Capita Atl Pension Trustees Ltd v Zurkinskas

The Sea Containers 1983 Pension Scheme (“the Scheme”) was constituted by an Interim Trust Deed dated 30th August 1983 with effect from 1st September 1983. The Definitive Deed and Rules were adopted on 29th September 1988 and were operative from then until the adoption, with effect from 1st July 2004, of a new Deed and Rules dated 16th December 2005. The Scheme was and is a final salary scheme for employees of participating employers in the Sea Containers Group. By a definition contained in Rule 1 “normal retirement date” was defined as 65 for men and 60 for women “except where....otherwise agreed by the Employers and the Trustees”. Clause 20 conferred power on the trustees with the consent of the principal company by deed to amend or alter the trust deed or by deed or board resolution passed by a meeting of the trustees to alter any provision of the rules but not so as to reduce any accrued benefit except with the consent of the member. Rule 5 and special rule 3 provided for a member to contribute 5% of his pensionable salary. The first defendant is a representative member of the Scheme, the claimants are its trustees and the second and third defendants were participating employers at the relevant times.

The decision of the European Court of Justice in GRE v Barber [1991] QB 344 established that private occupational pension schemes, such as the Scheme, came within the provisions of Article 119 of the EEC Treaty and that that article prohibited discrimination between men and women in relation to pay and pensions. Effect was given to that prohibition by ss.62 to 66 Pensions Act 1995. S.62 effectively incorporated an equal treatment rule into private pension schemes. S.65 enabled trustees to make any necessary alterations to their scheme if they were otherwise not authorised to do so. In addition s.117 constituted the equal treatment rule as an overriding requirement. Had matters rested there the effect would have been to reduce the normal retirement date for men to 60. In common with most schemes the view was taken that the necessary equalisation could and should be effected at a higher age and a number of steps were taken to fix the normal retirement age as 65 for both men and women and make other associated adjustments.

Such steps, in chronological order, were:

It is common ground that the 1993 Deed was wholly ineffective, insofar as it purported to have retrospective effect (albeit effective prospectively), because the power of amendment, otherwise validly exercised, did not permit any reduction of accrued benefits except with a member’s consent and no such consents were sought or given. Similarly it is common ground that the New Deed and Rules were and are wholly effective in relation to accruals in respect of periods after the date of its execution. The uncertainties and disputes exist in relation to the alterations purporting to have been made by the 1994 Decision and the 2002 Decision.

With effect from 30th September 2006 the Scheme has been closed to further accruals. Thereafter there occurred a number of relevant events, namely:

As part of the restructuring of the third defendant its business, and that of other members of the group, was transferred to a new company (“SeaCo.”) in exchange for shares. An agreement between the third defendant and its creditors (“the Plan”), including the Trustees of the Scheme in respect of the third defendant’s debt due under s.75 Pensions Act 1995 and its obligations under a financial support direction in respect of the second defendant’s pension liabilities, was agreed and approved by the Court in the US on 11th February 2009. Provision was made in the Plan for the debt due to the Trustees to be satisfied in a discounted amount by the transfer of shares in SeaCo. The Trustees have received 152,300,864 units of common stock in SeaCo. In addition provision was made in an Escrow Agreement for further shares to be issued to the Trustees in relation to Equalisation Claims, as defined, to which I shall refer later.

On 30th July 2009 the Trustees issued the Part 8 Claim now before me. It raises questions as to the validity of each of the steps to which I have referred in paragraph 3 above. Part A related to the 1993 Deed. It was agreed that it must have been wholly invalid insofar as it purported to have retrospective effect (albeit effective prospectively). On 24th November 2010 Arnold J, on the application of the Trustees, gave summary judgment to that effect, there being no opposition. Part B relates to the other three steps. Questions 1 to 3 concern the 1994 decision, questions 4 and 5 relate to the 2002 decision and questions 6 and 7 raise issues concerning the New Deed.

The application now before me is made by the first three defendants. They seek the court’s approval of a compromise intended to resolve all outstanding issues in the administration of the Scheme. The context of the intended compromise is, I am told by counsel, novel. It raises a number of issues of principle which need to be determined. It is probable that if they are determined in favour of these defendants this form of compromise may become a model by which similar issues in relation to pension schemes may be resolved by agreement, thereby saving both time and money. I will deal with those issues under the following headings:

Plainly whether proceedings of this sort are concluded by a judgment on the merits or by a compromise approved by the court it will be necessary for representation orders to be made. The relevant rule, CPR Rule 19.7(2) entitles the court to make an order:

“...appointing a person to represent any other person or persons in the claim where the person or persons to be represented –

(a)

are unborn;

(b)

cannot be found;

(c)

cannot easily be ascertained; or

(d)

are a class of persons who have the same interest in a claim and –

(i)

one or more members of that class are within sub-paragraphs (a), (b) or (c); or

(ii)

to appoint a representative would further the overriding objective.”

The representation orders sought follow the form of appointing the first defendant

“in relation to questions 1, 2(a), 3(a), 4(a) and 5(a) to represent all those members in whose interests it may be to argue for a negative answer to each such question...”

Such an order was made by Warren J in PNPF Trustee Ltd v Taylor and others [2010] EWHC 1573 (Ch) at para 23 following a practice identified by him from some recent cases such as HR Trustees Ltd v German [2009] EWHC 2785 (Ch) (see paragraph 2 of the judgment) and Walker Morris Trustees Ltd v Masterson [2009] EWHC 1955 (Ch) (see paragraphs 11 to 12 of the judgment).

No submission was made to me suggesting that the practice was not warranted by the rules but as the representation order is an essential preliminary to any approval of a compromise on behalf of the represented class and, as I was told, this is the first case of which counsel were aware in which the court is invited to approve a compromise of this sort in the context of a scheme in deficit without a sponsoring employer it has been necessary to be satisfied as to the strength of all links in the chain.

The usual form of representation order provides that a given defendant is to represent others of a particular and fixed description such as the issue of A or the next of kin of B. Such orders are plainly warranted by the rule. But such an order is inherently unsuitable to issues in relation to entitlement under a pension scheme because benefit entitlement is not usually dependent on any such relationship. In such a case the practice is to appoint one defendant to represent all others entitled to the like benefit. Again such an order is plainly warranted by the rule. But where there is a range of issues, some alternative to or consequential on others, a given individual may not be able to represent the same individuals on all the various issues raised by the claim. In such a case the position is less clear.

It appears to me that the form of representation order sought in this case can only be authorised by sub-paragraph 19.7(2)(d)(i) of the rules if the word “claim” is read as including “part of a claim” or as equivalent to an “issue” in a claim. I heard no argument on this issue. But if the word “claim” does not admit of that meaning in that context then I have no doubt that sub-paragraph 19.7(2)(d)(ii) applies so as to authorise the order sought because, on this hypothesis, it would be impossible to settle disputed points of interpretation of a pension scheme in one Part 8 claim. In that event multiple Part 8 applications would be needed thereby greatly increasing the cost and expense to the benefit of no one. Accordingly, I conclude that the representation orders sought in this Part 8 claim are authorised by CPR rule 19.7(2) so as to confer jurisdiction on the court to approve the compromise propounded by the first three defendants.

The compromise for which approval is sought involves the acceptance of a liability of the Scheme for some £17.5m because to crystallise an unquantified liability at that level is said to be for the benefit of both sides to the argument. Initially no evidence was adduced on the question of whether if such additional liability was accepted the benefits of the scheme would still accrue to the members. Plainly, if the acceptance of that liability required the scheme to be wound up then the anticipated benefit might never materialise. Accordingly further evidence was obtained.

The actuarial valuation of the Scheme as at 31st December 2005 conducted by Mercers, the Scheme’s Actuary, revealed an estimated wind-up funding level of only 40% and, on an ongoing basis, a deficit of £56.4m or a 58% funding level. The actuarial valuation as at 31st December 2007 showed a slightly improved funding level on an ongoing basis of 61%. The comparable valuation as at 31st December 2008 was produced by Mercers in March 2010. It is the first valuation to be made after the approval of the Chapter 11 Plan I referred to in paragraph 6 above. It noted that the Scheme’s accounts then included the shares in SeaCo as an asset of the Scheme valued at £35m. The valuation of the Scheme as at that date revealed a winding up funding level of 64%. Finally the actuarial report as at 31st December 2009 gave the funding level as 70% or 46% dependent on whether or not the shares in SeaCo were or were not included at a value of £35m.

In addition Mercers produced for the purposes of s.179 Pensions Act 2004 a PPF Funding Update as at 31st December 2009 on 19th April 2010. It set out the position of the Scheme on the assumption, contrary to the basis of the proposed compromise, that the steps to equalise benefits to which I referred in paragraph 6 were successful. On that basis the funding level was 102% if the value of the shares in SeaCo was included but only 67% if it was not. These figures would reduce to 86.6% and 56.7% if the amount of the crystallised liability of £17.5m were added without additional assets being added to the Scheme under the Escrow Agreement. On the other hand I have seen evidence to suggest that the value put on the SeaCo shares may be on the conservative side and that further shares distributed to the Scheme under the Escrow Agreement may also improve Scheme funding.

On balance I accept this evidence as justification for accepting that the crystallisation of the liability at £17.5m will not preclude the Scheme continuing to be administered as a closed fund for the foreseeable future. On that footing I have no reason to conclude that the benefits on which counsel have relied as justification for the approval of the compromise would be illusory.

The Pension Protection Fund (“the PPF”) constituted in accordance with Part 2 of the Pensions Act 2004 may in the circumstances prescribed by ss.127 and 128 Pensions Act 2004 come under a duty to assume responsibility for a pension scheme falling within the description of eligibility contained in s.126. The Scheme is prima facie eligible. If the PPF did assume responsibility for the Scheme then it would be obliged to pay the compensation for which Schedule 7 Pensions Act 2004 provides, see s.162. Paragraph 35 of that Schedule contains provisions designed to preclude any last minute increase of liability to the detriment of the PPF. The Trustees and the proponents of the compromise are concerned to establish that if this compromise is approved the crystallisation of liability in the sum of £17.5m will not be nullified in the event of the PPF assuming responsibility for the Scheme within the next three years.

So far as relevant paragraph 35 provides as follows:

“35 (1) In this Schedule, in relation to the scheme, the following expressions have the meaning given by this paragraph–

"admissible rules";

"recent rule changes";

"recent discretionary increase".

(2)

The "admissible rules" means the scheme rules disregarding–

(a)

in a case where sub-paragraph (3) applies, the recent rule changes, and

(b)

in any case, any scheme rule which comes into operation on, or operates by reference, to the winding up of the scheme or any associated event.

(3)

This sub-paragraph applies if the combined effect of the recent rule changes and recent discretionary increases is such that, if account were taken of those changes and increases in calculating the protected liabilities in relation to the scheme at the relevant time, those protected liabilities would be greater than they would be if all those changes and increases were disregarded.

(4)

In sub-paragraph (3) "the relevant time" means the time immediately before the assessment period which begins on the assessment date.

(5)

Subject to sub-paragraph (6), "recent rule changes" means–

(a)

changes to the scheme rules which took effect in the period of three years ending with the assessment date, or were made in that period and took effect by reference to an earlier time, and

(b)

any scheme rules which come into operation on, or operate by reference to–

(i)

an insolvency event in relation to the employer or any associated event, or

(ii)

any prescribed event relating to the future of the employer as a going concern.

(6)

"Recent rule changes" does not include–

(a)

any scheme rules or changes attributable to paragraph 3 of Schedule 5 to the Social Security Act 1989 (c. 24), section 129 of the Pension Schemes Act 1993 (c. 48), section 117 of the Pensions Act 1995 (c. 26), section 31(4) of the Welfare Reform and Pensions Act 1999 (c. 30) or section 306 of this Act (overriding requirements),

(b)

any enactment, or any scheme rules or changes which are required or reasonably necessary to comply with an enactment,..”

The concern is that the compromise might be regarded as a recent rule change within paragraph 35(5) and therefore disregarded as required by paragraph 35(2)(a). The Trustees submit, and are supported by counsel for the first three defendants, that the approval of the compromise is not a rule change at all and therefore not a recent rule change within paragraph 35(5). They submit, in the alternative, that if the approval of the compromise is to be regarded as a rule change it is excepted from the operation of paragraph 35(5) by paragraph 35(6)(a) or (b) because such changes are required by the decision of the European Court in GRE v Barber [1991] QB 344, are an overriding requirement pursuant to s.117 Pensions Act 1995 or are required to comply with all the enactments I have mentioned.

The compromise propounded for the approval of the court takes the form of an agreement between the second and third defendants (together “the Employers”) and the Trustees. Its terms include a requirement that the Trustees continue to administer the Scheme on the same basis as that on which it had been administered, namely that the steps referred to in paragraph 3(2)-(4) were valid and effective and to pay from the funds subject to the trusts of the Scheme the various amounts of compensation I shall refer to later in greater detail. There is little doubt that the effect of the compromise is to change the rules. Not only does it give validity to past rule changes of dubious worth, but it provides for payments not prescribed by the rules. In the absence of adversarial argument and an issue requiring decision I am not prepared to conclude that approval of this compromise could not constitute a rule change. On the other hand I do not doubt that the material changes are either required by s.117 Pensions Act within paragraph 35(6)(a) or are reasonably necessary to comply with the current equal pay rules contained in ss.64 to 71 Equality Act 2010 within paragraph 35(6)(b). It follows that in my view the changes, if properly regarded as rule changes, are excepted from the operation of paragraph 35(2) by paragraph 35(6). The PPF were given the opportunity to appear and make submissions on these points but did not think it necessary to do so. They accepted that they would be bound by my decision. Accordingly I will make a declaration to the effect indicated and invite counsel to agree its form for submission to me.

Given that that was my conclusion I remained concerned that the PPF had not been given the opportunity to consider and deal with my concern that approval of the compromise involved, at least, a crystallisation of liability in the sum of £17.5m in a form binding on the PPF. I say “at least” because the description of crystallisation might be regarded as a euphemism for an increase in liability. Accordingly, I required a number of documents to be provided to PPF for their consideration. They helpfully replied on 13th December 2010 in the following terms:

“Some concern has been expressed as to whether the effect of the compromise will be to increase the liabilities of the Scheme without any equivalent increase in assets. We note that concern but the Board as a statutory corporation has not been given any powers to intervene in schemes which have not started an assessment period; the Board does not operate a pre-approval or clearance process to provide comfort for schemes which have not yet but may in the future commence an assessment period save to the limited extent provided in Regulation 2(3) of the Pension Protection Fund (Entry Rules) Regulations 2005 (referred to in shorthand as a compromise above PPF levels). It is for that reason that as set out in the correspondence (exhibited to the Third Witness Statement of Katherine Helen Dandy, trial bundle Vol D tab 6) the Board’s approach to litigation involving schemes not yet in an assessment period is not to participate unless an issue of general application arises, for example such as that which arose in the case of ITS –v- Hope and Ors [2009] 2818 Ch. The Pensions Regulator is of course aware of the Scheme and is no doubt being kept informed of developments.”

In those circumstances I am satisfied that the position of the PPF has been sufficiently considered.

I have applied the description of “the percentage method” to the basis on which this compromise is propounded. Counsel have identified the various issues which arise in relation to the issues of validity of the steps referred to in paragraph 3(2)-(4) above and have attributed a percentage to the chance of the Employers establishing that ground of validity. For example, Part B of the Claim Form specifies three issues or grounds by or on which the validity of the 1994 Decision might be established. They are a free-standing power of modification, extrinsic agreement and estoppel and consent of members. Each is reflected in a separate question. Counsel for the first defendant and counsel for the Employers then negotiated and agreed a compromise percentage. That percentage was used by the Scheme Actuary for the purpose of calculating an amount of compensation to be paid to the member whose interest was to establish invalidity. For example, it was agreed that the percentage prospect of the Employers establishing that a member who joined the scheme before 1991 had his or her benefits equalised with a normal retirement age of 65 by the 2002 Decision was 25%. This was translated by the Actuary into a normal retirement date of 60 plus 25% of the difference, that is 1.25, so as to measure the benefit lost to the member for his intervening service by reference to a normal retirement age of 61.25.

It is, of course, common for compromises to be negotiated on the basis of percentage chances of success. But, counsel normally recognise the hazards of litigation by the range they adopt. Thus it is rare to find an estimate of 100% or 0%. It follows that a percentage figure at one extreme of the practical range or the other may attribute a value where, in truth, none exists. Where the parties involved are negotiating on their own behalf no harm is done because counsel for each will satisfy himself that his client is getting at least a fair deal. But in a case such as this a small percentage chance of success may be translated into a substantial sum when, in truth, the prospects of success are illusory. In ordinary litigation that may be acceptable because of the benefit of certainty and paying to get rid of the nuisance value of the claim.

In this case the agreed percentages ranged from 20% to 45% and were translated by the Actuary into a liability of £17.5m. Given that the costs of the action, if fought to a finish, would not exceed £1m and it is agreed that no issue is more likely to succeed than to fail it must be questionable whether the proposed compromise merely crystallises an existing liability. I do not suggest that the method adopted is not a permissible method by which to devise a compromise of disputed issues in relation to a pension scheme such as this. Indeed it is hard to think of another. But I do consider that the details need to be scrutinised in considerable and more than usual detail.

The evidence before me includes substantial and detailed opinions of counsel for the first defendant and for the Employers. Neither has seen the opinion of the other. In addition I received the benefit of oral submissions from each in the absence of the other, cf Re Moritz [1960] Ch 251 and Re Eaton [1964] 1 WLR 1269. Each relied on the agreed percentage as demonstrating a benefit. In some cases that was because the agreed percentage was more than the lowest figure regarded as acceptable by that side. In others, though higher than that considered to be acceptable by that side at least less than the opening figure sought by counsel for the other negotiating party. I have already expressed my reservations as to the suitability of this process but, that said, I have no reason to doubt the genuineness of the negotiating process in this case. Accordingly, I accept that a benefit can be shown to accrue to each of the members and to each of the employers if this compromise is approved.

There are also a number of additional factors to be considered. Approval of the compromise will avoid the costs and relative uncertainty which a full trial of the Part 8 claim would occasion. The cost would not be insignificant and to the extent to which some of the percentages at the bottom end of the success scale might be considered to be generous mitigates to some extent any disadvantage or extra liability which might thereby arise. It is true that the costs would be payable as part of the costs and expenses of the Plan but a reduction in those costs will produce a larger surplus to be shared by the creditors including the Trustees. Further if the uncertainty is not resolved now, by action or compromise, but had to be resolved if and when responsibility for the Scheme was taken over by the PPF the costs would then be payable out of the assets of the PPF to the detriment of all with an interest in them.

The form of compromise also simplifies the future administration of the Scheme. The terms of the Scheme will be clear for the future and the benefits payable to the members will have been clarified. This should at least keep the costs of administration to a minimum.

In my view there is also a benefit to be derived from approval of the compromise in that it will, or should, speed up the distribution to be made to the Trustees from the assets subject to the Plan. An Equalisation Claim, as defined in the Escrow Agreement referred to in paragraph 6 above, is one relating to the additional cost of providing benefits to members arising from the decision of the European Court of Justice in GRE v Barber [1991] QB 344. The funds in the Escrow Account will only be released, as provided by clause 3.1 thereof, on receipt by the Escrow Agent of confirmation that:

“either

(i)

Reorganised SCL has agreed...that an equalisation claim exists...and...has obtained approval from...an English court of competent jurisdiction; or

(ii)

a final non-appealable judgment in respect of the Equalisation Claim...has been handed down by an English court of competent jurisdiction.

It follows that approval of the compromise will bring forward the time at which a further distribution of shares in SeaCo to the Trustees can be made. In my view that is a tangible benefit in that such shares will be taken account of in the Actuarial valuations as some mitigation of the liability of £17.5m if and insofar as that is more than a crystallisation of an existing liability.

For all these reasons I consider that the proposed compromise is for the benefit of all those represented by the First Defendant or the Employers. Further I see no reason not to exercise the residual discretion conferred by CPR Rule 19.7(6).

I invite counsel to agree the form of my order. The draft with which I was provided requires the amendments to which reference was made in the course of the hearing. I will make the declaration indicated in paragraph 6 and give the direction referred to in paragraph 7 so that the declaration may be binding on the PPF. I give liberty to apply in relation to any further matters which may require my approval.