L of the 1992 Deed),

Question 5 asks in essence whether the New Trustees validly exercised the power of amendment when they executed the 1992 Deed. The Existing Members advance three contentions. First, they attack the exercise by IMG of its power of appointment under section 36(1) of the Trustee Act 1925 when appointing the new Trustees, and argue that it follows that the 1992 Deed was not valid. Secondly, they contend that there was no valid exercise of the power of amendment by the New Trustees, and accordingly the 1992 Deed is void, because the New Trustees did not exercise their discretion at all. Thirdly, they contend that the New Trustees failed properly to exercise the power of amendment.

I have set out the circumstances in which the New Trustees were appointed above.

I received evidence from three of the four New Trustees, Messrs Lafave, Todd and Clark. Mr McCormack died about six years ago. On the evidence, I consider that his position would have been much the same as that of Mr Lafave.

Mr Lafave’s evidence was as follows:

Mr Todd’s evidence was as follows:

Mr Clark’s evidence was as follows:

In his witness statement Mr Clark described the three points on which he obtained Mr Quarrell’s advice as follows:

“17.1

It seemed unusual to me that the provisions of the existing Trust Deed, which had been established in relation to a final salary scheme, could be converted to a money purchase scheme in the way proposed. Mr Quarrell assured me that this change could technically be made under the terms of the existing Deed.

17.2

Further, in the interests of existing pension scheme members, I wanted to know that the company was acting properly in making this change to the pension plan, in the sense that existing members would not be adversely affected by the conversion. Mr Quarrell advised me that the existing members were being properly provided for on the conversion.

17.3

He also confirmed at my request that he was personally satisfied that the documentation that his department had produced was appropriate and effective to make the change.”

In cross-examination, Mr Clark went slightly further in respect of the second point:

“I wanted to know that those people would be no worse off under a money purchase -- under the money purchase conversion than they were under the final salary arrangements they were enjoying.”

Mr Clark told me that he did not think that any note was made of this advice, and he was relying upon his memory. Counsel for the Existing Members questioned the accuracy of this recollection given that Mr Clark’s recollection of other events relating to the Plan was poor. He did not challenge the accuracy of Mr Clark’s evidence during cross-examination, however. That being so, I accept that evidence.

It is tolerably clear that each of the New Trustees executed the Deed of Appointment and the 1992 Deed at the same time. It is also fairly clear that there were no discussions between the New Trustees as to whether they should sign the 1992 Deed. Still less were there any discussions between the New Trustees as to (i) the propriety of converting the Plan from a final salary scheme to a money purchase scheme, (ii) whether the 1992 Deed sufficiently protected the interests of the Existing Members or (iii) whether it was appropriate for IMG to use the bulk of the accumulated surplus to take a contributions holiday.

Counsel for the Existing Members submitted that, taken as a whole, the evidence demonstrated that in signing the 1992 Deed the New Trustees had simply “rubber stamped” a decision which had already been taken by IMG and not exercised any independent discretion. I accept that submission. The only one of the New Trustees who did anything in the nature of exercising an independent discretion was Mr Clark. In substance, all he did was to attempt to assure himself that the transaction had been properly considered by his colleagues at NN.

The Existing Members’ first argument is that the appointment by IMG of the New Trustees was a “fraud on the power” conferred by section 36(1) of the 1925 Act because it was used for an improper purpose. The Existing Members contend that the power of appointment was a fiduciary power to be exercised in the best interests of the members, but that IMG improperly exercised it by appointing new trustees who would simply do what they were told by IMG.

It has to be said that it would have been better if IMG had followed Mr Fitzmaurice’s advice and appointed at least one member trustee. Nevertheless, IMG did appoint one trustee who was independent, namely Mr Clark. Counsel for the Existing Members submitted that Mr Clark was not fully independent because of the close relationship between IMG and both NN generally and himself specifically. I accept that there was a close relationship, but I do not consider that that meant Mr Clark lacked independence. He was a qualified solicitor in private practice, and moreover one with experience of acting as a trustee.

Furthermore, IMG were advised by NN as to the duties of trustees, and Mr Kuhn ensured that that advice was passed on to each of the New Trustees. I am satisfied that each of the New Trustees understood and appreciated, at least in general outline, the nature of the obligations that they were assuming.

In those circumstances I do not accept that IMG appointed the New Trustees, or the New Trustees accepted their appointment, simply to do IMG’s bidding regardless of whether they considered any proposed course of action appropriate. Accordingly, I do not accept that IMG improperly exercised the power of appointment.

I should explain that, for reasons I have indicated above and shall explain more fully below, I have concluded that the New Trustees did regard themselves as implementing a decision already taken by IMG when they executed the 1992 Deed. I do not regard that conclusion as inconsistent with the conclusion I have just expressed in relation to IMG’s exercise of the power of appointment, for two reasons. First, as I shall explain, I consider that the appointment of the New Trustees and the execution of the 1992 Deed were part and parcel of the same process. Secondly, the New Trustees were not just appointed to execute the 1992 Deed. They were appointed to serve, and did serve, for a period of time thereafter.

I would add that, even if I had been satisfied that the appointment of the New Trustees was invalid, it is not clear to me that that would mean that the 1992 Deed was invalid. It is not necessary for me to reach a conclusion on this point, however.

Nor is it necessary for me to consider the Employers’ argument that, even if the principle established in Turner v Turner applies to this case, the Existing Members should be denied relief on the ground of laches.

The Existing Member’s second argument relies on the decision of Mervyn Davies J in Turner v Turner [1984] Ch 100. The facts of that case are summarised in the headnote as follows:

“By an irrevocable deed of settlement dated March 30, 1967 the settlor created a trust for the benefit of his wife, children and remoter issue and any spouse or former spouse of such issue. The settlement contained a discretionary power to distribute capital or income out of the trust fund to all or any of the beneficiaries. The settlor, contrary to his solicitors' advice, appointed his father, sister-in-law and her husband, none of whom had experience or understanding of trust matters, as trustees. By a deed dated June 1, 1967, the trustees purported to exercise their power of appointment in favour of such of the settlor's four children who attained the age of 21. In 1969 they purchased a farm from the settlor, raising the money by means of a mortgage. By a deed dated July 9, 1971, the trustees revoked the appointment of the settlor's eldest son in the 1967 deed and appointed the remaining three children as the sole beneficiaries of the trust fund. At the end of 1975 the legal executive responsible for the trust affairs retired, and his successor, who was unaware of the 1971 appointment, prepared a conveyance on the settlor's instructions dated March 30, 1976, by which the farm purchased in 1969 was conveyed to the eldest son for no consideration, the intention being that the conveyance, in addition to conveying the legal estate, should operate as a beneficial appointment under the settlement in favour of the eldest son. The trustees at no time appreciated their powers and duties in relation to the discretionary trust which had been wholly disregarded for the purpose of decision-making. The settlor was regarded as the solicitors' client and the trustees took no part in the preparation of the 1967, 1971 and 1976 appointments, which were merely put before them by the settlor for execution.”

Mervyn Davies J held that the 1967, 1971 and 1976 appointments were not valid exercises of the trustees’ powers. After citing from the judgment of Sir Robert Megarry V-C in In re Hay’s Settlement Trusts [1982] 1 WLR 202 at 209-20, Mervyn Davies J said at 110B:

“… the trustees exercising a power come under a duty to consider. It is plain on the evidence that here the trustees did not in any way ‘consider’ in the course of signing the three deeds in question. They did not know they had any discretion during the settlor's lifetime, they did not read or understand the effect of the documents they were signing and what they were doing was not preceded by any decision. They merely signed when requested. The trustees therefore made the appointments in breach of their duty in that it was their duty to ‘consider’ before appointing and this they did not do.”

He went on to say at 111C:

“The authorities I have mentioned, including In re Hastings-Bass, decd., permit the inference that in a clear case on the facts, the court can put aside the purported exercise of a fiduciary power, if satisfied that the trustees never applied their minds at all to the exercise of the discretion entrusted to them. If appointers fail altogether to exercise the duties of consideration referred to by Sir Robert Megarry then there is no exercise of the power and the purported appointment is a nullity”

In Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 at 1623B Warner J recorded Edward Nugee QC’s explanation of Turner v Turner as “an equitable application of the principle of non est factum”. It appears that Warner J agreed with this analysis, since he held at 1624G that, while Turner v Turner rested upon the same foundation as the rule in Hasting-Bass, namely the duty of trustees to give proper consideration to any exercise of a discretion vested in them, it was not strictly speaking an application of that rule “because there there was no exercise of the discretion at all”.

This analysis appears to have been accepted by Lightman J in Abacus Trust Co (Isle of Man) v Barr [2003] EWHC 114, [2003] Ch 409 at [32] and in Betafence Ltd v Veys [2006] EHC 999 (Ch), [2006] PLR 137 at [73]. In the former passage he said:

“What may appear to have been a decision of trustees may on examination prove to have been no decision at all. An example is furnished by Turner v Turner [1984] Ch 100 where the trustees for many years signed every document placed before them by their solicitors, including appointments, without understanding that they had any discretion to exercise. But if the trustees have exercised the discretion conferred upon them, but in doing so have failed to take into account a relevant consideration or have taken into account an irrelevant consideration, it cannot in my view fairly or sensibly be held that they made no decision. It may be held that they made a flawed decision which is open to challenge, but that they made a decision is beyond question. The common law doctrine of non est factum has a very narrow and limited application. The transaction must be essentially different in substance or in kind from the transaction intended: Gallie v Lee [1971] AC 1004, 1026, per Lord Wilberforce. As Sir Robert Walker suggests [2002] PCB 226, 233 and 239, a like requirement as to the essential nature of a transaction is surely called for before the equivalent rule can render a decision in equity no decision at all.”

It also appears to have been accepted by Lloyd LJ sitting at first instance in Sieff v Fox [2005] EWHC 1311 (Ch), [2005] 1 WLR 3811 at [38(v)], where he described Turner v Turner as “an extreme and highly unusual case on the facts”.

I was not shown any other case in which the principle in Turner v Turner has been applied. Its application has been rejected on the facts in a pensions context in Stannard v Fisons Pension Trust Ltd [1990] PLR 201 and Smithson v Hamilton [2007] EWHC 2900, [2008] 1 WLR 1453. Counsel for the Employers relied upon the following observations of Sir Andrew Park in the latter case:

“129.

I do not suggest that, before signing the definitive deed, each of the trustees familiarised himself or herself in detail with what it contained. I have no doubt that those of them who were not involved in their managerial (non-trustee) capacities in the preparation of the draft deed and rules by Godwins left PFPL to take the lead in getting the deed and rules planned and drafted. I see nothing wrong with that, and indeed it would be unrealistic to expect anything else. When the deed and rules were ready and the next stage was for them to be brought into effect I see no reason to doubt that the trustees of the scheme, unlike the trustees in Turner v Turner, understood what they would be doing. They understood that they would be taking the important step of bringing into legal effect the rules which were going to govern the scheme for the future. They (except perhaps Ms Allen) did not know the details of the rules, but they did know that the rules had been drafted by Godwins, a company which specialised in advising on pension schemes. They knew that three of their number—Mr Holmes, Mr Perrett and Ms Allen—were already satisfied with the draft documents. They knew that Ms Allen, one of their number, had been the main contact between PFPL and Godwins during the process of the deed and rules being prepared. They knew, or if they had thought about it they would have assumed, that the managing director, the finance director and the personnel manager of PFPL had confidence in Godwins to do a satisfactory job in preparing the documents.

130.

I assert that it is common for trustees (or other bodies of similar size, like boards of directors) who need to enter into a transaction which needs to be documented in a way that requires specialist skills to instruct specialist consultants (like Godwins) to prepare the documentation. Possibly they may delegate the responsibility for liaising with the consultants to one of their own number who has some familiarity with the subject. When the documents are ready for execution the other trustees will in all probability ask the consultants to confirm that in their expert opinion they are suitable. (In this case Mr Evans of Godwins was in attendance at the meeting on 14 May 1992 when the five trustees present accepted and signed the deed and rules.) If one of the trustees' own number has been the contact with the consultants they may ask him or her to confirm that he or she is content with what the consultants have produced. If the trustees receive satisfactory answers they are likely to proceed and join in executing the document or documents. It is to my mind inconceivable that, if there turns out to be something wrong with a document after all, they or anyone else can say that they are not bound by it because they did not take adequate steps to inform themselves about the contents of it before signing it. At root that is what Mr Stallworthy's submission on this part of the case amounts to.

131.

Turner v Turner [1984] Ch 100 is an extreme and highly exceptional case. I do not accept that this case is of a similar nature.”

In my judgment the present case is not a case of equitable non est factum and is distinguishable from Turner v Turner. My reasons are as follows. While I have accepted that the New Trustees did not exercise an independent discretion, but instead “rubber stamped” a decision which had already been taken by IMG, I do not consider that there was no exercise of the discretion to amend at all. On the contrary, it seems to me that the reality of the situation in the present case is that IMG exercised the discretion to amend while it was the Trustee. The New Trustees were appointed as part and parcel of the same process as the amendment. Although the Deeds were dated so that the Deed of Appointment preceded the 1992 Deed, in fact each New Trustee signed the Deeds at the same time. In signing the Deeds the New Trustees proceeded on the basis that they were giving effect to a decision that had already been taken by IMG after careful consideration of the proposals, on the basis that IMG had obtained professional legal and actuarial advice in relation to what was proposed and in reliance upon that advice. Thus the New Trustees were simply implementing an exercise of discretion by their predecessor. Since IMG did carefully consider amendment of the Plan, did obtain professional legal and actuarial advice and did rely upon that advice, it cannot be said that IMG did not exercise the discretion to amend at all. The most that can be said is that IMG’s exercise of discretion was flawed because it did not consider (not having been advised to consider) whether the amendment complied with the Fetter in clause 7(i) of the 1977 Deed, but that is another matter.

Furthermore, so far as the power to augment benefits is concerned, IMG was well aware that the Plan was in surplus, and carefully considered what to do with that surplus, including use of some of it to augment existing members’ benefits. Again, therefore, it cannot be said that IMG did not exercise the discretion at all. The most that can be said is that IMG’s exercise of discretion was flawed because it did not consider (not having been advised to consider) exercising its power under clause 7(ii) of the 1977 Deed to use all of the surplus to augment members’ benefits, but again that is another matter.

The Existing Members’ third argument relies upon the decision of the Court of Appeal in Wilson v Turner (1883) LR 22 Ch D 521. In that case the settlor settled certain property by a marriage settlement upon trust for his wife for life and after her death for the children. The settlement provided that after the death of the wife the trustees should apply the whole or such part as they should think fit of the annual income of the expectant share of any child for or towards the maintenance of such child. The settlor and his wife had one child. After the death of the wife the trustees paid the whole income of the trust fund to the settlor during the infancy of the child as though it were his own property. Although the child resided with the settlor, the settlor made no request to the trustees that the income should be applied to the maintenance of the child and the trustees did not exercise any discretion as to its application to the child’s maintenance. The Court of Appeal held that the settlement created a discretionary power rather than an absolute trust to apply the income to the maintenance of the children, and that since the trustees had failed to exercise any discretion the settlor’s estate had to repay the money.

Counsel for the Existing Members also relied on In re Bryant [1894] 1 Ch 324 and Re Butler [1951] 4 DLR 281, but those authorities do not seem to me to add anything of relevance to Wilson v Turner.

Counsel for the Existing Members submitted that these authorities established that an exercise of discretion could be challenged as being excessive or improper where it was exercised upon a flawed basis, and that that was what had happened in the present case. Counsel for the Employers submitted that these cases did not establish a separate principle from that in Turner v Turner. I largely agree with counsel for the Employers. It seems to me that Wilson v Turner can be explained on one of two bases. The first is that the trustees acted on a fundamental error of law as to the effect of the settlement. The second is that they wholly failed to exercise a discretion which they were required to exercise. Either way, the present case is distinguishable for the reasons indicated above.

In the Existing Members’ skeleton argument, it was contended that the New Trustees’ exercise of the discretion to amend was void upon a third basis, namely by virtue of the rule in In re Hastings-Bass [1975] Ch 25. During the course of argument, however, counsel for the Existing Members accepted that the present case did not fall within that rule since this is not a case where the effect of the exercise of discretion is materially different from that which the New Trustees (or IMG in accordance with my reasoning above) intended. Accordingly, I need say no more about this point.

I conclude that the answer to question 5 is that the New Trustees’ decision to amend the Plan by executing the 1992 Deed was not invalid on any of the grounds contended for by the Existing Members.

At the dates which are material, section 91 of the Pensions Act 1995 provided as follows:

“(1)

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

(a)

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

(b)

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

(c)

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

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

…

(5)

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

(b)

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

(i)

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

(ii)

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

The Existing Members contend that the effect of section 91(1) is that the compromise agreements relied upon by IMG under question 7 are unenforceable. The Employers contend that section 91(1) does not render unenforceable compromises of genuine disputes as to whether or nor a person has an entitlement or right. This raises a very short point of statutory construction, which is whether a compromise agreement constitutes a surrender of a right within section 91(1)(a). I was not referred to any definition of the word “surrender” in the 1995 Act, and so I assume that there is none.

The previous wording of section 91 was considered by the Court of Appeal in Fisher v Harrison [2003] EWCA Civ 1047, [2003] PLR 293 at [26]. This is not of any direct assistance on the present question, but it does indicate that section 91 should be interpreted consistently with the report on Pension Law Reform of the Pensions Law Committee chaired by Professor (now Sir) Roy Goode dated September 1993 which led to sections 91-94 of the 1995 Act.

The Goode Report includes the following passages (omitting footnotes, emphases added):

“4.14.3

The prohibition against dealings with pension entitlements during a scheme member's lifetime is designed to fulfil two objectives. First, it is intended to avoid additional administrative burdens which would arise if the scheme administrator had to recognise the title of assignees and chargees. Secondly, and more fundamentally, the purpose of a pension scheme is not to build up an assignable asset but to provide income to support members upon their retirement and to their dependants on the member's death. The State has an interest in such provision, for in its absence the State itself may have to provide the requisite retirement support. Accordingly approval of a scheme for tax purposes is dependent on the inclusion of a provision in the trust deed or rules precluding assignment or surrender of a pension except within the permissible limits of commutation or by way of surrender or allocation of pension to provide a pension for a surviving spouse or dependant, or exchange of a non-indexed pension for an indexed or a lower indexed or a higher non-indexed pension of equal actuarial value.

4.14.4

The evidence submitted to us shows a broad consensus that pension entitlements should not be disposable during the lifetime of the member. We endorse this approach. We consider that quite apart from tax considerations public policy requires that pension rights should be utilised only for the purposes for which they are established. In the United States the provisions of the Internal Revenue Code requiring inalienability as a condition of tax relief have been reinforced by the Employee Retirement Income Security Act (ERISA), which specifically directs pension plans to prohibit assignment or alienation. Section 65 of the Ontario Pension Benefits Act operates even more directly by providing that every transaction that purports to assign, charge, anticipate or give as security money payable under a pension plan is void. We recommend similar legislation for the United Kingdom, so making inalienability a rule of general application, not merely a condition of approval for taxation purposes or a rule confined to short service benefits, GMPs and protected rights payments. There should be exceptions from this rule to reflect any decisions which may be made on the divisibility of pension rights on divorce, and to accommodate customary arrangements which are consistent with pensions policy, such as transfers to another scheme, limited commutation, surrender of part of a pension to provide a pension for a surviving spouse or dependant, and the like.”

These passages demonstrate two things. First, that section 91 is intended to make “inalienability a rule of general application”, subject to certain specified exceptions. Secondly, that the purpose behind section 91 is not merely to protect members of pension scheme from their own improvidence, but also to protect the public purse.

Against this, one must consider the public policy in favour of enforcing compromises of disputes. Chitty states at 16-013 (omitting footnotes):

“Compromises of illegal contracts. There is a manifestly obvious public policy in favour of encouragement and enforcement of compromises of disputes which the parties themselves have agreed to. Compromises result in a saving of public resources and probably produce an optimum result from the disputants' point of view in that they have agreed to one, and that this has not been imposed by a third-party mediator. However, to enforce compromises of illegal contracts would have the effect of undermining the public policy underlying the illegality doctrine: it would be paradoxical, to say the least, to permit a party to enforce the compromise of an illegal contract but not the illegal contract itself. Whether the compromise of an illegal transaction is itself enforceable depends on the question of whether the courts must give effect to the broad social policy underlying the illegality despite any private arrangement between the parties. Normally this will mean that the compromise, like the illegal contract, is not enforceable. An interesting problem on the compromise of an allegedly illegal contract arose in Binder v Alachouzos. A lent a sum of money to B which B refused to repay on the grounds that the transaction was one of moneylending and A was not a registered moneylender. A sued B, and after taking legal advice B compromised the action on the terms that he would repay the loan and not contend that the contract was one of moneylending. B then repudiated the compromise arguing that it, like the illegal contract, was unenforceable. The Court of Appeal upheld the compromise, but it did so on the grounds that the compromise was of a dispute of fact whether the contract was in actual fact an illegal moneylending contract. This was not a case where a clearly illegal contract was compromised, assuming arguendo that such a contract could be compromised.”

Binder v Alacouzos [1972] 2 QB 151 was applied in Panayiotou v Sony Music Entertainment (UK) Limited [1994] EMLR 229, where it was held that an agreement entered into by way of a compromise of an allegation that an earlier agreement was unenforceable as an unreasonable restraint of trade was binding. It has also been applied in two cases that are less relevant to the present situation, namely Colchester Borough Council v Smith [1992] Ch 421 and Attorney-General v British Museum Trustees [2005] EWHC 1089, [2005] Ch 397.

Binder and Panayiotou demonstrate that the public policy in favour of compromises will prevail where enforcement of the compromise does not undermine the public policy behind the illegality or unenforceability enshrined in the statutory provision or rule of law in question. I agree with the editors of Chitty, however, that the reverse is the case where enforcement of the compromise would undermine the latter policy.

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

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

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

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

I conclude that the answer to question 6 is yes.

can purported compromises and/or waivers only stated expressly to compromise claims against Participating Employers and/or their employees restrict entitlements or accrued rights otherwise arising under the Plan and payable by the present Trustee ? and

as a matter of construction, was any entitlement or accrued right determined under questions 1 to 5 above surrendered by purported compromises and/or waivers:

Although strictly speaking question 7 does not arise given my answer to question 6, I shall answer it anyway in case I am wrong about question 6.

The scope of the dispute in relation to question 7 was narrowed shortly before and during the course of the trial. First, it was agreed that this Court could not deal with three agreements (numbers 6, 7 and 8) containing Ohio arbitration and choice of law clauses. Secondly, Counsel for the Existing Members conceded that, subject to the effect of section 91(1) of the 1995 Act, four agreements (numbers 1, 2, 3 and 12) were effective to compromise the relevant individuals’ final salary rights. Thirdly, counsel for the Employers conceded that the Employers could not rely upon agreements (numbers 4, 5 and 13) as comprising the relevant individuals’ final salary rights. That leaves agreements relating to just two individuals, identified as Mr A (numbers 9, 10 and 11) and Mr D (numbers 14 and 15).

It is common ground that these agreements are to be construed in accordance with the well-known principles stated by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and Bank of Credit and Commerce International SA v Ali [2001] UKHL 8, [2002] 1 AC 251.

The relevant agreements with respect to Mr A are two letters dated 11 November 2004 which Mr A executed as deeds (agreements 9 and 10) and a compromise agreement dated 21 July 2005 (agreement 11).

For reasons that will appear, I consider that it is only necessary to consider agreement 10. This is a letter addressed to “International Management Group (UK) Ltd [new line] The Trustees & Scheme Administrator of the IMG Pension Plan”. It provides:

“In consideration of your offer to me of improved terms of employment, which offer I wish to accept, I hereby waive all claims, demands, rights, actions, remedies, costs and expenses which I have or may be entitled to in connection with or arising out of the reorganisation of the IMG Pension Plan in 1992 from a final salary scheme to a money purchase scheme, the administration of the Pension Plan and/or the investment of my investment fund with Equitable Life Assurance Society or the transfer of my investment fund out of Equitable Life Assurance Society. I further acknowledge and agree that I have no other present retirement or pension entitlement from International Management Group (UK) Ltd than that which arises under the present IMG Pension Plan.

I confirm that the benefit of this Agreement may be enjoyed and enforced by any person who was at, and from, 31 December 1999 a trustee of the IMG Pension Plan but who is no longer a trustee and any other company within the IMG Group capable of benefiting from the above waiver and release in accordance with the terms of the Contracts (Rights of Third Parties) Act 1999.”

In my judgment this agreement is sufficiently clear and unequivocal to have the effect contended for by the Employers. The principal argument to the contrary advanced by counsel for the Existing Members was that the word “reorganisation” did not, or at least did not clearly, apply to rights under the 1977 Deed. Counsel submitted that those were rights arising prior to, and separately from, the reorganisation. I disagree. The agreement provides for Mr A to waive all rights which he has or may have not merely “arising out of”, but also “in connection with”, the “reorganisation” of the Plan. In my judgment it is plain that this agreement was intended to represent a clean break with regard to the conversion of the Plan. Those words are wide enough to encompass the attempted conversion of the pre-existing final salary rights into money purchase rights. In any event, the second sentence of the agreement appears to me to put the matter beyond doubt.

The relevant agreements with respect to Mr D are an undated compromise agreement (agreement 14) and a letter dated 14 April 2004 which Mr A executed as a deed (agreement 15).

Agreement 15 is in almost identical form to agreement 10 and my conclusion is the same.