Independent Trustee Services Ltd v Hope & Ors

This is an application for directions by the trustee (“the Trustee”) of an occupational pension scheme, the Ilford Pension Scheme (“the Scheme”). The question, shortly stated, is whether the Trustee may properly implement a proposal to purchase annuities for Scheme members, in exercise of a power to “buy out” benefits conferred by the Scheme rules, in circumstances where the sponsoring employer of the Scheme is insolvent, the Scheme is significantly underfunded, and the Trustee intends in due course to take steps to cause the Scheme to enter the Pension Protection Fund (“the PPF”), which was established as a “lifeboat” for schemes whose employers are insolvent and whose funding levels fall below that set by the Pensions Act 2004.

There is a particular feature of the proposal which makes this an unusual and important case. The proposal has been specifically designed to take advantage of the compensation prospectively available for members and beneficiaries of the Scheme under the PPF, and seeks to apply in the purchase of annuities, before the Scheme enters the PPF, a disproportionately large share of the Scheme assets in a way that could not possibly be justified if the PPF did not exist. The proposal does not, however, contravene any express provision in the legislation establishing the PPF. It is intended to secure a better outcome for the great majority of members and beneficiaries than they would otherwise obtain when, as is almost bound to happen, the Scheme does in fact enter the PPF.

To elaborate the point a little further, when a scheme enters the PPF its assets vest in the PPF, and those assets are one of the sources of funding of the PPF. (The other main source of the PPF’s funding, as I will explain, is derived from annual levies on schemes which are eligible to enter the PPF.) It follows that any reduction in the assets of an eligible scheme, before it enters the PPF, will prejudice the PPF when the scheme does enter, unless the liabilities of the Scheme have also been proportionately reduced. The vice of the present proposal, from the PPF’s point of view, is that the bulk of the Scheme assets will be spent in the purchase of annuities, but there will not be a corresponding reduction in the Scheme’s liabilities. The reason for this is that only some members’ benefits will be bought out in full, and the other annuities will cover only the expected shortfall between the compensation prospectively available to members under the PPF and their contractual rights under the Scheme. In other words, the cost of the proposal, to the extent that it involves the expenditure of more than a proportionate share of the Scheme assets in purchasing the annuities, will be thrown onto the PPF.

Unsurprisingly, the features of the proposal which make it objectionable to the PPF make it attractive, if it may properly be implemented, to the Trustee. Indeed, if there were no legal or practical impediments to the proposal, it would prima facie be the duty of the Trustee to implement it. However, the Trustee was advised by leading counsel (Mr Andrew Simmonds QC) in October 2006 that the proposal was an improper one, either because in exercising its discretionary power to buy out benefits the Trustee is bound to take into account the interests of the PPF, or (counsel’s preferred formulation) because the availability of PPF compensation is not, in law, a relevant factor for the Trustee to take into account in exercising the power. Either way, a decision by the Trustee to implement the proposal would be fatally flawed, and if it went ahead the Trustee would be at risk of a claim for breach of trust at the suit of the PPF.

The initial impetus for the proposal came from a small group of relatively high-earning employees who had taken early retirement on favourable terms in 2000 or 2001, and whose pensions (which became payable immediately, and were not deferred until normal retirement age) would be very substantially reduced, in some cases by amounts approaching or even exceeding 50%, if the Scheme were to enter the PPF without their benefits having been bought out beforehand. There are two features in particular of the compensation regime under the PPF which can lead to this result. First, members who have not attained normal pension age receive only 90% of their basic scheme entitlement. Secondly, the compensation is subject to a cap prescribed each year by the Secretary of State for Work and Pensions, the level of which for 2009/10 is £31,936.32, subject to adjustment upwards or downwards for members older or younger than 65.

These members formed a pressure group, and obtained advice from leading counsel to the effect that the proposal was one which the Trustee could properly implement. In these circumstances the Trustee decided to apply to the court for directions, and the present action was begun by a Part 8 claim form issued on 15 August 2008.

The claimant is the present trustee of the Scheme, Independent Trustee Services Ltd.

The first defendant, Mr Paul Hope, is a senior manager who took early retirement on 30 April 2001, four days before his 55^th birthday. At the time when the claim form was issued, it was clearly in his interests to argue in support of the proposal.

The second defendant is the Board of the PPF, which is a statutory corporation. For the reasons which I have already indicated, the PPF opposes the proposal.

The third defendant is the Pensions Regulator, a statutory corporation created under Part 1 of the Pensions Act 2004. It performs the functions previously vested in the Occupational Pensions Regulatory Authority (which was abolished by the 2004 Act) and certain other regulatory functions conferred on it by the 2004 Act: see section 4(1). In essence, its function is to protect members of occupational and personal pension schemes, and to reduce the risk of claims being made on the PPF: see section 5. The Pensions Regulator asked to be joined as a party to the proceedings. It too opposes the proposal, and although it has been separately represented its reasons for doing so are very similar to those of the PPF.

The fourth defendant, Mr Alan Slater, is a deferred member of the Scheme who is below normal pension age. He was joined by amendment pursuant to an order of Norris J dated 17 June 2009, after it had emerged that there was an unresolved dispute whether Mr Hope’s normal pension age is 63 or 65. If it is 63, an age which he attained on 4 May 2009, he would in fact now suffer no (or comparatively little) detriment if the court were to determine that the proposal is unlawful. The reason for this, in brief, is that neither the 10% reduction nor the cap apply to pensions already in payment to members who have reached normal retirement age before a scheme enters the PPF. It was thought inappropriate that such a member should be the sole representative of the class arguing in favour of the proposal. By contrast, it is indisputably in the interests of Mr Slater to do so. In the event, he and Mr Hope have joined forces and been represented by the same solicitors and counsel.

Evidence has been filed by or on behalf of all the parties in two rounds, the first in September and October 2008 and the second in May 2009. There are witness statements before the court:

None of the witnesses was cross-examined, and there is no dispute about any of the background facts. There is, however, some disagreement about the inferences that I should draw from the evidence about the possible consequences for the PPF if the proposal were to be approved.

The relief sought in paragraphs 1 to 3 of the amended claim form is as follows:

“1.

Directions as to whether [the Trustee] may, in the circumstances set forth in the witness statement of [Mr Martin] made in support of the Claimant’s application, properly exercise its powers under Rule 12.3(b) of the Scheme Rules to purchase buy-out policies in respect of Scheme members (or any of them) prior to the commencement of an assessment period (as defined in section 132 Pensions Act 2004) in relation to the Scheme.

2.

If paragraph 1 above is answered in terms that the Claimant may properly purchase buy-out policies in such circumstances, directions as to whether the Claimant should apply the entire fund which is subject to the trusts of the Scheme (subject to any appropriate reserve for costs and expenses and so far as it may be practicable to do so) or only part of such fund (and, if so, which part) in purchasing such buy-out policies.

3.

If paragraph 1 above is answered in terms that the Claimant may properly purchase buy-out policies in such circumstances, directions as to whether the Claimant may properly implement the buy-out proposal referred to in Mr Martin’s said witness statement.”

The issues raised in paragraphs 1 and 2 of the claim form are essentially issues of law, whereas paragraph 3 focuses on the detail of the proposal and may give rise to potential conflicts of interest between different categories of Scheme members and beneficiaries. For that reason, it was agreed that the questions in paragraphs 1 and 2 should be heard first, with the question in paragraph 3 to be reserved to a later hearing if the proposal were approved in principle. An order to this effect was made by Chief Master Winegarten on 10 December 2008.

It should be noted that the Trustee has not surrendered its discretion to the court, and in essence it seeks a ruling on the question whether the proposal is one that it may properly implement, and (if so) whether it may apply the whole, or only part, of the trust fund for that purpose.

I have had the benefit of excellent written and oral submissions from no fewer than five leading counsel: Mr Andrew Simmonds QC for the Trustee; Mr Keith Rowley QC and Mr Pushpinder Saini QC for the first and fourth defendants; Mr Nigel Giffin QC (leading Mr Jonathan Hilliard) for the PPF; and Mr Michael Tennet QC for the Pensions Regulator. I am grateful to all of them, and their legal teams, for their assistance.

With this introduction, I will now fill in the background that is necessary for an understanding of the legal arguments. I will do so under the following headings:

The Scheme background

Ilford is, or at any rate was until its demise in 2004, a well-known name in the photographic industry. Ilford Ltd (later renamed Ilford Imaging UK Ltd) (“the Company”) was incorporated in 1898. It carried on business until it entered administrative receivership on 20 August 2004. The business was subsequently sold on 15 February 2005 to Harman Technology Ltd, at which time all the remaining active members of the Scheme left pensionable service.

The Scheme was established by the Company in 1974. The original trustee of the Scheme, as I have mentioned, was Ilford Pension Trust Ltd, which acted jointly with the Trustee following the latter’s appointment by deed dated 6 September 2004, but has since been dissolved. The Scheme is now governed by a Supplemental Trust Deed and Rules dated 16 November 1995 (“the Principal Deed” and “the Rules”) as amended by subsequent deeds, including in particular a Deed of Amendment dated 7 January 2005 (“the 2005 Deed”).

For most members the Scheme provides a pension at normal retirement age (age 65) based on 1/60 of final salary for each year of pensionable service, less a deduction based on the amount of the State pension (“the State pension deduction”). Provision is also made for payment of an early retirement pension on or after the age of 55 with Company consent. The early retirement pension is calculated in the same way as the normal retirement pension, but the State pension deduction takes effect only at State pension age (i.e. 65 for men and 60 for women). The early retirement pension is actuarially reduced to take account of accelerated payment unless the Company otherwise decides.

The Scheme also provides death benefits, including a surviving spouse pension of 50% of the pension to which the member became entitled on retirement, but ignoring any commutation of that pension for a tax-free lump sum. In other words, the pension for a surviving spouse is based on 50% of the member’s pension before commutation.

Provision is made for discretionary increases to pensions in payment, subject to the consent of the Company and after taking actuarial advice. This is subject to the overriding statutory requirement (in section 51 of the Pensions Act 1995) that pensions attributable to service after 6 April 1997 must be increased by the percentage rise in the Retail Prices Index (“RPI”) capped at 5%. The cap has been reduced to 2.5% in respect of pensions attributable to service after 6 April 2005, by section 278 of the Pensions Act 2004, but this is not relevant to the Scheme because all pensionable service ceased in February 2005.

The critical rule for the purposes of the present application is rule 12.3(b) of the Rules, which as amended by the 2005 Deed reads as follows:

“At the discretion of the Trustees, they shall apply such amount as they shall decide, after taking Actuarial Advice, in the purchase of a Buy-out Policy in respect of a Member or other beneficiary, providing benefits in substitution for the benefits (or relevant part) which would otherwise have been payable under the Plan.”

“Buy-out Policy” is defined as meaning “a policy of insurance or an annuity contract (whether providing immediate or deferred annuities) effected with an Approved Insurance Company in the name of a Member or other beneficiary, or in the name of trustees for the benefit of the Member or other beneficiary”, subject to certain prescribed requirements. “Actuarial Advice” means advice given by the appointed Scheme actuary. The “Plan” is a synonym for the Scheme.

The power conferred by rule 12.3(b) is expressly a discretionary one, which enables (but does not oblige) the Trustee to purchase for a member or beneficiary an insurance policy or annuity contract with an approved insurance company in substitution, or part substitution, for the benefits payable to him or her under the Scheme. There are various other requirements which have to be satisfied under the other paragraphs of rule 12.3 and by statute (for example as to the terms of the relevant policy or contract, and as to whether the consent of the member is required) but they are not in issue at this stage of the proceedings. If the requirements are satisfied, the effect is to discharge the Trustee from liability in respect of the benefits which have been bought out. This is provided for by rule 12.3(g), which says:

“Where the Trustees purchase a Buy-out Policy under this Rule, they shall be relieved of all liability to provide the specified benefits under the Plan.”

The process of buying out a member’s benefits in this way is generally known in the pensions industry as a “buy-out” of the relevant benefits, and the premium required by the insurance company for issuing such a policy or contract is known as the “buy-out cost” of the member’s benefits. The buying out of benefits in this way needs to be clearly distinguished from the converse situation of “buying-in”, where a trustee decides to purchase a policy or contract to hold as an investment for the purpose of satisfying benefits payable under the scheme. In that situation the liability of the trustee is not discharged, and the policy or contract is held as part of the fund.

By 1997 the Company was in financial difficulties, and in that year it was acquired by a combination of management and venture capital investors. The acquisition was not a success, and the Company continued to struggle financially. By 2000, the venture capitalists were pressing for a reduction in management posts. In consequence, a group of about 10 senior managers (including Mr Hope, the strategic marketing director, Mr Alcraft, the finance director, and Mr Brian Lear, the chief executive) accepted an invitation to take early retirement. The terms on which each senior manager departed were individually negotiated, but they all included a term that the actuarial reduction of their early retirement pension would be ignored, typically in return for an agreement by the manager to waive his contractual entitlement to notice. Because they were relatively long-serving and highly-paid employees, they retired with immediate pensions in the region of or exceeding £40,000 per annum.

Mr Hope describes the package which he was offered, and which he decided to accept, as follows (paragraph 9 of his first statement):

“I was 54 at the time and so became a potential candidate for early retirement under the new arrangements. Following discussions with the Group Managing Director, Ilford offered me a package whereby I would waive my contractual entitlement to 12 months’ notice (at the time I was earning £76,648 per annum and entitled to a bonus of up to 30% depending on performance against target) and in return receive a £30,000 redundancy payment plus an enhanced non-actuarially reduced pension (which I commuted to take the maximum lump sum).”

Mr Hope believed the package on offer to be an attractive one, and did not take separate advice to consider it. He understood his pension to be secure, based on the Scheme’s funding position which at the time was very healthy. He says members “had known for the best part of a decade that there had been a continuing Scheme contribution holiday”.

Mr Lear did not give evidence himself, but he explained his particular circumstances to Mr Hope who sets them out in his own statement. He retired on 31 October 2000 at the age of 50, after 26 years’ service. He had been chief executive of the Company from 1997 until his early retirement. He too was offered a non-actuarially reduced pension, and agreed to accept the terms on offer without seeking financial advice.

Mr Alcraft knew from his position as a director of the then trustee that the Scheme was very well funded, and he also knew that under the pensions legislation then in force pensions in payment would enjoy priority (save in respect of future increases) even if the Scheme had to be wound up. Like Mr Hope, he agreed to take a non-actuarially reduced pension in exchange for waiving his entitlement to 12 months’ notice, and like both Mr Hope and Mr Lear he did not seek any financial advice because he concluded that early retirement was clearly the preferable option for him to take. His initial pension was to be in excess of £47,000 per annum, but he commuted part of it for a lump sum payment which reduced his initial pension to £40,539.67 per annum.

In March 2002 the Company closed the Scheme to new members.

On 20 August 2004 the Company went into administrative receivership, and in February 2005 the Company’s business was sold with the result that all pensionable service then ceased and further accrual of benefits under the Scheme therefore also ceased. The administrative receivers, Grant Thornton, subsequently confirmed in a letter dated 16 August 2007 to the Trustee that there will be no funds available for distribution to the unsecured creditors of the Company.

As at 8 February 2008, the Scheme had 1,321 members in receipt of pensions and there were 522 other persons (such as spouses or civil partners, ex-spouses or former civil partners, or dependants of a Scheme member) who were also in receipt of a pension from the Scheme. At the same date, there were 1,247 deferred members of the Scheme. Of the 1,321 pensioners, 271 had taken early retirement and were still below their normal pension age. In terms of value, however, they accounted for around 31% of the payroll of pensions paid to pensioners and other persons in receipt of a pension under the Scheme. The 271 pensioners who had taken early retirement of course included the small group of senior managers who had departed on favourable terms in 2000 or 2001.

According to advice given to the Trustee by the Scheme actuary in March and October 2007, the Scheme had a funding deficit as at 31 January 2007 on the buy-out basis of approximately £45 million, and even if the Scheme were to continue to be run as a closed scheme, with pensions being paid as they fell due rather than being bought out, the deficit was still estimated to be at least £25 million, representing a funding level of approximately 85% to 90% at best. The value of the Scheme assets as at 31 March 2007 was £170.1 million, but by the date of Mr Martin’s first statement (8 August 2008) it had fallen to around £157 million. There is no prospect of recovering any part of the funding deficiency from the Company, because the Trustee ranks as an unsecured creditor. It is accordingly all but inevitable that the Scheme will have to be wound up, unless the PPF assumes responsibility for it.

The PPF

There are four aspects of the statutory regime governing the PPF which are relevant to the present proceedings. They are:

Funding

The PPF is principally funded by the assets of schemes entering the PPF, which are transferred to the Board; levies on schemes which are eligible for entry into the PPF; and investment returns on those assets and levies. It needs to be stressed that there is no government guarantee underpinning the PPF.

The number of eligible schemes was approximately 7,200 in September 2008. They varied in size enormously, the smallest having assets of under £1,000 and the largest having assets in excess of £20 billion. Every eligible scheme is obliged to pay (a) a “risk-based” levy, and (b) a “scheme-based” levy: see section 175.

The amount of the risk-based levy is assessed by reference to:

The amount of the scheme-based levy is assessed by reference to the amount of the scheme’s liabilities for benefits (other than money purchase benefits) and, if the Board considers it appropriate, the number of members and the amount of active members’ pensionable earnings.

There is a ceiling on the total amount of the levy for each financial year which is specified by order of the Secretary of State: see sections 177(2) and 178. The levy ceiling rises each year by the increase in average earnings in Great Britain over the previous 12 months, but the Secretary of State has power (on the recommendation of the Board and with Treasury approval) to raise the ceiling higher than that: see section 178(8). The levy ceiling for 2009/2010 is approximately £863.4 million.

The Board must aim to raise at least 80% of its target funding by means of the risk-based levy. The target figure for each year must also be no more than 25% higher than the previous year’s figure, although the Secretary of State has power (again with Treasury approval) to permit a higher increase: section 177(6). The target figure for 2009/2010 is £700 million.

Conditions for entry into the PPF

The key provision is section 127, which imposes three principal conditions for entry of a scheme into the PPF:

If those three conditions are satisfied, the Board must then “assume responsibility” for the scheme. The consequences (see section 161) are that:

The qualifying insolvency event marks the beginning of an “assessment period” (section 132) which is the period during which the funding level of the scheme is assessed to determine whether the Board must assume responsibility for it. This is achieved by means of a valuation under section 143. If the valuation discloses sufficient assets to meet the protected liabilities, the scheme does not go into the PPF but must be wound up by the trustees: section 154. If the assets are insufficient, the Board assumes responsibility by giving a “transfer notice” to the trustees which triggers the consequences set out in section 161: see section 160.

Whether or not a scheme is “eligible” is governed by section 126 and the Pension Protection Fund (Entry Rules) Regulations 2005, SI 2005/590. In essence, all occupational pension schemes (other than those which provide exclusively money purchase benefits) are eligible unless:

A “qualifying insolvency event” occurs in relation to an employer if it is the first “insolvency event” to occur in relation to that employer after 6 April 2005: see section 127(3). The definition of “insolvency event” is broad (section 121) and covers bankruptcy and individual voluntary arrangements in relation to individuals and compulsory or voluntary liquidation (other than a members’ voluntary liquidation), company voluntary arrangements, administration orders and the appointment of administrative receivers for companies. The appointment of administrative receivers in respect of the Company in August 2004 was an “insolvency event” but it was not a “qualifying insolvency event” because it did not occur after 6 April 2005. However, there would be a qualifying insolvency event in relation to the Company if the Trustee were to petition successfully for the Company to be compulsorily wound up.

Pension compensation provisions

The prescribed level of PPF benefits is set out (pursuant to section 162) in Schedule 7. The level of benefits payable to a scheme member depends on the member’s age and status on the “assessment date”, i.e. the beginning of the assessment period.

So far as age is concerned, the key concept is “normal pension age” which is defined in Schedule 7 paragraph 34(1):

“In this Schedule “normal pension age”, in relation to the scheme and any pension or lump sum under it, means the age specified in the admissible rules as the earliest age at which the pension or lump sum becomes payable without actuarial adjustment (disregarding any admissible rule making special provision as to early payment on the grounds of ill health or otherwise).”

The level of compensation depends on whether or not the member has attained “normal pension age”, as so defined, before the assessment date. The “admissible rules” are defined in paragraph 35 so as to exclude “recent rule changes” which increase the scheme’s protected liabilities. “Recent rule changes” are changes to the scheme rules made or taking effect in the three years before an assessment period (other than changes required or authorised by statute).

So far as status is concerned, Schedule 7 makes different provisions for:

By virtue of Schedule 7 paragraph 3, pensioners are entitled to receive 100% of their basic scheme entitlement (i.e. ignoring future increases provided for by the scheme) if they have attained normal pension age before the assessment date. The same entitlement applies if they have retired early on grounds of ill health, or if they are in receipt of a survivor’s pension. If they have not attained normal pension age, and if they are not in either of the other two categories which I have mentioned, they receive only 90% of their basic scheme entitlement, and the compensation is also subject to the cap prescribed each year by the Secretary of State: Schedule 7 paragraph 26.

As I have already said, the cap for 2009/2010 is £31,936.32 for members who become entitled to compensation at the age of 65. The Board publishes actuarial factors which reduce the cap for members who become entitled to compensation under 65, and increase it for members who become entitled over 65: see Schedule 7 paragraph 26(7). The cap increases each year by the amount (if any) by which average earnings in Great Britain have increased over the previous 12 months. The ceiling on compensation is not in fact the cap itself, but 90% of the amount of the cap: see Schedule 7 paragraph 26(3).

Deferred members who have not attained normal pension age before the assessment date are not entitled to compensation until they attain normal pension age. They are then entitled to receive 90% of their basic scheme entitlement (re-valued at prescribed rates over the period between termination of pensionable service and the date on which the member attains normal pension age), subject to the cap. If a deferred member has attained normal pension age before the assessment date, he receives 100% compensation under Schedule 7 paragraph 5.

There are two further respects in which the amount of pension compensation can be (and, in relation to the Scheme, is) less than the member’s scheme entitlement:

The Board has power under Schedule 7 paragraph 29 to reduce revaluation and pension increase rates by any amount down to zero. The Secretary of State also has power under Schedule 7 paragraph 30 to reduce the 100% and 90% compensation percentages, apparently without any floor, but may only do so once the Board has reduced revaluation and pension increase rates to zero.

“Moral hazard” provisions

During the passage of the Pensions Bill (which became the Pensions Act 2004) through Parliament, the government made it clear that it was concerned by the risk of “moral hazard” associated with the introduction of the PPF. By “moral hazard” was meant the opportunity for those managing occupational pension schemes to act irresponsibly secure in the knowledge that the PPF would be available to bale out the fund if things went wrong. For example, in March 2004 the Minister for Pensions, Mr Malcolm Wicks MP, said during the debate on the Bill in Standing Committee B:

“The cost issue is important, but the greatest risk to the [PPF] is, without question, moral hazard – that those with the ability to influence the way in which a pension scheme is run will take less care than they otherwise would because of the new PPF. Scheme decision makers might deliberately undertake certain activities or fail to take action if they knew that the PPF will step in 100%. They may make risky investment decisions or not adequately fund their schemes, especially if their employer is in difficulty and they have to make hard choices about where to put the money. Also, others with influence may be less inclined to intervene if they, or their members, will not lose out. We are concerned about moral hazard.”

In order to counter this risk, a number of “moral hazard” provisions were incorporated into the Pensions Act 2004. They fall into three main categories:

The Pensions Regulator has a range of powers under the Act which enable it to require scheme employers and those associated or connected with them to remedy underfunding in defined benefit schemes. In particular, in prescribed circumstances the Pensions Regulator may issue contribution notices under section 38, and financial support directions under section 43. These powers may be exercised whether or not the relevant scheme is already in an assessment period. These powers are not directly relevant in the present case.

I have already described the main limits on pension compensation, that is to say the 90% limit and the cap. Other limitations are built into the definitions of “normal pension age” and “admissible rules”. For the definition of “admissible rules”, see paragraph 48 above. The definition of “normal pension age” disregards “any admissible rule making special provision as to early payment on the grounds of ill health or otherwise”. Thus the general rule is that the 100% level of compensation does not apply to members who are given early retirement and who have not yet reached normal pension age when an assessment period begins, although an exception is made in the case of genuine ill health: see Schedule 7 paragraph 3(7)(b). The Board also has power under sections 140 to 142 to review ill health pensions granted in the three years before an assessment period where the original award of the pension was made in ignorance of a material fact.

A number of specific provisions restrict the operation of a scheme, or prohibit certain transactions undertaken in the course of its administration, during an assessment period. In particular:

Finally, it should be noted that section 270 amended the overriding statutory order of priority set out in section 73 of the Pensions Act 1995 which applies where a defined benefit pension scheme is in wind up. For schemes in wind up before 6 April 2005, pensioners have priority over deferred members. For schemes which go, or have gone, into wind up since 6 April 2005, all members are entitled to receive their PPF level benefits under the first priority and, if the assets are insufficient, such benefits abate rateably.

The Proposal

As I have already explained, the origins of the proposal lie in the position of the small group of former senior managers who took early retirement in 2000 and 2001. In view of the substantial funding deficit in the Scheme, and the insolvency of the Company, it is clear that members will be better off if the Scheme enters the PPF than if the Trustee has to wind it up outside the PPF. Comparative figures are given in paragraphs 28 and 29 of Mr Martin’s first witness statement, from which it appears (for example) that on average pensioners who had reached normal pension age would probably receive between 76% and 91% of the value of their full Scheme benefits in a winding up outside the PPF, but would probably receive compensation of between 89% and 91% of the value of those benefits from the PPF. The corresponding figures for pensioners who had not reached normal pension age, and who would be affected by the PPF compensation cap, are between 39% and 43% of the value of their full Scheme benefits on a winding up outside the PPF, and between 43% and 46% of that value if the Scheme were to enter the PPF.

Since, by virtue of section 75 of the Pensions Act 1995, the Trustee is a contingent creditor of the Company for approximately £45 million (i.e. the funding deficit on the buy-out basis), the Trustee would be in a position to petition to wind up the Company and precipitate a qualifying insolvency event, thereby starting an assessment period in respect of the Scheme. As at 31 January 2007 the amount of the Scheme’s protected liabilities exceeded the value of its assets by approximately £15 million. There have been a number of changes in relevant factors since that date, but according to Mr Martin it is still likely that the Scheme would qualify for entry into the PPF if a qualifying insolvency event were to occur.

It is clear that, if the Scheme does enter the PPF, the senior managers who took early retirement will be financially much worse off than they are at present. They retired, and have since been living, on pensions in the region of £40,000 per annum. Since they did not retire early on ill health grounds, and since most of them are still under the Scheme’s normal retirement age of 65, their pension compensation under Schedule 7 will be limited by both the 90% rule and the cap. Mr Hope estimates in his evidence that his pension income would fall by between 24 and 27%, while Mr Alcraft estimates that in his case the reduction would be of the order of 53.3%. According to Mr Hope, Mr Lear has calculated that he would suffer a reduction of about 56%. Unsurprisingly, reductions in income of this order of magnitude would be most unwelcome, and would have an adverse impact on the standard of living and financial plans of those concerned. Some details of the likely impact are given by Mr Hope and Mr Alcraft in their evidence, and I do not doubt that it would cause them considerable difficulties. They also point out that, when they retired, the PPF did not exist and the statutory priority order on winding up was then such that they could confidently expect to receive their full pensions even if the Company failed.

It was against this background that the Trustee was asked to consider exercising its power under rule 12.3(b) to buy out the benefits of these members in full before an assessment period was triggered in respect of the Scheme. If their benefits were bought out in this way, the members in question would be entitled to receive their full pensions from an insurance company for the rest of their lives, and they would be completely unaffected by the entry of the Scheme into the PPF. However, the corollary of this would be that the PPF would bear the burden of the extra cost involved, because although the PPF would no longer have to pay pension compensation to these members at the 90% capped level, the Scheme assets transferred to the Board under section 161 would be reduced by the cost of providing benefits for them at the uncapped 100% level. There would accordingly be a net detriment to the PPF.

The Trustee was sympathetic to the concerns of these members, and was willing to exercise its power to buy out their benefits (together with those of other members who had taken early retirement on grounds other than ill health, and who would be affected by the 90% rule but not by the cap), provided that it could lawfully and properly do so. Conflicting advice on this question was received by the Trustee and the members concerned, and the purpose of paragraph 1 in the claim form is to resolve it.

If the adverse effect on the PPF does not in principle preclude the buying out of benefits, the question then arises whether all the members of the Scheme who would be worse off under the PPF should not also benefit from implementation of the proposal. With a few exceptions, all members of the Scheme would receive pension compensation in the PPF which, to a greater or lesser extent, would be less favourable than the nominal amount of their Scheme entitlements. I have already set out the reductions that would apply to those under normal pension age at the assessment date, including deferred members. However, even those over normal pension age would stand to receive pension increases and death benefits under the PPF which would, at least potentially, be less favourable than those to which they are entitled under the Scheme. The proposal in its current form is accordingly:

There is one qualification which needs to be added. Because of the way in which pension compensation under Schedule 7 is calculated, there are some members who took early retirement and who are still under normal pension age who would not benefit from being bought out. The reason for this is that their entitlement under the Scheme is subject to the State pension deduction at State pension age, but there is no provision in Schedule 7 for any deduction to be made after the amount of pension compensation is fixed as at the assessment date. Accordingly, the pension compensation of these members would continue unreduced even after they reach State pension age. The Trustee has calculated that this advantage would more than compensate them for the reductions attributable to the 90% rule (and, where applicable, the cap). It is therefore intended that these members would be excluded from any buy-out.

The issues which were debated before me overlap in a number of respects, but may for convenience be grouped under the following main headings:

One further issue, which was raised in the skeleton argument for the Pensions Regulator, is whether rule 12.3 on its true construction confers power to buy out part only (as opposed to the whole) of a member’s benefits. In the event, however, this argument was not pursued, and I therefore need say no more about it.

I will now review the arguments and state my conclusions under as many of the above headings as it proves necessary for me to consider.

The argument that the proposal would entail the exercise of the rule 12.3(b) power for an improper purpose is relatively straightforward, and it is not surprising that counsel for the PPF and the Pensions Regulator put it at the forefront of their submissions. I emphasise at the start that the argument is about the purpose for which the power would be exercised, not about the question whether the proposal falls within the ambit of the power as a matter of construction of the Rules. Following the abandonment of the issue mentioned in paragraph 69 above, there is no dispute that the proposed exercise of the power would fall within the scope of the wording of rule 12.3(b). In other words, the dispute is not about vires, but about the propriety of the exercise of the power.

I will begin by outlining the main stages in the argument as advanced by Mr Tennet QC on behalf of the Pensions Regulator.

First, it is trite law that a power conferred on a trustee (or any person other than a beneficial owner) may be exercised only for the purposes for which it was granted, and not for purposes foreign to the power or to secure a collateral benefit. The classic authority for this proposition is Duke of Portland v Topham (1864) 11 HLC 32 (HL), where the power in issue was a special power to appoint a fund between two of the daughters of the donee of the power. Lord Westbury LC said at 54:

“I think we must all feel that the settled principles of the law upon this subject must be upheld, namely, that the donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power, and not for the purpose of accomplishing or carrying in to effect any bye or sinister object (I mean sinister in the sense of its being beyond the purpose and intent of the power) which he may desire to effect in the exercise of the power.”

To similar effect, Lord St. Leonards said at 55:

“My Lords, the rules on this subject are so well settled that it is quite unnecessary to go through any authorities on the subject. A party having a power like this must fairly and honestly execute it without having any ulterior object to be accomplished. He cannot carry into execution any indirect object, or acquire any benefit for himself, directly or indirectly. It may be subject to limitations and directions, but it must be a pure, straightforward, honest dedication of the property, as property, to the person to whom he affects, or attempts, to give it in that character.”

Secondly, the doctrine is one of very wide application, and it has repeatedly been invoked and applied in relation to powers conferred under occupational pension schemes. See, for example, Hillsdown Holdings Plc v Pensions Ombudsman [1996] PLR 427 at paragraphs 73 to 76 (Knox J); Re Courage Group’s Pension Scheme [1987] 1 WLR 495 at 511-2 (Millett J); and Scully v Coley [2009] UKPC 29 at paragraphs 47 to 49 (Lord Collins of Mapesbury, delivering the advice of the Privy Council).

In all these cases, the approach of the court is to look at the nature of the power being exercised in order to assess the purposes for which it was conferred. If the proposed exercise is not for those purposes, but for a collateral purpose, it will be invalid. As Lord Wilberforce said in a case concerning the exercise by directors of a power to allot shares under the articles of association of their company, Howard Smith Ltd v Ampol Ltd [1974] AC 821 at 835F:

“In their Lordships’ opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not.”

Adopting this approach in the present case, the nature of the power in rule 12.3(b) is that:

Tested against the purpose of the power so identified, the proposal would represent an improper exercise of the power for at least three separate reasons. First, the purpose would not be to secure benefits to which the member in question would otherwise become entitled, but rather to secure for some members benefits which there would otherwise be no prospect of their receiving either on a winding up of the Scheme, or if the Scheme went into the PPF. Secondly, it would intentionally depress the funding position of the Scheme, and deprive it of the ability to provide the basic PPF benefits of other members under the Scheme, even though those members have a priority entitlement to such benefits on any winding up. Thirdly, it would involve the improper exercise of a power conferred for administrative purposes as if it were a dispositive power, because it would have the effect of altering the rights of members between themselves.

The point becomes still clearer, submits Mr Tennet, when one appreciates that the proper purposes of any power must be ascertained as at the date when the power was conferred. In support of this submission he relies on Stevens v Bell [2002] EWCA Civ 672, [2002] PLR 247, where Arden LJ said at paragraph 30, in the context of a discussion of the interpretation of pension schemes, that:

“… 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.”

In its original form rule 12.3 dates back to 1995, nine years before the establishment of the PPF in 2004. It is common ground that the proposed exercise of the power would not be proper if the PPF did not exist, but the purpose of rule 12.3 cannot have been broadened by the establishment of the PPF in 2004.

Nor is it a good answer to an allegation of improper purpose that the donee is acting in what he or she believes to be the best interests of those affected by the exercise of the power, or even that the proposed exercise would demonstrably be for their benefit. As Lord Wilberforce said in Howard Smith Ltd v Ampol Ltd, loc.cit., at 834G:

“pleas to this effect have invariably been rejected … - just as trustees who buy trust property are not permitted to assert that they paid a good price.”

Many of the same points were also made, with some differences of emphasis, by Mr Giffin QC on behalf of the PPF.

He submitted that the fundamental purpose of a pension scheme, and the purpose for which its assets are held, is to provide benefits for all of the scheme’s members. It follows that administrative powers (such as a power of investment, a power to buy out benefits, or a power to make transfer payments out of the scheme) must be exercised in a manner consistent with ensuring that the funding position of the scheme is as healthy as possible. Deliberately to place the scheme, through the application of all or substantially all of its assets in the purchase of annuities for some of its members to the exclusion of others, in a position where it is unable to meet the benefits of remaining members is clearly acting for an improper purpose. It deliberately disables the scheme from fulfilling the very purpose for which it exists. Helpful guidance may be found in Edge v Pension Ombudsman [2000] Ch 602 where Chadwick LJ, delivering the judgment of the Court of Appeal, discussed the “main purpose” rule of the pension scheme there in issue, namely “the provision of retirement and other benefits for employees … who are members of the scheme”. He said at 623A:

“At the risk of stating the obvious, that “main purpose” rule embodies three concepts which are fundamental to a pension scheme of this nature. First, the purpose of the scheme is to provide the retirement and other benefits to which the members, pensioners and dependents are entitled under the rules. The scheme is a “defined benefits” scheme: the benefits are fixed by the rules. The scheme is not set up as a unit trust, under which the members would be entitled to a proportionate share in the fund.

…

Third, the task of the trustees is to maintain a balance between assets and liabilities valued on that actuarial basis; so that, so far as the future can be foreseen, they will be in a position to provide pensions and other benefits in accordance with the rules throughout the life of the scheme.”

Mr Giffin submitted that these fundamental principles would clearly be violated by the proposed exercise of the power. The object would be to ensure that the retirement benefits of members remaining in the Scheme were not met, or met in full, by the Scheme, but by the PPF instead. Furthermore, it would represent a deliberate attempt not to maintain a balance between assets and liabilities.

Mr Giffin went on to submit that the creation of the PPF could not have broadened the permissible purposes for which the Trustee’s powers could be exercised, so as to permit them for the first time deliberately to depress the Scheme’s funding position. The purpose of the PPF is to protect schemes which are underfunded when the employer becomes insolvent: it is not to enlarge the proper purposes of a pension scheme, or of the exercise of powers under a scheme. Mr Giffin suggested that the matter could be tested by imagining that the trustees of a pension scheme knew that a particular member had a wealthy relative who would ensure that the member did not suffer financially if the scheme failed to pay his benefits. Plainly that circumstance would not justify the trustees in applying that member’s share of the scheme’s assets in increasing the benefits of other members at his expense. Discrimination on such grounds could only be permissible in the context of a discretionary trust or power of a dispositive nature, and would be wholly inconsistent with the character of benefits under an occupational scheme as deferred remuneration for the member’s work in the service of the employer.

The principal response to these submissions by Mr Rowley QC, arguing in support of the proposal, was that the purpose of the power should be identified as simply being to enable the Trustee to purchase an insurance policy in substitution for benefits payable under the Scheme. This is what the Trustee intends to do, in the manner best calculated to obtain for members as high a proportion as possible of the benefits which they were promised under the Scheme: see paragraph 8 of Mr Martin’s third witness statement, where he says:

“Whilst avoiding the limits placed on PPF compensation and securing benefits for members at the expense of the PPF might be consequences of the buy-out proposal, if implemented, neither represents the purpose of the proposal.”

Mr Rowley sought to buttress the distinction between the purpose of the proposal and its consequences by submitting that the objections raised by the PPF and the Pensions Regulator do not, on a proper analysis, go to the issue of improper purpose, but rather to the question whether the proposal maintains a fair balance between the different classes of beneficiary. He submitted that, even if the PPF did not exist, the proposal would still not involve the exercise of the power for an improper purpose, although it would be vitiated by a failure to have proper regard to the interests of the different classes of member. As it is, the proposal falls squarely within the scope and purpose of the power, and is wholly consistent with the stated main purposes of the Fund and the Scheme, which are respectively “to provide benefits for and in respect of Members in accordance with the Rules” (rule 1.3) and “the provision of relevant benefits … for Employees of the Employers” (rule 1.4).

Mr Rowley had two answers to the submission that the purpose of the power must be ascertained as at the date of its creation. First, he pointed out that the power which the Trustee wishes to exercise is that conferred by the amended rule 12.3(b), which was substituted for the original version by the 2005 Deed, after the Pensions Act 2004 had received the Royal Assent on 18 November 2004. Secondly, he submitted that the power clearly has to be exercised in the light of changing circumstances from time to time, and the existence of the PPF is merely a changed circumstance that now has to be taken into account. In other words, its relevance is not to the purpose of the power, but rather to the manner of its exercise.

As to the alleged distinction between administrative and dispositive powers, Mr Rowley submitted that these are no more than convenient labels of a general nature, and in any event exercise of the rule 12.3(b) power does have a very real effect on the entitlement of the member concerned, because he then ceases to be a member of the Scheme (if all his interests are bought out), and the Trustee is discharged from liability in respect of all the benefits that are bought out. Mr Rowley warned me politely about the danger of formulating the purpose of the power in a way that would inevitably lead to the answer that the proposed exercise was outside it. He also reminded me that the stated intentions of the donee of the power are a relevant, although not conclusive, consideration. He urged me to adopt what he called a “practical and purposive approach” to how rule 12.3(b) was intended to function in the context of the Scheme, and to identify its purpose in a way that would allow the Trustee maximum flexibility. Such an approach would not prejudice the beneficiaries of the Scheme, because any exercise of the power would remain subject to the usual constraints which apply to the exercise of a fiduciary power.

I have not recorded all of the submissions that were addressed to me on this issue, but I hope I have said enough to indicate the main areas of debate in the course of a hearing that extended over four days. I must now state my conclusions.

I find it helpful to begin by considering the context of rule 12.3(b) in the Scheme. Rule 12.3 is contained in Part 12 of the Rules, headed “Transfers and Buy-outs”.

Rule 12.1 deals with transfers into the Scheme of assets from other pension schemes under which a Scheme member is entitled to benefits. It empowers the trustees to accept such a transfer, subject to certain specified conditions, and says that the member “shall be entitled to such benefits or additional benefits under the Plan as the Trustees acting on Actuarial Advice shall decide to be appropriate in respect of such transfers”.

Rule 12.2 deals with transfers to another retirement benefits scheme. Paragraph (a) provides that where a member applies under rule 9.5 for a transfer of his “Cash Equivalent” to another scheme of his choice, the trustees are obliged to comply with the request. Rule 9.5 confers the right to apply for such a transfer on a member who has ceased to be an active member at least one year before normal pension date and becomes entitled to a deferred pension. The definition of “Cash Equivalent” says that it means “the cash equivalent of his benefits under the Plan, as determined by the Trustees on Actuarial Advice, certified by the Actuary as being computed in accordance with and using methods and assumptions consistent with the requirements of [the Pension Schemes Act 1993]”.

Rule 12.2(b) (as amended by the 2005 Deed) then confers a more general power in the following terms:

“The Trustees may (subject to Members’ rights under Rule 12.2(a)), in lieu of providing the benefits to which all or any of the Members or other persons are entitled under the Plan, transfer to the trustees or administrator of any Retirement Benefits Scheme that satisfies the requirements of the Board of Inland Revenue for this purpose, such amount as they shall decide to be just and equitable, after taking Actuarial Advice.”

There are various requirements which have to be satisfied in respect of a transfer under rule 12.2 (for example, the member’s consent is generally required for a transfer under rule 12.2(b)), and these are laid down in paragraphs (c) and (d) of the rule.

Rule 12.3 deals with the buying out of benefits, and rule 12.3(b) is of course the rule directly in issue in the present case. Like rule 12.2, rule 12.3 contains a specific provision in paragraph (a) relating to transfer applications under rule 9.5, followed by a more general provision. Rule 12.3(a) is in the following terms:

“Where a Member has made application to the Trustees under Rule 9.5 for a transfer to an Approved Insurance Company, then the Trustees shall apply the whole or such part of the Member’s Cash Equivalent as is directed by him in the purchase of a Buy-out Policy providing benefits in substitution for the benefits (or relevant part) which would otherwise have been payable under the Plan.”

Paragraphs (c) to (f) of rule 12.3 then lay down various requirements for consent and so forth, one of which I should mention because Mr Rowley placed some reliance on it. The general rule, laid down by paragraph (e), is that the trustees must obtain the consent of the member concerned before purchasing a buy-out policy. A number of exceptions are then specified, including where

“(ii)(A) in the Trustees’ opinion the Buy-out Policy secures benefits identical to (or more favourable in amount than) those benefits or the relevant part which would otherwise have been payable under the Plan …”

I have already drawn attention to the important provision in rule 12.3(g), which says that where the trustees purchase a policy under the rule “they shall be relieved of all liability to provide the specified benefits under the Plan”.

Finally, rule 12.4 provides for the case where a member makes an application under rule 9.5 for a transfer to a personal pension scheme. The trustees are directed to transfer to the personal pension scheme “the whole or such part of the Member’s Cash Equivalent as is directed by him or, such greater amount as the Trustees, with the consent of the Principal Employer and after taking Actuarial Advice, decide”.

In this context, it seems clear to me that the purpose of rule 12.3(b) is to enable the trustees, if they think fit, to apply an amount of money which fairly represents the benefits to which a member or beneficiary is entitled under the Scheme (or a specified part of those benefits) in the purchase of an insurance policy which provides benefits in substitution for those benefits (or the relevant part of them). The limitation on the amount which may be so applied to (in short) a fair share of the Scheme assets is in my judgment implicit in the rules, not as a matter of construction, but because it would be contrary to the fundamental purpose of the Scheme as a whole to empower the trustees to apply a disproportionately large share of Scheme assets in the purchase of benefits which are intended to be in substitution for those available under the Scheme. By virtue of rule 1.3, the Fund (defined as meaning “all contributions, monies, property and other assets held by the Trustees for the purposes of the Plan”) is held, as Mr Rowley rightly emphasised, “upon irrevocable trusts, to provide benefits for and in respect of Members in accordance with the Rules”. It is obvious, to my mind, that the application of a disproportionately large share of the Scheme assets in the purchase of substitute benefits would, in all normal circumstances, prejudice the remaining members who were not bought out, because the liabilities from which the trustees are discharged (by operation of rule 12.3(g)) would not be matched by a corresponding reduction in the Scheme assets, but by a disproportionately large reduction in the Scheme assets.

Further support for this conclusion may be found in the express requirement for the trustees to take actuarial advice before deciding what amount is to be applied in the purchase. The purpose of this requirement must be to help ensure that no more than a fair share of the Scheme assets is so applied. No other plausible explanation for the requirement has been suggested.

Nor am I deterred by Mr Rowley’s point about the exception from the requirement for the member’s consent in rule 12.3(e)(ii)(A). It is always possible that the trustees may be able to secure bought out benefits which are more favourable to the member than those available under the Scheme. If they can do so, so much the better for all concerned (at any rate so long as the insurance company remains solvent). But none of this has any relevance to the question of how much money the trustees may spend in the purchase of the new substitute benefits. Indeed, if anything, the requirement for consent where the new benefits are less favourable than those nominally available under the Scheme reinforces the point that the trustees may not spend more than a fair share of the assets in effecting a buy-out.

More generally, the consistent policy underlying Part 12 of the Rules is that the amounts applied by the trustees in exercise of the powers or duties conferred upon them is to be the amount of the Scheme assets that they consider to be fair in the light of advice from the scheme actuary. This underlying policy finds expression in various different ways, but the differences in wording are not in my opinion significant. Furthermore, this is exactly what one would expect to find in the context of an occupational pension scheme, where the benefits have the quality of deferred remuneration, and all the members have an equal interest, while the scheme is a going concern, that it should be fairly administered in a way which does not favour one group of beneficiaries at the expense of the others. The concept of a power to apply a disproportionately large share of assets in buying out benefits is one so foreign to the fundamental purpose of a pension scheme that it would need the clearest possible justification, and equally clear language so that its implications could be fully understood by the members. By contrast, the wording of rule 12.3(b) is entirely normal and straightforward. There is nothing in it to suggest that such a strange possibility was ever contemplated by the draftsman of the rule.

If my analysis is right this far, the next question is whether the compensation prospectively payable under the PPF can properly be taken into account by the Trustee in deciding what is a fair share of the Scheme assets to apply in the purchase of a buy-out policy. In my judgment the answer to this question is plain. In no sense can the statutory right for members to receive PPF compensation, if and when the Scheme enters the PPF, be described as an asset of the Scheme. The effect of entry of a scheme into the PPF is that the scheme assets are automatically transferred to the Board, the trustees are discharged from their pension obligations, and the Board assumes liability for securing that compensation is paid in accordance with the pension compensation provisions of the 2004 Act: see section 161(2), which goes on to say that:

“… accordingly, the scheme is to be treated as having been wound up immediately after that time.”

Compensation payable under the 2004 Act, as its name suggests, is intended to compensate members for the scheme benefits which they have lost. It only becomes payable after the scheme has been wound up, and after the scheme assets have vested in the PPF. Thus there is no way in which the compensation could properly be regarded as a scheme asset at any time while the scheme remains in existence.

It must follow, in my judgment, that the proposal falls well outside the purposes for which the buy-out power in rule 12.3(b) was conferred. Read in its context, it is a power to apply a fair share of the Scheme assets in the purchase of a buy-out policy providing substitute benefits. It is common ground that the proposal would involve the application of a disproportionately large share of the Scheme assets for this purpose.

It is revealing to note, in this connection, that the Trustee’s own description of the purpose of the proposal, upon which Mr Rowley heavily relies, cannot avoid a reference to the expected availability of PPF compensation. It is worth returning to what Mr Martin says in paragraph 8 of his third witness statement:

“As I explained in paragraph 9 of my first witness statement, the purpose of the proposal is, by combining payments under any annuities purchased with the compensation that the PPF is likely to pay, to secure for members as high a proportion as is possible of the benefits that they were promised under the Scheme.”

In my view this formulation of the purpose of the proposal, no doubt carefully considered and drafted with the benefit of legal advice, illustrates with stark clarity precisely why the proposal is objectionable. It treats PPF compensation, which is payable (if at all) only when the Scheme has ceased to exist, as though it were itself an asset of the Scheme, instead of a wholly extraneous source of compensation for the failure of the Scheme. The Trustee’s motive, I have no doubt, is indeed “to secure for members as high a proportion as is possible of the benefits that they were promised under the Scheme”. This explains why the Trustee wishes to implement the proposal, if it may properly do so. But ascertainment of the purpose of the proposal requires a more objective appraisal of what it is that the Trustee, in substance, intends to do. To spell it out, I would identify the true purpose of the proposal as being to apply a disproportionately large, and therefore unfair, share of the Scheme assets in the purchase of buy-out policies. Such a purpose is an improper one, because it goes far beyond the purposes for which rule 12.3(b) exists in the context of the Scheme as a whole.

I would add that it makes no difference to my conclusion whether one looks at rule 12.3(b) in its original form, or as it was amended in January 2005. It is, of course, the amended power that the Trustee now wishes to exercise. However, the effect of the amendment was merely to remove the references in rule 12.3(b) to the Principal Employer, which had by then entered into administrative receivership. There is no indication of any intention to extend the scope or basic purpose of the power. In any event, even if it is right to regard the power as freshly conferred in 2005, after the enactment (but before the entry into force) of the relevant parts of the Pensions Act 2004, the result is still the same. The existence of the PPF is one of the changed circumstances in the light of which the power has to be exercised, but as I have tried to explain it is not a relevant circumstance. The power remains one which exists for the sole purpose of enabling the Trustee to apply a fair share of the Scheme assets in the purchase of insurance policies providing substitute benefits, no more and no less.

It will be apparent from what I have already said that I am unable to accept Mr Rowley’s submission that the purpose of the power is simply to enable the trustees to purchase buy-out policies which provide substitute benefits. That is a description of what the trustees actually do when they exercise the power, but it is in my judgment insufficient as a statement of the purpose of the power, because it omits the crucial “fair share” limitation. I am also unable to agree that such considerations are relevant only to the separate question whether the proposal maintains a fair balance between different classes of beneficiary. On the contrary, they seem to me to go to the very heart of the present issue.

I have already explained why the existence of the PPF is not in my view a relevant factor for the Trustee to take into account when exercising the rule 12.3(b) power in its present form. That conclusion alone would be enough to dispose of the present application, subject to the Community law arguments. But it gives rise to a further question on which the Trustee understandably wishes to have the court’s guidance. Suppose that the Scheme rules were amended, or purportedly amended, in such a way as to permit the Trustee to take account of PPF compensation, and to treat its future availability as though it were a Scheme asset. Would the proposal then be one that the Trustee could in principle properly adopt? Any steps of this nature would raise obvious questions about the validity of the amendment, but resolution of those questions would probably depend on the answer to a further question, which may be posed in general terms: as a matter of law, is the existence of PPF compensation a factor that trustees of a pension scheme may legitimately take into account in the exercise of a power to buy out scheme benefits? That is the fundamental question to which I now turn.

The main argument in support of a negative answer to this question was presented by Mr Giffin QC. He prefaced his oral submissions on the point, however, by stressing that his argument was not that it can never be appropriate for trustees to have regard to the existence of the PPF. He accepted, for example, that it might be perfectly proper for trustees to have regard to the PPF in deciding whether, or when, to bring about a qualifying insolvency event, as part of the planning for an orderly running down of an under-funded scheme. Similarly, it would plainly be relevant for trustees to consider whether an action they were otherwise minded to take might render the scheme ineligible for entry into the PPF: compare L and others v M Ltd [2006] EWHC 3395 (Ch), [2007] PLR 11, where the question considered by Warren J was whether certain proposals for the refinancing of the principal employer would render the scheme ineligible for entry into the PPF. Mr Giffin submitted, and I would agree, that there is no single all-purpose answer to the question whether the PPF is a relevant consideration for trustees to take into account. It all depends on the context and purpose of the particular power which the trustees are proposing to exercise, and the particular way in which they wish to take the PPF into account.

Mr Giffin instead focused his attack more narrowly, on cases where trustees wish to take advantage of the availability of compensation under the PPF in order to render lawful a proposed exercise of a power which would otherwise be unlawful. For example, could the trustees of an underfunded scheme properly make an imprudent, but potentially profitable, investment, on the basis that if it succeeded the funding position of the scheme would be improved, perhaps above PPF levels, and if it failed the scheme could enter the PPF and compensation would still be payable at the same level as if the imprudent investment had never been made? Without resiling from his submission that one always needs to look at the particular power in question, Mr Giffin suggested that it would in general be correct to say that the PPF is not a relevant consideration for trustees to take into account in dealing with the assets of the scheme.

Subject to the above qualifications, Mr Giffin’s submissions were broadly as follows.

On behalf of the Pensions Regulator, Mr Tennet adopted Mr Giffin’s submissions and supplemented them with some additional points. He reminded me that there are many categories of trusts and trust provisions which have been held by the courts to be contrary to public policy and unenforceable, such as provisions which are contrary to the policy of the law of bankruptcy, or which purport to oust the jurisdiction of the court. (A comprehensive treatment of trusts which are void for illegal purposes may be found in Underhill and Hayton at pp. 239-280.) Public policy is notoriously an unruly horse, but judges have nevertheless not hesitated to mount it where satisfied that a trust provision offends against public policy. The present case is of a less extreme nature, because there is no provision in the Rules which is itself contrary to public policy; but it would be in accordance with the same general approach for the court to hold, as a matter of public policy, that in exercising the rule 12.3(b) power the existence of compensation under the PPF is not a relevant consideration for the Trustee to take into account.

Mr Rowley’s submissions in support of the proposal approached the question from a different angle. He submitted that, just as in public law, the primary principled basis for identifying whether or not particular considerations are relevant is the purpose for which the power or discretion has been granted. In public law, the purpose is identified by considering the legislation which confers the power or discretion. In the present case, the purpose has to be found in the Principal Deed and the Rules. The purpose of the Scheme is to provide benefits for members. It is no part of the purpose or object of the Scheme to protect or promote the interests of public authorities such as the PPF. In pursuance of the purpose of the Scheme, the Trustee may legitimately seek to ensure that the members obtain the maximum possible financial benefits, whether those benefits are obtained directly from the Scheme or from a third party which is obliged to make payments to members.

Mr Rowley drew an analogy with the now well-established principle that the financial and fiscal consequences of a proposed course of action are highly material considerations for trustees to take into account in the exercise of discretionary powers. He submitted that there is no difference in principle between a trustee being required to have regard to the fiscal consequences of his actions (which depend on the impact of fiscal legislation) and the need to have regard to other benefits which a beneficiary will receive under the statutory regime governing the PPF if certain steps are taken by the trustee. In the tax context, the object of the exercise is to minimise the exposure of the trust to tax, to the advantage of the beneficiaries but to the disadvantage of the Revenue. In the present context, the object is to maximise the benefits obtained by the members, to their advantage but to the disadvantage of the PPF. Not only are the existence of the PPF, and the rights of Scheme members to future compensation under the PPF, highly relevant factors, but it would be a breach of duty by the Trustee to exclude them from consideration as irrelevant. It is the duty of trustees of an occupational pension scheme to put the interests of their beneficiaries first, and to “put on one side their own personal interests and views”, as Sir Robert Megarry V.-C said in Cowan v Scargill [1985] Ch. 270 at 287G. He went on to say that trustees may even have to act dishonourably, although not illegally, if the interests of their beneficiaries require it, for example by “gazumping” a prospective purchaser of trust property: ibid., at 288B. Sir Robert Megarry also quoted with approval what Templeman J had said in relation to an official receiver, in In re Wyvern Developments [1974] 1 WLR 1097 at 1106:

“[He] must do his best by his creditors and contributories. He is in a fiduciary capacity and cannot make moral gestures, nor can the court authorise him to do so.”

Mr Rowley submitted that Parliament has enacted a carefully delineated statutory scheme to regulate the PPF, and has chosen to protect it in specified ways against the risk of abuse: the so-called “moral hazard” provisions. It is no part of the court’s function to do what Parliament has chosen not to do, in the name of a supposed public policy derived from the very Act which fails to prohibit the Trustee’s proposed course of action. If it turns out, in the light of experience, that further protection for the PPF may be needed, that is exclusively a matter for Parliament to determine after a full consideration of all the competing arguments. Nor is there any warrant for transplanting the public law principles applied in cases like Crédit Suisse v Allerdale Borough Council into the private law context of a pension scheme. The court should be very wary of appeals to public policy, which is still the “unruly horse” famously referred to by Burrough J in Richardson v Mellish (1824) 2 Bing. 229 at 252:

“When once you get astride it you never know where it will carry you. It may lead you from the sound law. It is never argued at all but when other points fail.”

In evaluating these submissions, I begin by reminding myself that the deliberate object of the present proposal is to deplete the assets of the Scheme by purchasing benefits for members in excess of those available under the PPF. It is intended that the Scheme will enter the PPF once the proposal has been implemented, as a result of the Trustee bringing about a qualifying insolvency event. If the proposal is implemented in its most extreme form – and that is now the Trustee’s preferred option – no, or virtually no, Scheme assets will be left for the PPF to take over, but all those members for whom top-up benefits have been purchased will still receive their full level of compensation from the PPF. The senior managers and others in early retirement whose benefits have been bought out in full will no longer be Scheme beneficiaries, and will not be eligible to receive PPF compensation, but they will of course enjoy their full Scheme benefits under their buy-out policies.

Can it be said that a proposal of this nature is consistent with the policy of the legislation establishing the PPF? In my judgment, obviously not. The policy of the PPF legislation, broadly stated, is to establish a fund of last resort for insolvent schemes whose assets are insufficient to provide benefits at the PPF level, and to ensure that compensation is paid in accordance with the PPF compensation provisions to the members and beneficiaries of schemes which enter the PPF. In colloquial terms, it is a lifeboat or safety-net for underfunded schemes which would otherwise have to be wound up. For its funding, the PPF relies on annual levies on the population of eligible schemes, and on the assets of schemes which have entered the PPF. There is no government guarantee, although it may be surmised that if the PPF were to be at serious risk of insolvency the government would take steps, if at all possible, to prevent its collapse. Any such decision, however, would be one of a political nature, and there can be no certainty whether, or on what terms, the government would intervene.

In my judgment the proposal seeks to subvert this legislative policy in two principal ways. First, it aims to minimise, if not eliminate, the Scheme assets which will vest in the PPF, at a time when the Scheme is seriously underfunded and almost certainly unable to provide benefits at the PPF level, let alone the level provided for by the Rules. Secondly, it treats the availability of PPF compensation as though it were an advantage to be exploited for the Scheme’s benefit, whereas Parliament clearly intended the PPF to be a funder of last resort which will step in if, and to the extent that, the Scheme is unable to fund PPF level benefits with its own assets.

I have no hesitation in holding that the proposal represents a blatant attempt to undermine or circumvent the policy of the PPF legislation. Furthermore, there is to my mind a clear and strong public interest involved, both in the operation and financial health of the PPF itself, and more generally in the responsible administration of occupational pension schemes, including the maintenance of proper funding levels. The proposal could hardly be more inimical to this public interest, because it involves the depletion of the Scheme assets at the expense of the PPF. Furthermore, I have little doubt that, if the present proposal were approved, numerous and ever more ingenious attempts to take advantage of the PPF would soon follow, and unless amending legislation were passed to counter the threat, the PPF would find itself under increasing, and possibly fatal, pressure: see further paragraphs 142 to 154 below.

It would in my judgment be a sad state of affairs if the court were powerless to prevent conduct of this kind, and had to leave it to Parliament to intervene. In the context of tax avoidance, that is a conclusion which the court is sometimes obliged to reach, and the history of judicial attempts to counter some of the worst abuses has been a chequered one: see the well-known line of cases beginning with W T Ramsay Ltd v IRC [1982] AC 300 and culminating, at least for the time being, in Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51, [2005] 1 AC 684. But the present case is not in my judgment of that character. Taxation may only be imposed by Parliament, and it deprives the taxpayer of money which he could otherwise keep. The starting point is still that the taxpayer is entitled to take any lawful steps open to him to minimise the impact of taxation on his affairs: IRC v Duke of Westminster [1936] AC 1. By contrast, pension schemes, although private trusts in form, operate in an increasingly regulated public sphere, as Mr Giffin in my view rightly submitted, and the role of the PPF, unlike that of the Revenue, is essentially a supportive, not an extractive, one.

In the light of these fundamental differences, I do not find Mr Rowley’s analogy with tax avoidance a persuasive one, and I ask myself whether there is any principled basis upon which the court can intervene to nip behaviour of this kind in the bud. In my judgment there is, at least in cases of the present type, and it is to be found in the power of the court, in the administration of a trust, to lay down what are, or are not, relevant factors for the trustee to take into account in the exercise of a particular power or discretion. The question of relevance must ultimately be a question of law for the court to determine, and I see no good reason why the decision of the court should not, in an appropriate case, be shaped and guided by considerations of public policy.

Adopting that approach, I would hold, as a matter of law, that the prospective availability of compensation under the PPF, if and when the Scheme enters the PPF, is not a relevant factor for the Trustee to take into account in the exercise of the rule 12.3(b) power, or any power of a similar nature, because to take it into account would be contrary to the clear legislative policy of the Pensions Act 2004, and would thus be contrary to public policy. Further than that I would not, at present, go, bearing in mind that the existence of the PPF is in certain contexts a legitimate matter for trustees to take into account, and the dangers of invoking public policy in relation to a situation which is not before the court. I would, however, say that if my conclusion in the present case is soundly based, I would expect a similar approach to be adopted in any instance where trustees seek to take advantage of the existence of the PPF as a justification for acting in a way which would otherwise be improper.

My conclusion on this point means that any attempt to amend the Scheme rules so as to permit, or oblige, the Trustee to take the existence of PPF compensation into account in exercising its power to buy out benefits would clearly be void. It also follows that it is unnecessary for the court to consider the third and fourth groups of issues identified in paragraph 68 above, unless the overriding effect of Community law is such that the conclusions which I have already reached must in some way yield to it. I will therefore move straight on to the fifth issue, the impact of Community law.

The relevant provisions of the Insolvency Directive are as follows:

In Robins v Secretary of State for Work and Pensions (Case C-278/05), [2007] ICR 779, the European Court of Justice (“ECJ”), on a preliminary reference from the Chancery Division of the High Court, was asked to rule on two questions: whether Article 8 of the Insolvency Directive required member states to make up the deficit of underfunded pension schemes in full in the event of the employer’s insolvency, and (if not) whether the legislation then in force in the UK properly implemented Article 8. The two claimants were members of contributory pension schemes which provided final salary benefits and were funded on a balance of costs basis, the employer being required to pay contributions on top of the payments by employees at the rate necessary to ensure the proper funding of the scheme. Following the insolvency of the employers, the schemes entered wind up in July 2002. Each scheme was heavily in deficit, and there was no prospect of obtaining any further funding from the employers. It was common ground that, on an actuarial basis, and in accordance with the statutory order of priorities on a winding up then in force, the claimants (who were deferred pensioners) would receive only 20% and 49% respectively of their contractual entitlements, after taking into account the various forms of government support that were available.

The Advocate General (Kokott) considered that Article 8 required full protection of employees’ interests, and that although member states were not directly liable for shortfalls in benefits, they were obliged to ensure in some suitably effective manner that the benefits were paid in full.

The Court agreed with the Advocate General that the wording of Article 8 did not oblige member states themselves to fund the rights to benefits that must be protected by virtue of the Directive, and held that member states had some latitude as to the means to be adopted for that purpose (paragraphs 35 and 36 of the judgment). The Court added in paragraph 37:

“A member state may therefore impose, for example, an obligation on employers to insure or provide for the setting up of a guarantee institution in respect of which it will lay down the detailed rules for funding, rather than provide for funding by the public authorities.”

It was partly in response to this guidance, as I understand it, that the PPF was subsequently established as a self-funding organisation.

The Court differed from the Advocate General, however, in holding that Article 8 did not require a full guarantee of the members’ contractual rights (paragraphs 42 to 45). As the Court said in paragraph 45:

“In this regard, in so far as it does no more than prescribe in general terms the adoption of the measures necessary to “protect the interests” of the persons concerned, article 8 of the Directive gives the member states, for the purposes of determining the level of protection, considerable latitude which excludes an obligation to guarantee in full.”

The Court then turned to the second question, and answered it in a passage which I should quote in full:

“54.

According to unchallenged statements in the documents before the court, two of the claimants will receive only 20% and 49% respectively of the benefits to which they were entitled.

55.

There being no obligation to guarantee entitlement to benefits in full, it remains to determine the minimum level of protection required by [the Insolvency Directive].

56.

It must be pointed out that, unlike articles 3 and 4 of the Directive, the words of which make it possible, notwithstanding the latitude given to the member states, to determine the minimum guarantee of outstanding claims relating to pay (see Francovich v Italian Republic [1995] ICR 722, paras 18-20), neither article 8 of the Directive nor any other provision therein contains elements which make it possible to establish with any precision the minimum level required in order to protect entitlement to benefits under supplementary pension schemes.

57.

Nevertheless, having regard to the express wish of the Community legislature, it must be held that provisions of domestic law that may, in certain cases, lead to a guarantee of benefits limited to 20% or 49% of the benefits to which an employee was entitled, that is to say, of less than half of that entitlement, cannot be considered to fall within the definition of the word “protect” used in article 8 of the Directive.

58.

On that point, it may be noted that in 2004, according to unchallenged figures communicated to the Commission by the United Kingdom, about 65,000 members of pension schemes suffered the loss of more than 20% of expected benefits, and some 35,000 of them, that is to say, nearly 54% of the total, suffered losses exceeding 50% of those benefits.

59.

It must therefore be concluded that a system such as that established by the United Kingdom legislation does not ensure the protection provided for by the Directive and does not constitute proper implementation of article 8 thereof.”

It can be seen, therefore, that the ECJ declined to lay down any firm rule as to the minimum level of benefits which had to be guaranteed in order to ensure compliance with Article 8, but held that, wherever the line fell to be drawn, the claimants were on the wrong side of it. Furthermore, the clear implication is that a loss of more than 50% of a member’s contractual entitlement would normally involve an infringement of Article 8, at any rate if that occurred on a systematic basis.

The argument in support of the proposal on this part of the case was presented by Mr Saini QC. He submitted that at least two of the senior managers who had taken early retirement, Mr Alcraft and Mr Lear, stood to lose more than 50% of their contractual pension entitlement if the scheme entered the PPF without their benefits having been bought out beforehand: see the figures in paragraph 63 above, which show that they would suffer an estimated reduction in their pension income of around 53.3% and 56% respectively. A reduction of this order of magnitude would prima facie breach their directly effective Community law rights under Article 8. Accordingly, so the argument goes, the court in the present case should adopt an approach of “harmonious interpretation” under which national law, in all its manifestations, including the rules of equity and public policy, must be interpreted and applied in the light of Community law obligations.

Mr Saini referred me to the well-known principle of interpretation laid down by the ECJ in Case C-106/89 Marleasing SA v La Comercial Internacional de Alimentación SA [1990] ECR I-4135 (“Marleasing”), where the Court said at paragraph 8 of its judgment:

“… it should be observed that, as the Court pointed out in its judgment in Case 14/93 Von Colson and Kamann v Land Nordrhein-Westfalen [1984] ECR 1891, paragraph 26, the Member States’ obligation arising from a directive to achieve the result envisaged by the directive and their duty under Article 5 of the Treaty to take all appropriate measures, whether general or particular, to ensure the fulfilment of that obligation, is binding on all the authorities of Member States including, for matters within their jurisdiction, the courts. It follows that, in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and thereby comply with the third paragraph of Article 189 of the Treaty.”

Mr Saini submitted that this is a strong interpretative obligation, which extends to the whole body of rules of national law, and can apply in cases between private individuals as well as cases to which a member state is a party. In support of these propositions he relied on the later decision of the Grand Chamber of the ECJ in Joined Cases C-397/01 to C-403/01, Pfeiffer v Deutsches Rotes Kreuz, Kreisverband Waldshut eV [2004] ECR I-8835, [2005] ICR 1307 (“Pfeiffer”) at paragraphs 109 to 119 of the judgment of the Court. Pfeiffer was concerned with the application of directives relating to health and safety at work, and working time, to emergency medical workers. In particular, the Court said at paragraphs 115 and 118-119:

“115.

Although the principle that national law must be interpreted in conformity with Community law concerns chiefly domestic provisions enacted in order to implement the directive in question, it does not entail an interpretation merely of those provisions but requires the national court to consider national law as a whole in order to assess to what extent it may be applied so as not to produce a result contrary to that sought by the directive …

…

118.

In this instance, the principle of interpretation in conformity with Community law thus requires the referring court to do whatever lies within its jurisdiction, having regard to the whole body of rules of national law, to ensure that directive 93/104 is fully effective, in order to prevent the maximum weekly working time laid down in Article 6(2) of the directive from being exceeded (see, to that effect, Marleasing, paragraphs 7 and 13).

119.

Accordingly, it must be concluded that, when hearing a case between individuals, a national court is required, when applying the provisions of domestic law adopted for the purpose of transposing obligations laid down by a directive, to consider the whole body of rules of national law and to interpret them, so far as possible, in the light of the wording and purpose of the directive in order to achieve an outcome consistent with the objective pursued by the directive. In the main proceedings, the national court must thus do whatever lies within its jurisdiction to ensure that the maximum period of weekly working time, which is set at 48 hours by Article 6(2) of Directive 93/104, is not exceeded.”

In the domestic context, Mr Saini cited the recent decision of the Court of Appeal in McCall v Poulton and others [2008] EWCA Civ 1313, where Waller LJ (with whose judgment Carnwath and Wilson LJJ agreed) discussed Marleasing and Pfeiffer in the context of the question whether a reference should be made to the ECJ on issues concerning the liability of the Motor Insurers’ Bureau (“the MIB”) under the Uninsured Drivers Agreement made between the MIB and the Secretary of State for Transport, and whether the MIB is an emanation of the state. The issues were, in short, whether certain exceptions in the Uninsured Drivers Agreement are compatible with Article 1.4 of Council Directive 84/5/EEC of 30 December 1983, and whether Mr McCall had a direct claim against the MIB under the directive. In upholding the decisions of the courts below to order a reference, Waller LJ reviewed Marleasing and Pfeiffer at paragraphs 26 to 40 of his judgment, and said in paragraph 39 that he regarded it as “very arguable” that Pfeiffer had extended the Marleasing principle so that it would apply to the interpretation of the Uninsured Drivers Agreement, “particularly in the context of an agreement which is entered into between a member state and another entity and which is relied [upon] as fulfilling the member state’s obligations under the Treaty”.

These general principles of Community law were lucidly expounded by Mr Saini, but he was unable to explain, except in the most general of terms, how they were supposed to lead to the conclusion that the present proposal should be approved. It is at this crucial stage, in my judgment, that the argument breaks down, even on the assumption that the PPF compensation prospectively payable to Mr Alcraft and Mr Lear (and any other members in a similar position) would fall short of what Article 8 of the Insolvency Directive requires. If there is a problem, it is in my judgment a problem with the level of compensation payable under Schedule 7 to the Pensions Act 2004, and nothing else. If, therefore, the Scheme in due course enters the PPF, and these members’ benefits have not been bought out, they will (if so advised) be able to challenge the level of compensation they receive on the ground that the UK has failed in its duty fully to implement the requirements of Article 8. They would presumably be able to claim payment of the balance which would take their pensions up to the minimum acceptable level, or alternatively damages for breach of their Community law rights. But I am unable to understand how any principle of interpretation, even on the most generous reading of Pfeiffer, could possibly lead to the conclusion that the Trustee should now be under a duty to exploit the PPF in the exercise of its fiduciary powers, or that the public policy considerations which I have identified should be relaxed to the extent necessary to allow the proposal to proceed.

Mr Saini freely accepted that his argument could have no application to the first ground on which I have held the proposal to be improper, namely the improper purpose ground. The argument must be equally inapplicable, in my judgment, to the second, public policy, ground, as reflected in my holding that the existence of the PPF is not a legitimate consideration for the Trustee to take into account in the exercise of the rule 12.3(b) power. The policy of the legislation establishing the PPF, and the undesirability in the public interest of attempts to exploit or take advantage of the PPF, remain exactly the same, and apply with undiminished force to trustees of pension schemes, whether or not the level of benefits payable under the PPF complies in all respects with Article 8. The proposition that a legislative failure on the part of the UK to meet the full requirements of Article 8 could somehow justify otherwise unlawful attempts to undermine or take advantage of the PPF – and that, in essence, is what Mr Saini’s argument seems to me to entail – is in my judgment little short of absurd.

For these short reasons, I am satisfied that there is nothing in the Community law argument which should cause me to modify in any way the conclusions I have already reached on improper purpose and public policy. I also wish to emphasise that although, for the purpose of testing the Community law argument, I have assumed that the PPF compensation of members in the position of Mr Alcraft and Mr Lear may fall below the level required by Article 8, I express no view on the question whether that assumption is correct.

I would, however, make the following brief observations:

In the light of these, and similar, considerations, it seems to me all but inconceivable that the ECJ would hold the existence of a cap on PPF compensation to be incompatible with Article 8, and the real dispute would be about the level at which the cap may legitimately be set, having regard to the social and economic factors referred to in the directive and the degree of latitude afforded to member states by the relative imprecision of its wording. It might also be relevant to bear in mind that Mr Alcraft and his fellow managers decided to take early retirement at a time when the Scheme was well funded, when the statutory order of priority on a winding up was favourable to them, and the establishment of the PPF lay some years in the future, so no question of their having sought to manipulate it could have arisen. Furthermore, although the early pensions of around £40,000 per annum enjoyed by the senior managers are much higher than those of the majority of the Scheme members, they are still relatively moderate in amount. Without expressing any sort of a concluded view, I think it may well be a difficult question whether their prospective level of PPF compensation does in all the circumstances comply with Article 8, and it is quite possible that its resolution will in due course require a further reference to the ECJ.

My conclusion on the Community law issue means that it is unnecessary for me to go on to consider the further questions that would arise if (a) the proposal did not have an improper purpose, and (b) it were in principle legitimate for the Trustee to take the existence of the PPF into account in exercising the rule 12.3(b) power. I heard full and interesting arguments on these questions, but I think that it would be inappropriate as well as unnecessary for me to deal with them in any detail, because the premises upon which they are founded are ones which I believe to be profoundly mistaken. I would therefore be embarking on an exercise which was in my view both artificial and misguided, and anything which I said on the subject would anyway be obiter. It is in general a sound principle that a court should rule only on issues which are necessary to its decision.

I will, however, make a few comments on some of the questions which I have grouped under headings (3) and (4) in paragraph 68 above.

First, although I was initially attracted by the idea that the PPF should itself be regarded as a contingent beneficiary of the Scheme, I think on reflection that this would be an unrealistic response to the present problem. One obvious difficulty is that the PPF did not exist when the Scheme was established, so it cannot have been contemplated as a beneficiary by the Company or the original trustee when the Principal Deed and the Rules were drafted. More fundamentally, however, I am satisfied that it is wrong in principle to describe as a beneficiary, or even as a quasi-beneficiary, a statutory body to which the Scheme’s assets will be transferred, if at all, only at the point where the Trustee is discharged from its obligations to provide benefits under the Scheme, and where the PPF itself comes under an obligation to provide different benefits from those laid down in the Rules, albeit quantified to a large extent by reference to the Rules. The transfer of the assets is a means of partially funding the compensation that the PPF will be obliged to pay. Alternatively, it may be regarded as part of the price that the Scheme has to pay for entry into the PPF. Any description of the PPF as a quasi-beneficiary of the Scheme would in my view have to be hedged around with so many qualifications as to render the concept virtually meaningless.

To make the same point in a different way, the correct legal basis of the proposition that the Trustee should not set out to prejudice the financial position of the PPF is not to be found by casting the PPF in the improbable role of a Scheme beneficiary, but rather in a consideration of the purpose of rule 12.3(b) and the purpose of the legislation establishing the PPF.

Secondly, if the PPF is not to be regarded as (or as akin to) a beneficiary, but it were nevertheless legitimate for the Trustee to take its existence into account, one would immediately encounter a problem. Should the Trustee take the PPF into account as a potential source of benefit to be exploited, or as a potential saviour whose interests should not be prejudiced? To my mind there is no satisfactory way of reconciling these diametrically opposed approaches, and the dilemma is a sure indication that, if one reaches this point, a wrong turning has been taken at an earlier stage of the analysis.

Finally, I wish to say a little more about the “floodgates” argument advanced by the PPF and the Pensions Regulator. There is a good deal of evidence on the point, most of which is necessarily inconclusive.

In his witness statement of 28 September 2008 on behalf of the Pensions Regulator, Mr Wray expressed the concern that if the Trustee were entitled to implement the proposal, other trustees would be not only entitled, but obliged, to do the same in the interests of their members. He continued in paragraph 21:

“In such circumstances the solvency of the PPF would be jeopardised to the detriment of all those (including the members of the Scheme) who are or will be relying on it in the future (possibly many decades into the future) to pay their pensions, and to pay them at the levels currently envisaged.”

Similar fears were expressed by Mr Dasgupta on behalf of the PPF in his statement of 30 September 2008. He pointed out that the annual levy was already a significant cost to schemes, and in the 2007/08 levy year the average (mean) amount of the pension protection levies charged to schemes was approximately £75,000. Even at that level, the PPF received a significant amount of lobbying from stakeholders complaining that the levy was unaffordable, and in the current economic climate it was reasonable to assume that pressures on the PPF might increase. By September 2008 the PPF had already assumed responsibility for approximately 60 schemes, and the funding position of the PPF as at 30 June 2008 (including an allowance for schemes in assessment) was around 88%.

Mr Dasgupta went on to emphasise what he called “two critical points”. First, the appropriate level of PPF compensation for members of schemes that are not funded to the PPF level needed to be set very carefully at the time when the PPF was established. In view of the finite sources of funding for the PPF, and the absence of a government guarantee, the cost of increased compensation ultimately falls on the population of levy-paying schemes. It follows that PPF compensation had to be affordable if the fund was to be viable. On the basis of government estimates at the time, the annual cost of the levy would have had to be broadly doubled (by an amount in the region of £300 million) if PPF compensation had been set at an uncapped level of 100%. Secondly, the PPF is only meant to provide a safety net for schemes that genuinely need it, and then only to the extent that such schemes are funded below the PPF level. Since the PPF takes over the scheme’s assets, it effectively tops up the benefits that the scheme could meet from its own assets to the PPF level. Accordingly, if a scheme were able to ensure that the PPF bore a disproportionately greater burden than the amount truly necessary to achieve the top up to the PPF level of benefits, it would in effect gain an unfair advantage over other schemes which behaved in the way that the legislation contemplated. Such behaviour would in turn threaten the carefully considered affordability of the PPF.

Enlarging on this theme, Mr Dasgupta agreed with Mr Wray that if the present proposal were lawful all schemes able to undertake a similar exercise would be obliged to do so, and “[t]he financial impact of this would be very serious indeed”. Such action by the trustees of schemes would lead to some or all of the following three consequences:

According to calculations undertaken by the PPF’s actuarial team, if all the 41 schemes for which the PPF had assumed responsibility by 31 March 2008, and the much greater number of schemes which were in an assessment period by that date, were assumed to have undertaken the proposal, or something similar to it, and to the extent that their assets allowed, then (extrapolating from the figures for the 41 schemes) the net liabilities of the PPF might be expected to increase by around £380 million per annum. In paragraph 38 of his statement, Mr Dasgupta said:

“This is the best estimate we can make of the potential extra annual costs to be passed on to levy payers in future using the data available to the PPF based on its experience to date. It compares reasonably with the estimations made by the Government in the Parliamentary debates on the 2004 Act. Although it should be seen as a broad estimate of potential consequences rather than anything more precise than that, the fundamental points I make in this statement would hold good in relation to any large-scale repetition of this proposal by other schemes, regardless of the precise amount of the resulting cost to the PPF.”

While maintaining the Trustee’s neutrality, Mr Martin assisted the court by commenting on the floodgates argument in the light of his very extensive experience as a professional pension scheme trustee, including involvement in more than 35 buy-out proposals. In his third witness statement of 21 January 2009 he explained that, in his view, the circumstances in which the present proposal has arisen are fairly unusual. There are two main reasons for this.

The first reason is that in practice buy-outs never take less than six months to implement, and have been known to take longer than five years. Typically, a period of between 15 and 24 months is needed. There are two factors, in particular, that lead to this delay. The first is ensuring that the data in relation to beneficiaries of the scheme are up to date (commonly known as “data cleansing”). The second is ensuring that the scheme’s records of any “guaranteed minimum pensions” held by it are reconciled with the records held by the National Insurance Contributions Office of HMRC (“NICO”), which regulates the provision of guaranteed minimum pensions. Mr Martin went on to give a detailed account of the Trustee’s experience of both these matters.

The second main reason is due to the fact that any buy-out must be completed before the occurrence of a qualifying insolvency event (because such an event triggers the commencement of an assessment period, and during an assessment period a buy-out would be prohibited by section 135(4) of the 2004 Act). It is therefore critical to any buy-out proposal that the trustee has control over the process of precipitating a qualifying insolvency event, but this will rarely happen in practice because either the employer itself or other creditors may precipitate such an event before the buy-out is completed. The present case is unusual in that a non-qualifying insolvency event has already occurred, the Company no longer has any assets, and therefore no other creditors have any interest in precipitating a qualifying insolvency event.

To some extent these points had been anticipated by Mr Dasgupta, who acknowledged that the insolvency context of the present proposal is relatively unusual, but nevertheless expressed his belief that, if the proposal were lawful, “it is reasonable to assume … that a very high proportion of schemes could put themselves into a position to take similar action”. His main reasons for saying this were (a) that in most cases trustees would probably have advance warning of the impending insolvency of the scheme employer, bearing in mind that the members of a trustee board normally include senior employees of the sponsoring employer, and (b) if trustees did become aware that an insolvency event was likely, the process of purchasing annuities could be expected to accelerate once there was an incentive to do so. In particular, well advised trustees would take steps to put their records in order so that they were in a position to act speedily if it became appropriate to do so.

In their evidence in response to Mr Martin, these points were more fully developed by the PPF and the Pensions Regulator. In his statement dated 29 May 2009, Mr Soper (on behalf of the Pensions Regulator) said this:

“4.

I am far less confident than Mr Martin that other schemes will not be able to exploit the existence of the PPF by entering the buy-out market to provide benefits in excess of PPF limits. While the market may at present require fairly long lead in times for a full buy-out of benefits to take place, my own experience from time at the Regulator has taught me that practices and markets invariably evolve to take advantage of commercial opportunities where it is perceived such opportunities exist. I think it would be naïve to assume insurance companies could not act very quickly to secure the buy-out of at least part of a scheme’s liabilities if there were a commercial demand for them to do so.

…

5.

Even if I were wrong in my assessment of the risks of many other schemes attempting to buy out benefits in excess of PPF limits (which I do not believe I am), it does not follow that the PPF is safe from proposals of a similar nature to that being considered in the present case. Similar arguments to those being deployed in the present case, are also being deployed in many other cases of which the Regulator has become aware, to justify a whole range of schemes and practices which, in the absence of the PPF, would otherwise be wholly indefensible uses of pension scheme resources. Collectively such schemes pose a very significant threat to the PPF.”

Mr Soper went on to give some specific examples of recent proposals which seek to “select against” or “game” the PPF.

On behalf of the PPF, Mr Rubenstein expressed his full agreement with Mr Soper’s evidence and his assessment of the risk to the PPF posed by schemes of this nature. He also pointed out that the reasons why buy-out proposals currently take so long to implement are essentially of a practical nature, and said he thought ways to surmount them could easily be found once there was an incentive to do so.

It is unnecessary for me to express any concluded views on this evidence, but I will say that in general I think the concerns expressed by the PPF and the Pensions Regulator are well-founded. I feel little doubt that, if the present proposal were lawful, schemes which in one way or another sought to take advantage of the PPF would rapidly proliferate, and ways would soon be found of surmounting the practical difficulties with data cleansing and the co-ordination with NICO of records relating to guaranteed minimum pensions which currently make a buy-out a relatively lengthy process. Past experience is not in my view a sure guide for the future, precisely because the commercial and legal incentives to act swiftly have hitherto been lacking. Markets usually evolve rapidly to meet a perceived need, and in this respect the parallel of the tax avoidance industry is not a reassuring one.

For all the reasons which I have given, I would answer the question in paragraph 1 of the amended claim form in the negative. In those circumstances the second question does not arise.