Entrust Pension Ltd v Prospect Hospice Ltd

On 18 June 2012 I handed down judgment (“the June judgment”) on a number of issues of construction of the rules of an occupational pension scheme called the Federated Flexiplan No. 1 (“the Scheme”): see Entrust Pension Limited v Prospect Hospice Limited and another [2012] EWHC 1666 (Ch). On 9, 10 and 11 October 2012 the trial took place of certain consequential issues of fact which, in the light of the June judgment, need to be determined by the Court before the claimant and present trustee of the Scheme, Entrust Pension Limited (“Entrust”), can safely administer the benefits under the Scheme and in due course wind it up. This is my judgment on the trial of those issues of fact. It should be read as a sequel to the June judgment, and makes use of the same definitions. In particular, I will not repeat, but will take as read, the introductory, historical and background material contained in paragraphs 1 to 39 of the June judgment.

The representation of the parties was the same as it had been at the trial of the construction issues, with Mr Michael Furness QC appearing on behalf of Entrust, Mr Jonathan Evans and Ms Emily McKechnie appearing on behalf of the first defendant (joined on a representative basis to represent the interests of the employers under the Scheme) and Mr Fenner Moeran and Ms Jennifer Seaman appearing for the second defendant (joined to represent the interests of the members). As before, I have had the benefit of very full written and oral submissions, for which I am grateful.

The questions which I now have to decide arise, most directly, from my ruling on Issue 12, which affects all Scheme members who left the service of a participating employer with the right to a deferred pension under the 1976 Rules. I am not at this stage concerned with those deferred members, as it is convenient to call them, who left service either before 1 April 1976, when the 1976 Rules came into force, or on or after 1^st October 2005, the date when the 1976 Rules ceased to apply and the 2005 Rules came into force. As I shall explain, I am also not concerned with deferred members who left service while the 1976 Rules were in force, but who subsequently retired before 10 July 2006.

I dealt with Issue 12 in paragraphs 83 to 108 of the June judgment. The basic question was whether the previous trustee of the Scheme (“the Previous Trustee”) was under a duty to consider adding a share of surplus in respect of a deferred member’s pension, pursuant to rules 18(2) and 19(1) of the 1976 Rules, (a) at the date when the member left service, or (b) at the date when the member retired (which would usually be when the member reached the normal retirement age of 60). I held that the duty fell to be performed at the date when the member left service, and that this was also the date when the Previous Trustee should have determined the amount of deferred pension which would be payable to such members on retirement at normal pension age (albeit subject to reduction if the member then took early retirement as provided for by rule 19(3)). If for any reason the amount of a member’s deferred pension was not calculated as at the date of leaving service, as it should have been, I held that the member’s “pension capital” as at the date of leaving service (which would include any share of surplus awarded) should be increased annually until the member’s retirement by such amounts as the present trustee, having taken actuarial advice, should think fit.

These rulings were reflected in paragraphs 4 to 6 of the Order which I made on 11 July 2012, at the end of a hearing which had been fixed to deal with consequential matters arising from the June judgment:

“4.

The Trustee’s duties under [Rule 11(2) of the 1976 Rules], in respect of members falling within … Rule 19(1):

(1)

to consider whether to add an amount representing a share of actuarial surplus to the amounts credited to or in respect of a member in the account of the fund and

(2)

to convert the resulting sum into a pension payable from normal retirement date

fell to be exercised as at the date when the member in question left service under the Scheme.

5.

Where a member who leaves service before normal retirement date has become entitled to a deferred pension but no level of deferred pension has been ascertained as at his date of leaving service the Trustee shall award such amounts by way of annual increases in the amount standing to the member’s credit in the accounts of the Plan for the period between his date of leaving service and his retirement as it shall, having taken actuarial advice, think fit.

6.

In the event of a member who is entitled to a pension the amount of which has or ought to have been determined at the time of his leaving service before normal retirement date receiving payment of that pension before normal retirement date, the Trustee must make such adjustment as it thinks appropriate to the amount of the pension to reflect early payment.”

Rule 19(1) of the 1976 Rules provided that:

“A deferred pension granted out of the Fund pursuant to Rule 18 shall be calculated in the manner set out in Rule 11 based on the Member’s Pension Capital at the date of leaving the Service.”

Accordingly, when a deferred member became entitled under rule 18 to the grant of a deferred pension, the pension had to be calculated in the manner set out in rule 11, which provided for the calculation of a member’s pension on retirement, but on the basis of the member’s “pension capital” as at the date of leaving service. Under rule 11(2), a member’s “pension capital” comprised (a) the member’s Accrued Amount (as defined in paragraph 3 of the June judgment), and (b):

“such an amount (if any) as in the opinion of the Trustee may properly be added thereto as representing the retiring Member’s share of any actuarial surplus arising in the Fund as to which the decision of the Trustee shall be final and shall not be questioned.”

The proper construction of rule 11(2) was the subject of Issues 1 to 5 at the earlier hearing. The most important point for present purposes is that, as I held, members had no entitlement to be awarded a share of surplus in addition to their Accrued Amounts. The Previous Trustee had a discretion whether or not to credit a retiring member with a share of surplus, but was not obliged to do so. Equally, the amount to be credited by way of a share of surplus, if the Previous Trustee decided to exercise the power, was entirely a matter for its discretion. This was so whether the member was retiring from service at normal pension age, or whether the member was entitled to a deferred pension on leaving service at an earlier date.

As to the manner in which these discretions should be exercised, it was common ground by the date of the earlier trial that the Trustee’s power should be exercised (a) in good faith, with the Trustee giving genuine and responsible consideration to the exercise of its power; (b) for the purpose for which the power was given; and (c) giving proper consideration to the matters which were relevant, and excluding from consideration those which were irrelevant: see the June judgment at [74].

I also decided, in relation to Issues 13 and 14, that although the Previous Trustee’s duty to consider whether to add a share of surplus did not lapse merely because it was not performed within a reasonable time, the duty nevertheless became incapable of performance, and therefore lapsed for that reason, once the Scheme ceased to have any surplus over which it could be exercised: see the June judgment at [109] to [128]. In practical terms, this meant that the duty could be treated as having lapsed on 10 July 2006, that being the date when the Previous Trustee decided to discontinue its previous invariable practice of providing target benefits to members on retirement: see paragraph [7] of the June judgment. All members retiring after that date have been granted pensions based only on their guaranteed Accrued Amounts. Further, by virtue of paragraph 8 of the Order made on 11 July 2012, Entrust is now entitled, in administering the Scheme, to proceed on the footing that the Trustee’s duty to consider crediting a member with an amount representing a share of surplus under rule 11(2) of the 1976 Rules lapsed on 10 July 2006.

In these circumstances, it is clearly essential for Entrust to know whether the Previous Trustee actually performed its duty to consider adding a share of surplus and to determine the consequent level of pension at retirement in relation to members who (a) left service during the currency of the 1976 Rules, but (b) retired after 10 July 2006, or have not yet retired and remain deferred members at the date of this judgment. Those who retired before 10 July 2006 are not affected, because in accordance with the invariable practice of the Previous Trustee they will have been awarded target benefits on retirement, whether or not there had previously been an effective grant to them of a deferred pension based on their target benefits when they left service. By contrast, members retiring on or after 10 July 2006 will be confined to a pension based on their Accrued Amounts unless they can establish, the burden of proof being on them, that they were in fact awarded a deferred pension based on target benefits at the date when they left service. The making of such an award would have required a proper exercise by the Previous Trustee of the discretions to which I have referred. In the absence of a proper exercise of the discretions, there could have been no valid grant of target benefits to a deferred member when he or she left service.

This is the central issue raised in paragraph 2(4) of the re-re-amended claim form, which asks the Court to determine:

“Whether, on a true construction of the [1976] Rules and in relation to each Member of the Plan who left service before 1 October 2005

(a)

the Previous Trustee at any time in the past performed either of the duties referred to in questions (3) and (3A) above; and

(b)

if the answer to (a) above is “yes”, how and to what effect those duties were performed?”

The duties referred to in questions (3) and (3A) were, in effect, the duty to consider whether to add an amount in respect of a deferred member’s share of surplus on leaving service, and the duty to ascertain the amount of a deferred member’s pension at that date.

Despite this wide formulation of the question, however, it is common ground that in practice the only live issue in relation to the entire class of affected members (that is to say members who left service between 1 April 1976 and 30 September 2005, but retired after 10 July 2006 or have not yet retired and remain deferred members at the date of this judgment) is whether the Previous Trustee made a valid award of target benefits when the member left service, or whether (consciously or otherwise) it deferred making that decision until the member was about to retire. In view of the Previous Trustee’s invariable practice of awarding target benefits to members who left service on retirement at all times before 10 July 2006, it is not remotely plausible to suppose that the Previous Trustee might ever have consciously performed its duty to consider the exercise of its discretions in relation to a deferred member, but then decided either not to award a share of surplus at all, or to award a share of surplus different from that needed to produce target benefits.

It may be helpful at this stage to emphasise two points:

Counsel for the employers argued in this context that it would be wrong for me to start with any assumption that the Previous Trustee appreciated that it was under a duty to consider awarding a share of surplus, and to make an immediate grant of a deferred pension, when a member left service before retirement. Mr Evans pointed out that Entrust had felt sufficient doubt about these questions to seek a ruling on them from the Court; and, although I had decided them in the members’ favour, I nevertheless granted the employers permission to appeal. I agree that it would be wrong for me to start with any preconceptions, but I also think it is relevant to bear in mind that the construction of rules 18(2) and 19(1) which I adopted does in my view accord with the natural meaning of those provisions, whereas the argument for the employers did not shrink from submitting that something must have gone wrong with the drafting of rule 19(1) when it said that a deferred pension granted under rule 18 “shall be calculated … at the date of leaving the Service”. An argument of such relative legal sophistication is unlikely to have occurred to a layman, and it is in my view much more probable that, if any officer or employee of the Previous Trustee had taken the trouble to read the relevant 1976 Rules, he or she would have concluded that a deferred pension had to be both calculated and granted as at the date when a deferred member left service.

It is also convenient to record at this stage that, although I granted the second defendant permission to appeal on Issue 14 at the hearing on 11 July 2012, I refused to grant her a protective costs order for the prosecution of any such appeal. In the event, the second defendant was unable to obtain an alternative source of funding and no notice of appeal by her was lodged within the stipulated period. Since, in those circumstances, there was no challenge to my conclusion that the relevant discretions had lapsed when there was no longer any actuarial surplus in the Scheme, it became unnecessary for the first defendant to prosecute any cross-appeal on Issues 12 and 13, for which I had also given permission, so it too filed no appellant’s notice.

There is one further potential complication which I should mention. On 27 September 2012 a firm of solicitors, Plexus Law, instructed on behalf of Capita Pension Trustees Limited and two other companies in the Capita Group (together “Capita”), in their capacities as Previous Trustee and former providers of other services to the Previous Trustee in respect of the Scheme, wrote to Entrust’s solicitors giving notice of their intention to apply to the Court of Appeal as a non-party seeking permission to appeal in relation to Issue 12, and raising the question whether the forthcoming hearing of the second stage in the proceedings before me should be adjourned. Having considered the position, it was the common view of Entrust and both defendants that the second stage hearing before me should proceed as planned, despite the risk that the costs of it might turn out to be wasted if Capita were to make an application for permission to appeal, be granted permission by the Court of Appeal, and then succeed in overturning my decision on Issue 12. I agreed with the parties that, on balance, it would be preferable for the second stage hearing to proceed, and no application to adjourn it was made by Capita. Nor had any application to the Court of Appeal been made by Capita by the conclusion of the trial before me on 11 October 2012.

I preface my consideration of the general nature of the evidence with a brief résumé of the history of the trusteeship of the Scheme before Entrust’s appointment as the sole trustee on 15 May 2007. In his first witness statement on behalf of Entrust made on 17 June 2010, Mr Patrick Kennedy, who is a director of Entrust, summarises the previous position as follows:

“2.7

Prior to the appointment of Entrust as sole corporate trustee of the Plan, the trusteeship and the majority of the services provided in relation to the Plan (including administration, actuarial and investment advisory) were largely carried out within the Capita group of companies and, prior to their acquisition by Capita in September 2005, within the FPS Group of companies.”

In a little more detail:

It is usually unnecessary to specify which particular company was trustee at any given time before 2007, and I shall follow the parties in using the term “the Previous Trustee” as a convenient generic description. The most important point to note is that there were never any individual trustees. The Previous Trustee was always a single body corporate, which could only act through its duly authorised officers or agents in accordance with the usual rules of attribution (on which see the well-known observations of Lord Hoffmann, delivering the judgment of the Privy Council, in Meridian Global Funds Management Asia Limited v Securities Commission [1995] 2 AC 500 at 506-7).

In June 2010 Mr Kennedy exhibited to his first witness statement all of the documentary evidence relating to the affected members which was then available. This material is now contained in trial bundles 1 to 10. Further material which has come to light since June 2010 is contained in bundle 11. On the advice of Leading Counsel, Entrust prepared a Due Diligence Report dated 30 April 2009 which reviewed all the documentary evidence available at that time. The principal difference between the material reviewed and that subsequently exhibited to Mr Kennedy’s first statement is that the Due Diligence Report was prepared with sight of only a sample of the leaving service statements provided for affected members, whereas copies of all the then available statements had been obtained by June 2010.

The leaving service statements are of particular significance, because they were contemporary documents sent by the Previous Trustee to deferred members at or about the time when they left service, with the object (in broad terms) of providing such members with information about their pension entitlements. Large numbers of such statements survive, and they have been the subject of detailed and helpful analysis by counsel for the members. An earlier analysis was performed by Mr Kennedy in his first statement, from which I quote the following brief extracts:

“9.3

Entrust understands from KPMG, who have reviewed a sample of the statements and the calculations behind them, that where a deferred pension is quoted in a Leaving Service Statement the figure quoted will be the member’s Target Pension.

9.4

The Leaving Service Statements have been compiled into separate batches based on who issued the statements or when an individual issuer is not named the designation of the issuer, for example “Client Services” or “for the Trustee”. Batching the statements in this way illustrates the different types of statements that were issued by different individuals from time to time.

9.5

We have prepared a schedule setting out the years in which the communications contained in each batch were issued …

9.6

This schedule reveals the overlapping years in which different statements were being issued by the Previous Trustee. The years 2001 to 2007 appear particularly active. During that period different types of documents or communications were issued as follows [particulars are then given, ranging from a maximum of eight different types in 2001 to a minimum of three in 2007]. By 2008 just one form of statement is being issued but the picture before 2008 is one of multiple communication types …”

The Due Diligence Report was a detailed and careful piece of work, and I have read it with care. If I say little about it in this judgment, that is not because I regard it as unhelpful, but merely reflects the fact that it has no evidential weight, because its authors had no first hand knowledge of the relevant events, and the fact that it was based on only a sample of the leaving service statements.

The significance of the leaving service statements is enhanced by the complete absence of any documents which either show or record the internal decision making process of the Previous Trustee in relation to the present issue, and the absence of any witness who is able and willing to give evidence about it.

So far as the documentary record is concerned, I am satisfied that the evidence is as complete as can reasonably be expected, and that appropriate searches have been made by Entrust, both of its own initiative, and through the Special Consultant (mentioned below), and in response to requests made on behalf of the members by the second defendant’s solicitors, Eversheds LLP. Such minutes as survive of the meetings of the Previous Trustee are relatively recent (the earliest appears to date from 1996), and are completely silent about the policy (assuming that there was one) which lay behind the despatch of leaving service statements to deferred members. Nor, it seems, can any light be thrown on the question retrospectively by looking at the policy which the Previous Trustee adopted when granting target benefits to members who were still in service when they retired. That had been the invariable practice since the inception of the Scheme in 1966, but no record survives of the initial adoption of the policy, or of how (if at all) it was kept under regular review.

The absence of any oral evidence needs a little more explanation. It is hardly surprising that no witness can be found to give first hand evidence about the operation of the Scheme in relation to deferred members in the early years, but one might have expected that at least some first hand evidence would be available from (say) 1990 onwards. One explanation appears to be that, with one exception, none of the potential witnesses any longer works for Capita. Another reason may be that Entrust has sued Capita for negligence in its previous administration of the Scheme, so it is anyway unlikely that present or former employees of Capita would be willing witnesses in the present action. The potential witness who at first sight seems most likely to have been in a position to supply relevant information is Mr David Braithwaite, who was a director of Federated Pension Services (Guarantee) Limited from September 1991 until June 2002, and of FPS Trustee Company Limited from August 1995 until April 1998. Mr Braithwaite was already the deputy general manager of Federated Pension Schemes in the mid-1980s, and he worked for the Previous Trustee for a number of years in various capacities until his retirement. He has twice been asked, first in 2009 and again in July 2012, whether he would be willing to provide a witness statement for use in the present action, but on each occasion he has declined. Among other things, he apparently thought it unlikely that his recollection of events up to 15 years ago would be clear enough, even with the assistance of documents, to be of much use, and he thought “he would be very likely to get things muddled”. In the circumstances, it is perhaps unsurprising that no party has taken steps to compel Mr Braithwaite to give evidence. The one potential witness who is still employed by the Capita Group is Mr Steve Jones, but again no steps have been taken to compel his attendance.

The nearest that I have to any direct evidence comes from Mr Paul Sturgess, who was described in the Due Diligence Report as “the Special Consultant”, apparently because he had performed a consultancy role for the FPS Group before and at the time of its acquisition by Capita in September 2005. For that reason, various sources of information were uniquely available to him, and after attending a consultation with leading counsel for Entrust in January 2009 he was asked to provide answers to a number of questions, which he did in a report (“the Special Consultant’s report”) supplied under cover of a letter dated 8 April 2009. In answer to the question “How were deferred members’ benefits calculated?”, Mr Sturgess said this:

“In practice, until 14 July 2006 the trustee exercised a blanket trustee discretion that deferred members’ benefits (a) would not be allocated a share of surplus at the point of deferment and (b) would be paid at the Target Benefit level at the point of retirement.”

On the face of it, this statement appears to provide clear support for the proposition that the policy of the Previous Trustee had never been to allocate a share of the surplus to deferred members when they left service. Unfortunately, however, the weight which I can attach to this statement is in my judgment very limited. In the first place, it is not contained in a witness statement verified by a statement of truth, and no party has called Mr Sturgess as a witness. Secondly, Mr Sturgess provided no evidence in the report to support his proposition (a), nor did he state the grounds for his belief. Thirdly, it is in any event unclear how far back in time his recollection actually went, or whether he had any basis at all for saying what the policy of the Previous Trustee had been in (say) the 1980s. Fourthly, it is clear from Mr Sturgess’s covering letter of 8 April 2009, and from a reading of the Special Consultant’s report as a whole, that Mr Sturgess was concerned to defend Capita’s past conduct in administering the Scheme, and it is not clear to me that he was trying to answer the questions put to him from an impartial point of view. For example, although he cited a number of documents as being consistent with the position which he had stated, he said nothing at all about possible indications the other way, including in particular many of the earlier forms of leaving service statements.

With the exception of the leaving service statements, the other main categories of secondary evidence comprise the booklets and other announcements distributed to members of the Scheme over the years, and the regular actuarial valuations. Neither category of material is complete, particularly in the earlier years. There is a helpful summary of the material in the Due Diligence Report, which is far too long to reproduce, but may be summarised by saying that any assistance to be derived from it is in general both indirect and inconclusive.

The difficulty of drawing any firm conclusions from this material is reinforced by the thoughtful observations of Mr Furness QC on behalf of Entrust, from a neutral standpoint, in his skeleton argument for the hearing:

“21.

The Claimant’s concern, having reviewed this evidence, is that while there is clear evidence that the Previous Trustee had decided from the outset to run the Scheme on the basis that all members would receive target benefits, there is no clear evidence that the Previous Trustee ever appreciated that there was a need to take a decision about members who left service when they left service. The fact that pensions were only put into payment on retirement meant that there was, in reality, no apparent need to decide on the share of surplus before that date. The Scheme could be run on the assumption that target benefits would be provided on retirement, without any need actually to address the question as to what share of surplus was to be allocated on leaving service.

22.

This is borne out by the actuarial valuations. These proceed on the assumption that [deferred members] will get target benefits. But one cannot infer from that assumption that the Previous Trustee had necessarily already granted target benefits to each deferred member, because the same assumption is always made for active members. Clearly no share of surplus had yet been allocated to them …

23.

Similarly, the fact that many of the early leaving service benefit statements give target benefits may simply reflect the view that in due course target benefits would be available. It is not necessarily the case that the Previous Trustee was at any point directing its mind to the possibility that the surplus might run out before the then current [deferred members] actually retired. The fact that many of them also refer to benefits accruing interest in deferment suggests that the mechanics of the grant of deferred benefits had not been fully thought through, as does the fact that there was not a consistent approach to the wording of Leaving Service Statements even during periods when the majority of such statements might be thought at least consistent with the discretion having been exercised at the point of leaving service …”

I have already explained how the leaving service statements which survive were divided into separate batches by Entrust based on the name or designation of the issuer. Some of the categories are not, strictly speaking, leaving service statements as such, but related documents such as forms setting out the options available to departing members, or confirmations issued after the return of an option reply form. Nor is it always possible to identify a particular issuer, either by name or designation. Provided these qualifications are borne in mind, however, it is convenient to refer to the documents collectively as the leaving service statements. They are exhibited to Mr Kennedy’s first statement in 24 batches. The first 17 batches, with a rough indication of the dates when they appear to have been in use, are as follows:

One of the directions which I gave on 11 July 2012 was that the second defendant should file a statement by no later than 17 August 2012 setting out the categories of members in respect of whom she intended to argue for an affirmative answer to the question posed in paragraph 2(4)(a) of the re-re-amended claim form. Pursuant to this direction, the second defendant identified three categories of deferred members for whom it would be argued that the discretion was exercised at the date of leaving service. The first category comprised all those members identified by reference to the documents contained in Mr Kennedy’s batches (1) to (17) inclusive. The second category contained one name only, that of Mrs Sarah Louise King, while the third category listed 57 named individuals by reference to additional documents provided to the second defendant under cover of letters dated 30 July and 2 August 2012.

The remaining batches in Mr Kennedy’s classification, numbered (18) to (24), appear to have been in use between 2002 and 2008. With the exception of two miscellaneous documents which comprise batch 24, they all either contain references to a deferred pension based on both Pension Capital (in the limited sense of Accrued Amount – a frequent and potent source of confusion in the documentation) and on Target Pension, or else contain only a reference to Pension Capital (in the sense of Accrued Amount). For that reason, counsel for the members realistically concede that it is impossible to argue that the members concerned were granted deferred pensions based on target benefits alone when they left service.

By the date of the trial, counsel for the members had made some further refinements to their classification of the leaving service statements. In their skeleton argument they said that they would only be arguing in favour of those members who received documents in 14 categories which they labelled A to M. I will have to examine these categories in more detail later on, but for now I record that categories A, B, C and D all fall within Mr Kennedy’s batch (1); category E falls within batch (2); categories F, G, H and I fall within batch (5); category J falls within batch (6); category K falls within batch (7); category L falls within batch (14); and category M falls within batch (15). Four further categories, N, O, P and Q, falling within Mr Kennedy’s batches (18), (20) and (21), exemplify the types of statement in respect of which counsel accepted that no argument could properly be advanced. Specimen documents from each of the categories (A) to (Q) were helpfully included in the core bundle.

Given the almost complete absence of primary evidence, it is relevant to consider whether there are any points of principle which should guide me in my examination and assessment of the indirect, or secondary, evidence from which inferences may legitimately be drawn about what the Previous Trustee actually did. I begin by recording two matters which were common ground between counsel for the members and counsel for the employers.

First, it is agreed in principle that the Previous Trustee could have validly exercised the relevant discretion without there being a record of it in a formal minute of a board or trustee meeting. It would suffice if a suitable officer or employee, with the appropriate authority to represent the “controlling mind” of the Previous Trustee for this purpose, took the decision to exercise the discretion. Such authority could, if necessary, have been delegated by the board either formally or informally.

Secondly, it is agreed that the Previous Trustee was not entitled either to fetter the future exercise of its discretion, or to exercise it pre-emptively. On the other hand, it would in principle have been possible for the Previous Trustee to adopt a general, or blanket, policy to allocate surplus to deferred members in such a way as to permit the payment of target benefits when they exceeded those which could be funded by a member’s Accrued Amount, and then to implement that policy on a case by case basis, whether by taking a decision at board level on each occasion or by conferring properly delegated authority on another person who then took a decision on each occasion. It would, however, have been the duty of the Previous Trustee to keep any such policy under review, and to consider from time to time whether it should be maintained or revised.

The latter point may, I think, be more accurately expressed by saying that, once the Previous Trustee had decided to adopt a general policy as to the future exercise of its discretion, the only positive requirements were that it should continue to keep an open mind when occasions for exercise of the discretion arose, and it should never purport to bind itself to exercise the discretion in the future. There is no further positive requirement for the policy to be consciously reviewed from time to time, nor is there a maximum period after which it must lapse in the absence of active reconsideration. To make the point in less abstract terms, I consider that it would in principle have been open to the Previous Trustee to adopt a general policy at or around the time when the 1976 Rules came into force, to the general effect that a deferred pension based on target benefits would be awarded to members who left service before retirement, and that this policy would remain in force indefinitely provided that the funding position of the Scheme remained strong enough to justify its continued application and there were no other material changes of circumstance. Mr Moeran cited in this context Lewin on Trusts, 18^th edition (2008), at paragraph 29-205:

“Similarly, trustees may properly adopt a general policy as to the future exercise of their powers and discretions, provided that they do not thereby purport to bind themselves. Indeed, when delegating their powers of investment, they are required by statute to adopt a policy for the guidance of their agent [the reference is to section 15(2) of the Trustee Act 2000].”

I did not understand Mr Evans to dissent from this statement, which I consider to be correct in principle.

I now turn to consider whether any assistance can be gained from the presumption of regularity, which is sometimes expressed in the Latin maxim “Omnia praesumuntur rite esse acta”. The principal circumstances in which the presumption has been applied appear to be cases where certain formal requirements have to be satisfied, or where due to the lapse of time it would be unreasonable to expect primary evidence to be adduced in order to establish the lawful origin of a proprietary right: see Halsbury’s Laws of England, 5^th edition, volume 20, paragraph 1103 where several examples are given. The presumption is, at least normally, a presumption of fact, not law, and as such it is rebuttable by evidence to the contrary. So viewed, the term “presumption of fact” is in my judgment something of a misnomer, because such a presumption does not shift the persuasive or evidential burden of proof on the relevant issue, but merely “describes the readiness of the court to draw certain repeated inferences as a result of common human experience”: see Phipson on Evidence, 17^th edition (2010), paragraph 6-17, and also paragraph 1-17 where it is said that “Not only are [presumptions of fact] always rebuttable, but the trier of fact may refuse to make the usual or natural inference, notwithstanding that there is no rebutting evidence”.

Mr Moeran drew my attention, in this connection, to the judgment of Lindley LJ in Harris v Knight (1890) 15 PD 170 at 179-80, where in relation to the question whether a lost will had been duly executed and attested, he said this:

“The maxim, “Omnia praesumuntur rite esse acta”, is an expression, in a short form, of a reasonable probability, and of the propriety in point of law of acting on such probability. The maxim expresses an inference which may reasonably be drawn when an intention to do some formal act is established; when the evidence is consistent with that intention having been carried into effect in a proper way; but when the actual observance of all due formalities can only be inferred as a matter of probability. The maxim is not wanted where such observance is proved, nor has it any place where such observance is disproved. The maxim only comes into operation where there is no proof one way or the other; but where it is more probable that what was intended to be done was done as it ought to have been done to render it valid; rather than that it was done in some other manner which would defeat the intention proved to exist, and would render what is proved to have been done of no effect.”

This passage appears to suggest that the maxim will be of assistance only where there would otherwise be no proof one way or the other; but since the maxim is also stated to be “an expression … of a reasonable probability” and “an inference which may reasonably be drawn”, I would respectfully question whether it really adds anything to the power which the court anyway has to make a finding of fact on the balance of probabilities based on inferences drawn from circumstantial evidence. But if that is right, the so-called presumption is really no more than a rebuttable statement, founded on common sense and experience, of the inference that it will normally be appropriate to draw in a given situation where primary evidence is lacking.

No doubt with these uncertainties about the scope and nature of the presumption in mind, counsel were in general agreement that I would be likely to find it of only marginal assistance. I agree. The principal matter which the members have to establish is that the Previous Trustee did in fact exercise its discretion in their favour on leaving service. Resolution of that question depends on an examination of all the relevant secondary evidence, and is not assisted by any presumption of regularity based on common sense or common experience. If, however, I were to be satisfied that the Previous Trustee did indeed adopt such a policy, I think that there could then be modest scope for application of the presumption in relation to more formal issues such as whether a valid decision to adopt the policy had been taken, or whether those who made the necessary calculations and despatched the leaving service statements to members were duly authorised to do so. And even then, I would not regard the so-called presumption as adding anything, on analysis, to an inference which it would anyway be open to me to draw in the usual way on the balance of probabilities.

A separate point, which needs to be carefully distinguished from the so-called presumption of regularity, is that there may be a valid implied exercise of a power, even if the donee of the power is unconscious of its existence or mistaken as to its terms and ambit. The principle is stated by the editors of Lewin on Trusts at paragraph 29-176, as follows:

“There may be a good exercise of a power without any reference to the power, even in general terms, or to the property (if any) subject to it and without taking the least notice of it. When, in the case of a dispositive power, the intention to pass the property can be collected then it will pass under the power, if the exercise of the power is necessary for the disposition to take effect; an intention to dispose of the property is enough and there is no need to show also an intention to dispose of it [by] means of the power … Since the intention to exercise the power is inferred from the intention to effect the given transaction, it does not matter that an actual intention to exercise the power cannot be discerned, unless a positive intention not to exercise it is to be inferred.”

The leading recent authority on this doctrine is the decision of Scott J, as he then was, in Davis v Richards & Wallington Ltd [1990] 1 WLR 1511, where one of the issues was whether two deeds governing a pension scheme had been validly executed by the parent company and two of the three trustees, in circumstances where the third trustee still held office as a trustee, even though he had purportedly resigned his office by letter, his name had been struck out from the deeds, and he was no longer willing to act as a trustee. Scott J held that the deeds were validly executed, on the basis that the parent company had power to remove the third trustee from office, and could properly have exercised that power in order to bring about the result contemplated by the two deeds: see 1530A to 1531F. After referring to some nineteenth century cases, and the seventh (1845) edition of Sugden on Powers, Scott J formulated the principle in general terms at 1530F-H as follows:

“A disponor (A) purports to make a disposition of property. The disposition cannot be effective unless associated with the exercise of a power vested in A and that A could properly have exercised in order to make the disposition. The disposition makes no mention of the power and does not purport to be an exercise of it. The effect of the principle and cases to which I have referred is that A’s intention to make the disposition justifies imputing to him an intention to exercise the power, provided always that an intention not to exercise the power cannot be inferred. If the requisite intention can be imputed, the court will treat the disposition as an exercise of the power.”

Nor does it matter if the evidence shows that it is impossible to infer a positive intention to exercise the power, as Scott J made clear at 1531C:

“The facts of this case make it impossible, I agree, to infer that positive intention. The intention will, however, be imputed to Industries unless the facts of the case justify the inference that Industries had the positive intention not to exercise the power.”

The relevance of this principle, for present purposes, is that there could have been a valid exercise by the Previous Trustee of the discretion conferred on it by rules 19(1) and 11(2) of the 1976 Rules to award a share of surplus and grant an immediate deferred pension to a member on leaving service, even if the Previous Trustee was unaware of the existence of the power, or was aware of it but under some misapprehension about its meaning. There would nevertheless have been a valid exercise of the power if the evidence established, on a balance of probabilities, that the Previous Trustee (a) added an amount in respect of the member’s share of surplus when the member left service, (b) determined the level of the member’s deferred pension at that date, and (c) positively intended those transactions to take effect, unless there were grounds for inferring a positive intention not to exercise the power.

I will now review the evidence in detail, taking it in broadly chronological order. I will express some provisional conclusions as I go along, but these should not be read as in any way prejudging my ultimate conclusions, which will depend on an assessment of the evidence as a whole.

The early years: 1968 to 1988

The earliest rules of the Scheme were of course not the 1976 Rules, but the 1968 Rules. Very few documents survive from the period of currency of the 1968 Rules, but it is appropriate to start with them because they help to place in context the 1976 Rules and the earliest leaving service statements issued under them. Rule 21(4) of the 1968 Rules conferred the right to a deferred pension on Class A members who left service and satisfied various conditions. The time of payment, and method of calculation, of the deferred pension were provided for by rule 22(1), as follows:

“Where a Member has become entitled to a deferred Pension pursuant to Rule 21 then … such Pension shall commence [either on retirement or on earlier permanent incapacity] such deferred Pension to be based on the full amount of such Member’s actuarial interest in the Pension Fund and to be of such an amount as shall be certified by the Actuary to be appropriate having regard to such Member’s age and the amount of his contributions with interest and any other relevant facts and so that the Actuary’s decision shall not be questioned by any person in any circumstances.”

Rule 22(1) had to be read in the light of rule 14, which provided for the grant of a pension on retirement based on the member’s “Pension Capital” in terms very similar to those subsequently contained in rule 11 of the 1976 Rules.

These provisions were reflected in the earliest guide for employees which was issued in June 1969. Paragraph 7 summarised the benefits payable on retirement, expressing the hope, but without any guarantee, that they would together approximate to target benefits, while paragraph 11 said that a member who left service and satisfied the relevant conditions “will be granted a deferred pension (see paragraph 12 below)”. Paragraph 12 then said that a deferred pension and lump sum, calculated as in paragraph 7, would be payable on retirement or on permanent incapacity.

To my mind it is reasonably clear from these provisions that, as under the 1976 Rules, it was necessary for the amount of a member’s deferred pension to be calculated as at the date when he left service, even though it would not become payable (in the normal way) until his subsequent retirement. Against this background, I must now examine the earliest surviving letter emanating from the Previous Trustee in relation to a member who had left service. The letter was dated 7 May 1968 and related to a Miss Priscilla Anne Dick, who had evidently left the service of a participating employer. The letter was written by a “Deputy General Manager”, and addressed to the secretary to the trustees of the P & O Sea Staff Pension Fund, possibly in connection with a proposed transfer of benefits. The letter reads as follows:

“Further to my letter of the 30^th April [which does not survive], I am now able to advise that there will be preserved for the above named in the Group Scheme a guaranteed pension from age 60 of not less than £ … per annum in respect of her service with you between 1^st October 1967 and 29 March 1968.

I would be grateful if you would advise her accordingly, and would you also ask her to let us know of any subsequent change in her position so that we can advise her accordingly.”

It seems clear that this letter was not provided for merely illustrative purposes, and that it recorded the entitlement of Miss Dick to a deferred pension from age 60 in respect of her short period of service within the Scheme. The language naturally suggests that the deferred pension had already been awarded, and that its minimum amount was fixed, presumably subject to unspecified increases during the period of deferment. The language certainly does not suggest that either the entitlement to, or the basic amount of, the pension still remained to be determined in the future. Further, the natural inference is that the amount of Miss Dick’s future pension had been certified by the Scheme Actuary pursuant to rule 22(1), because in the absence of such a certificate there was no way in which the writer of the letter could have specified the amount of her future pension.

Similar inferences may be drawn from the earliest category A letters written by Mr Runciman during the currency of the 1968 Rules. For example, on 12 June 1970 Mr Runciman wrote to a Miss M S Russell in the following terms:

“With reference to the termination of your appointment with [a specified employer] … under the Rules of the above Scheme accrued pension rights fall to be preserved by way of a deferred pension. I confirm that we have arranged accordingly and that the pension amounts to £… per annum, normally payable from age 60 on 29 June 2001. In calculating this pension we have had regard to contributory service under the Group Scheme between 5 February 1968 and 21 February 1969.

You should keep this correspondence by you for reference and I would ask you to notify us of any change of address. In all future correspondence please quote your membership number.”

As before, this letter clearly appears to evidence the actual grant of a deferred pension (“we have arranged accordingly”), in an amount which could only have been derived from a certificate by the Actuary under rule 22(1).

The 1976 Rules came into force on 1 April 1976. The changes in relation to deferred pensions were expressly drawn to the attention of employers by the Previous Trustee in a letter to them dated 16 March 1977 from the General Manager and Secretary of Federated Pension Schemes, Mr M Catling. In particular, he said this:

“2.

A copy of the revised Trust Deed and Rules is enclosed for your retention and inspection by Members on request together with a supply of revised employee’s Guides for issue to existing members and subsequent new entrants …

3.

There is very little difference between the old and the revised Rules of the Scheme; however your attention is drawn particularly to Rule 18 which now contains the provisions of the 1973 Social Security Act regarding preservation of benefits for those Members who leave your employment and for whom a transfer value cannot be paid. If they have five or more years of Qualifying Service and have reached the age of 26 a refund of contributions cannot be made and the only alternative to a transfer value is a deferred pension payable at age 60 in normal circumstances or earlier on permanent incapacity or at the request of the Member at a reduced rate on or after age 50.”

Mr Catling went on to explain that no distinction had been made between service before and after 5 April 1975 in defining Qualifying Service, with the result that a deferred pension under rule 18(3) could be offered as an alternative to a return of contributions, however short the member’s service had been. Mr Catling described this as “a particularly valuable concession to the member with only a short period of service”, and continued:

“However, we are conscious that it was not possible to consult employers before the Rules were amended; nevertheless, for the above reasons we hope you will feel able to concur with our conclusions. If, however, you envisage any difficulty please let me know.”

It seems clear from this letter that the amended provisions relating to deferred pensions in the 1976 Rules must have been at the forefront of the Previous Trustee’s corporate mind both when the 1976 Deed and Rules were being drafted and after they had been brought into force. I therefore infer that due notice would have been taken by the Previous Trustee of the fact that it would now be responsible for the grant and calculation of deferred pensions pursuant to rules 19(1) and 11(2), whereas previously the amount of a deferred pension had been a matter for the Actuary to decide under rule 22(1) of the 1968 Rules. I have also drawn attention (in paragraph 14 above) to the fact that the natural reading of rule 19(1) of the 1976 Rules is that the amount of a member’s deferred pension had to be calculated at the date of leaving service, not at the date of subsequent retirement. In those circumstances, I would expect the Previous Trustee to have put machinery in place to ensure that the necessary grant and calculation of deferred pensions took place within a relatively short time after the date when a member left service. It would also have been necessary to make arrangements to inform departing members of the various options open to them, such as an election for a transfer payment into another pension scheme under rule 18(1) or a return of contributions under 18(3).

It is also relevant to note how the position was explained to members and employers. The second edition of the Employee’s Guide, dated October 1976 and expressed to be operative from 1 April 1976, set out the options on changing or leaving employment in paragraph 11, and said that a member for whom a transfer value was not payable, and who had not received a refund of contributions, “can ask instead for a deferred pension – see paragraph 12”. Paragraph 12 then said:

“A deferred pension will be calculated in the manner set out in paragraph 7(a) based on his Pension Capital at the date of leaving the Participating Employer’s service, increased at the rate of 3% per annum compounded for the period from the date of leaving, and is payable: -

(a)

when the member attains Normal Pension Age under the Group Scheme

or

(b)

after attaining age 50 at the member’s request as outlined in paragraph 7(c)

or

(c)

on permanent incapacity

whichever first occurs.”

It seems to me to be clearly implicit in this language that the member’s Pension Capital (in the rule 11(2) sense – see paragraph 7(a) of the Guide) was envisaged as being calculated as at the date of leaving service, and that the deferred pension would be calculated on the basis of that amount increased at the stated annual rate until the pension became payable. The reference to annual increases, however, betrays a certain confusion, because a member’s Pension Capital (as defined in the 1976 Rules) was meant to include the member’s appropriate share of actuarial surplus in the fund, and not itself to be subject to future annual increases. However, the booklet was only intended to give “a simple outline” of the Scheme, and the point I would emphasise for present purposes is that it envisaged the ascertainment of a member’s Pension Capital when he left service, and the immediate grant of a deferred pension based on it.

So far as employers were concerned, an outline of the Scheme prepared by the Previous Trustee in April 1977, and primarily designed for those with 15 or fewer employees, summarised the position for members leaving employment before normal pension age as follows:

“The member will have the choice of:

(a)

a return of his own contributions with interest at 3% less tax …;

(b)

a deferred pension appropriate to the member’s total stake in the Fund (i.e. including the benefit of employer’s contributions), payable on reaching age 60;

(c)

a “transfer value” appropriate to the member’s total stake in the fund.

Note: In certain circumstances a deferred benefit under (b) is compulsory”.

I now turn to the surviving letters which were sent to members leaving service in the early years of operation of the 1976 Rules.

On 21 July 1977 Mr Runciman, by now described as “Principal Assistant” under his signature, wrote to a Miss Jennifer Yates as follows:

“FEDERATED GROUP PENSION SCHEME FPS 6912

YOUR MEMBERSHIP NUMBER 9040

Further to my letter of 26 May, I confirm that we have set up a deferred pension which is guaranteed to be not less than £… per annum, i.e. 1/60^th of pensionable remuneration (£…) for each year of Scheme membership. This pension will be payable on attainment of age 60.

In the event of your death occurring before the commencement of the above pension, a lump sum in lieu will become payable under the Rules.

You should keep this letter with your other personal papers for reference …”

I infer from the reference to earlier correspondence that the options available to Miss Yates on leaving service had been explained to her, and that she had either chosen to take a deferred pension or it was compulsory to grant her one. Mr Runciman was now writing to confirm that the pension had been set up – not that it would be set up at some future date, that it was guaranteed to be not less than her target benefits at the date of leaving service, and that the pension would be payable when she was 60.

I comment that the only way in which Miss Yates could have been granted a deferred pension payable at 60, based on her target benefits at the date of leaving service, was by means of a valid exercise by the Previous Trustee of its discretion (under rule 11(2) as applied by rule 19(1)) to award her a share of actuarial surplus which, when added to her Accrued Amount, would have been sufficient to fund those benefits. All the indications, to my mind, are that the Previous Trustee intended to make a valid award of a deferred pension to Miss Yates, and that it thought it had already done so by the time when Mr Runciman wrote to her on 21 July 1977. There is certainly nothing to suggest that the Previous Trustee intended to do anything not authorised by the 1976 Rules. My provisional inclination, therefore, would be to infer that the Previous Trustee had directed its mind to the relevant rules, had made a positive decision to grant an immediate deferred pension to Miss Yates, and had either allocated a fixed share of surplus to fund it or, I suspect more probably, had decided to commit a sufficient share of surplus to fund the promised benefits, but without performing a separate calculation of the necessary amount at that stage. A failure to allocate a specific share of surplus at the time when the pension was granted would not, in my view, have invalidated the exercise of the power, so long as the Previous Trustee had reasonable grounds for believing that the financial position of the Scheme was healthy enough to permit the continued provision of target benefits for members on retirement. In practice, that continued to be the position, as reflected all of the surviving actuarial reports, until at least March 2002: see paragraphs 26 to 32 of the June judgment.

Nor do I consider that an exercise of the discretion would necessarily have been invalidated by the fact that the pension was said to be of a given minimum amount. This may merely have reflected the general power to increase benefits (including deferred pensions payable under rule 18) conferred on the Trustee by rule 21 of the 1976 Rules. Alternatively, the pension may have been granted in an amount calculated as at the date of leaving service, but subject to fixed or discretionary annual increases during the period of deferment (compare paragraph 12 of the 1976 Employee’s Guide). Such a procedure may not have been in strict compliance with rule 11, which seems to require the amount of a pension to be fixed from its inception, and to be funded by a member’s ascertained Pension Capital, but in practice the question of revaluation during the period of deferment had to be dealt with in one way or another, and it should not matter whether this was in fact done by the application of built-in assumptions resulting in the immediate ascertainment of a fixed pension payable at retirement, or by the grant of a pension calculated as at the date of leaving service but subject to annual increases. To my mind these are matters of machinery rather than substance. In my judgment, the critical requirements for a valid exercise of the discretion were:

It is worth noting, in this connection, that when the Scheme Actuary valued the Scheme as at 31 March 1978 it pointed out to the Previous Trustee that paragraph 12 of the Employee’s Guide was in error in saying that deferred pensions would be increased by 3% per annum during the period of deferment. In a letter sent to employers in November 1979, Mr Catling said this:

“During his valuation of the Scheme the Actuary has drawn our attention to an error in the Employee’s Guide. This is in the first part of paragraph 12 relating to increases in deferred pensions. Again, although it is our intention to increase such pensions by 3% p.a. during the period of deferment so long as the resources of the fund permit, we cannot guarantee this and the point ought to have been clarified when the Guide was re-printed.”

This document may be read as supporting the view that the Previous Trustee never in fact intended to make an irrevocable grant of a deferred pension when a member left service, because if such a pension were granted with fixed annual increases of 3% during the period of deferment, the Previous Trustee would have had no discretion to revisit that element in it, and should already have satisfied itself that there were sufficient resources to fund it. On the other hand, the letter still seems to envisage that there is a deferred pension in existence which is subject to annual increase, resources permitting. A possible reconciliation of the apparent confusion might be that the error in paragraph 12 lay in promising fixed, rather than discretionary, increases during the period of deferment, and not as casting doubt on the proposition that, once a deferred pension with annual increases had been granted, the Previous Trustee was committed to honouring it.

Mr Runciman appears to have continued to issue letters to members on leaving employment in similar terms to his letter to Miss Yates, until about mid 1978. Thereafter there was no reference to a guaranteed minimum amount of pension, but instead a form of words exemplified by his letter of 30 October 1978 to a Ms Jane Bartlett:

“I confirm that we have arranged accordingly and on the current basis of assessing Group Scheme benefits this amounts to: -

Deferred Pension £… p.a.

Deferred Lump Sum £…

These benefits will be payable on attainment of age 60.

In the event of your death occurring before the commencement of the above pension, a lump sum in lieu will become payable under the Rules.”

Letters in this form continued to be sent by Mr Runciman until the last surviving example on 12 June 1981.

Whether the new form of words reflected a change of actual practice by the Previous Trustee is at this distance of time impossible to say. However, the very fact that there was a change, to which Mr Runciman then consistently adhered, does suggest that something may have changed, as does the statement of specific figures for the deferred pension and lump sum. On the other hand, the change may merely have been one of presentation, with the quoted figures showing what the recipient could expect to receive on retirement if discretionary annual increases continued to be made at the then current rate throughout the period of deferment. On the whole, the latter explanation seems to me the more probable, as there was no change to the underlying rules. It is also important to note that the words “we have arranged accordingly” continue to suggest that positive steps had been taken to secure the member’s entitlement to a deferred pension on the basis of target benefits. If no such steps had been taken, and the Previous Trustee had intended to defer the grant of a pension until the member’s retirement date, one would expect this to have been clearly stated, and reference to have been made to the member’s Accrued Amount as representing a guaranteed minimum. The language used remains in my view far more suggestive of a positive decision having been taken to award the member in question a deferred pension based on target benefits at the date of leaving service, albeit subject to discretionary increases during the period of deferment.

The position which I have now outlined appears to have continued relatively unchanged throughout most of the 1980s. New editions of the Employee’s Guide in 1980 and 1984 continued to describe a member’s entitlement to a deferred pension in the same terms as before, while making it clear that the increase of such pensions by 3% per annum during the deferment period was an aspiration, not a guarantee. Between 1983 and 1985 letters to members very similar to those previously issued by Mr Runciman were sent by Mr John D Barker, who was described as the “Head of Funded Schemes”. So, for example, on 4 September 1985 Mr Barker wrote to Miss Margaret Cheeseman as follows:

“FEDERATED GROUP PENSION SCHEME FOR BLATCHINGTON COURT SCHOOL FPS 6856

YOUR MEMBERSHIP NUMBER 5908

With reference to previous correspondence, I confirm that we have set up a deferred pension and lump sum which, on the current basis of assessing Group Scheme benefits, amounts to:

Deferred Pension £… (held to accrue at 3% p.a. compound interest)

Deferred Lump Sum £…

These benefits will be payable on attainment of age 60.

In calculating this pension we have had regard to contributory service under the Group Scheme between 1 January 1972 and 31 August 1985 (including transferred-in service).

In the event of your death occurring before the commencement of the above pension, a lump sum in lieu will become payable under the rules.

You should keep this letter with your personal papers for reference …”

Miss Cheeseman provides a useful case study, because she engaged in correspondence with the Previous Trustee in 2006 about the level of pension she would be entitled to receive when she retired at the age of 60 in the following year. Her enquiries led to the discovery of a number of relevant documents apart from Mr Barker’s letter to her of 4 September 1985, including in particular an internal computation form which was sent by the Previous Trustee on 16 August 1985 to Royal National Pension Fund for Nurses (“RNPFN”) to be completed. RNPFN provided certain investment and administration services to the Previous Trustee, and this form was clearly a standard one which was in regular use. The details about the member were filled in by the Previous Trustee, but RNPFN then had to calculate the deferred pension, transfer value or refund of employee contributions as the case might be. RNPFN returned the form to the Previous Trustee duly completed on 2 September 1985 giving figures for Miss Cheeseman’s accumulated contributions, her Pension Capital (probably in the sense of her Accrued Amount), her deferred pension, and her lump sum. These figures were then reflected in the letter which Mr Barker sent on 4 September 1985.

This glimpse of the internal workings of the Scheme provides confirmation, to my mind, that the object of the exercise was to calculate a deferred pension to which Miss Cheeseman had become entitled, and not merely to provide her with an illustration of possible future benefits. Furthermore, it is in my view telling that Mr Barker only quoted to Miss Cheeseman the figures for deferred pension and lump sum, which it is common ground reflected her target benefits at the date of leaving service, and did not also inform her of her Accrued Amount. This strongly suggests to me that a positive decision had been taken to grant her a deferred pension based on target benefits, because it would be more favourable than one based on her Accrued Amount alone. If, by contrast, the Previous Trustee had intended to defer the grant of a pension until Miss Cheeseman’s retirement in 2007, some 22 years later, I would have expected the letter to take an entirely different form, and to set out a number of possible projections of her future entitlement, as well as providing her with a statement of her Accrued Amount at the date of leaving service.

I should add, for completeness, that Miss Cheeseman’s chief complaint in 2006 was that annual increases had not in fact been applied to her deferred pension, despite the statement in Mr Barker’s letter that it was “held to accrue at 3% p.a. compound interest”. Given the apparently unqualified terms of the letter, Miss Cheeseman’s concern on that score is easy to understand, even though the latest editions of the Employee’s Guide had made it clear that this was not guaranteed. I am not, however, directly concerned with that question in the present proceedings, and its only relevance is for any light it may throw on the question whether the Previous Trustee had in fact exercised its discretion under rules 19(1) and 11(2). As I have already explained, I do not consider the reference to interest, confusing though it undoubtedly is, to be necessarily incompatible with a valid exercise of the power.

Mr Runciman and Mr Barker were not the only people who issued leaving service statements on behalf of the Previous Trustee during the 1980s. In December 1985, for example, a letter in a similar form to Mr Barker’s was issued by Mr A W G Purkiss, described as Deputy Manager, Pensions Administration Department. Other letters, in response to enquiries, were sent out in the name of the Pensions Administration Department. There are a few others in respect of which it is no longer possible to identify the sender. I do not need to refer in detail to any of these other letters, because the substance of the information conveyed did not differ in any material respect from that in the prototypes signed by Mr Runciman and Mr Barker.

I would also draw attention to the Notes for Guidance of Participating Employers which were issued by the Previous Trustee, in a revised version, in December 1984. These show, as one would expect, that detailed procedures were in place for use on various occasions, including when a member left the service of a participating employer. Under the heading “Request for a refund of contributions/deferred pension/transfer value payment”, employers were told that they should notify the Trustee by means of Form G.4, and that the Trustee would then send to the employer, for forwarding to the member, Form B/W1 describing the benefits available, together with Form C/B1. The member would then enter the benefit required on the latter form and return it, via the employer, to the Trustee. The Trustee would then either pay the benefit or confirm that the appropriate action had been taken directly with the member, copying the relevant correspondence to the employer.

At least one example of Form B/W1 survives, which was completed by the Previous Trustee in respect of a member, Miss Marks, who had left service on 31 August 1987 after completing 200 days of pensionable service. The form set out the figures for all three options available to her (contribution refund, deferred benefit or transfer payment). The deferred benefit option read as follows:

“Deferred Pension of £… p.a. See Employee’s Guide for details of increases (if any) in pension during deferment and after retirement.

…

Details of options available at retirement (e.g. tax-free cash) and other benefits payable (e.g. death benefits) are contained in the Scheme Rules and summarised in the Employee’s Guide.”

It is important to note that the options said to be available at retirement were ones which applied when any pension came into payment at retirement, such as commutation of part of the pension in return for a tax-free lump sum, and did not include recalculation of the basic amount of the deferred pension. Still less is there any indication that the quoted figure for deferred pension was meant to be merely illustrative, or that the effective decision to award a deferred pension would be taken only when the member retired.

A probable example of a confirmatory letter sent by the Previous Trustee in accordance with the above procedure is a letter dated 3 March 1987 to a Miss Griselda Moules, signed “For the Trustee”. It reads as follows:

“With reference to your termination of employment, a deferred pension of £… per annum has been preserved for you in respect for your period of membership of the above Scheme. In our calculation we have had regard to service for the period 1 September, 1983 to 31 December, 1983.

Your deferred pension will be put into payment on your retiring date, normally on your attainment of normal pension age i.e. 60 years on 8 April, 2016.

In the meantime your benefits will accrue interest in accordance with the terms and conditions set out in the Rules of the Scheme.

At the time of your retirement you will be advised of such options as are available to you in respect of your benefits.

In accordance with the “Disclosure of Information” requirements under the Social Security Act 1985 information concerning the growth of your benefits will be available to you from time to time on the written application by yourself.

You should keep this letter with your personal papers for reference …”

The reference to “the growth of your benefits” would have included the statutory revaluation provisions in relation to deferred benefits which were introduced by the Social Security Act 1985. Again, this appears to presuppose that the basic amount of the deferred pension had been fixed when Miss Moules left service, because otherwise there would have been nothing to revalue.

The middle years: 1988 to 1999

There is no particular magic about the year 1988, but it provides a convenient break in my consideration of the evidence because it was the year when the Scheme changed its name to Federated Flexiplan No. 1 following the establishment of a separate money-purchase scheme called Federated Flexiplan No. 2. The change of name was formally accomplished, with effect from 1 April 1988, by a Supplemental Trust Deed dated 12 June 1989.

In July 1988 the Previous Trustee issued a new form of Employee’s Guide to reflect the re-launch of the Scheme. The Guide described the Scheme as a “targeted final salary” pension scheme, which had started in 1966, been improved over the years “and re-launched in 1988 to take account of the opportunities presented by the Government’s new pensions legislation”. The aim was said to be “to provide you with an income in retirement which is related to your salary close to retirement and the number of years you have been a member of the Plan”. This object was reflected in the description of retirement benefits, which was however subject to the following Note:

“Unlike true final salary pension schemes the contributions to FlexiPlan 1 are fixed. It is therefore possible that, at some time in the future, because of inflation, investment or other factors, the Plan may be unable to provide the target pension unless higher contributions can be agreed. In these circumstances there is a guarantee that the pension will not be less than that which can be purchased by the contributions paid plus 4% p.a. compound interest. However, it should be noted that the Plan has been going since 1966 and has never failed to pay the target pension.”

In the section of the Guide headed “Leaving or Opting Out”, a description was given of the three options available to those who decided to leave their current employment or to opt out of the Scheme. The second option was described as follows:

“You may choose to take a deferred pension. This becomes payable when you actually retire. A deferred pension is calculated in exactly the same way as a retirement pension but based on pensionable service and final salary at your date of opting out or leaving. By law the pension you will be entitled to is increased during the deferred period by 3% to 5% a year compound to offset the effects of inflation. At retirement the same options and conditions apply to benefit payments as if you had remained a contributing member.”

This description appears to me to be entirely in line with the earlier documents which I have examined. It envisages that a deferred pension will be calculated as at the date of leaving service, in exactly the same way as a retirement pension, and that the statutory revaluation provisions will then apply to it. As I have already explained, the only way in which such a deferred pension could be granted would be by an exercise of the discretion under rule 11(2); and in the absence of the grant of such a pension, there would be nothing to which the revaluation provisions could apply. The significant point for present purposes is that the previous position was in substance restated by the Previous Trustee, in fresh language and in the context of a re-launch of the Scheme. This suggests to me that the matter must have been reconsidered, at a suitably high level, and that the relevant principles had not disappeared from the Previous Trustee’s corporate consciousness.

In 1990 we begin to find samples of annual benefit statements provided to members who were still in service. In contrast to the leaving service statements, these documents made it quite clear that the projected pension payable on retirement was illustrative only, and based on a number of assumptions. The purpose of the statement was said to be “to give you an indication of the present situation”; the member was referred to the Employee’s Guide for a fuller description of the benefits and other provisions of the Scheme; and it was stressed that the statement did not in any way “override the terms and conditions actually set out in the Trust Deed”.

1990 also provides the occasion for another case study where the surviving contemporary documentation is rather fuller than usual. The member concerned was a Mr W R Cumming, who left the service of a participating employer, the Thistle Foundation, on 23 April 1990, having completed 6 years and 90 days of pensionable service. On 14 June 1990 the Previous Trustee completed a Form B/W1, which showed his deferred pension as £… per annum. On 18 June Federated Pension Services wrote to Mr Cumming, enclosing details of the options available to him and asking him to return the Form C/B1 when he had completed it. The enclosed details were presumably a copy of the completed Form B/W1. No transfer value had been shown on that form, and it seems that Mr Cumming then telephoned to request that additional information. This was duly provided by the assistant pensions administration manager who had signed the Form B/W1, Mr D J Whelpdale, in a further letter to Mr Cumming dated 20 June 1990. A few months later, on 27 September 1990, the pensions administration department wrote to the administrative officer at the Thistle Foundation, following a telephone conversation between them relating to Mr Cumming, summarising the information which had been provided to Mr Cumming in June and saying that nothing further had been heard from him since then. The part of the letter dealing with Mr Cumming’s deferred pension was as follows:

“Mr Cumming’s deferred pension at date of leaving amounts to £… per annum. This pension will increase until age 60 by no less than 3% p.a.

In calculating this figure, we have used a Pensionable Remuneration of £… and service of 6 years 90 days.

Mr Cumming’s date of leaving has been deemed to be 30 June 1990 as contributions were received from both employee and employer to this date.”

There was then a sequel in 1993, some three years later. It seems that Mr Cumming then wrote to the pensions administration department asking for updated details of his deferred pension and his current transfer value. A senior administrator, Mrs Wells, replied on 24 May 1993 in these terms:

“I can advise you that your deferred pension at the date of leaving amounts to £… [i.e. the same figure as had been quoted in 1990]. This will increase by no less than 3% per annum until you [retire]. Your AVC fund of £… will be used to purchase an additional pension when you retire.

The current transfer value amounts to £… and does not include your AVC’s. Should you wish to proceed with the transfer your AVC fund of £… will also have to be transferred. I enclose transfer details for your information.”

The clear implication, in my judgment, is that Mr Cumming’s deferred pension had been irrevocably fixed in amount when he left service, subject only to annual revaluation. The contrast with the future use of his AVC fund to purchase an additional pension “when you retire” could hardly be clearer.

The enclosed transfer details showed a calculated transfer value, guaranteed for three months, of the amount quoted by Mrs Wells in her letter. However, the calculation sheet stated that the “actual transfer value” was the greater of Pension Capital, shown as £…, and the calculated value of £… . On behalf of the employers, Mr Evans makes the telling point that this comparison could not properly have been made in 1993 if Mr Cumming had already been awarded a deferred pension in 1990, because the amount of the deferred pension would then have been fixed by reference to his then Pension Capital as defined in rule 11(2). That is true, but in the present context my provisional inclination would be to dismiss this as a slip, possibly caused by following standard instructions for the calculation of a member’s transfer value as at the date of leaving service and before the grant of a deferred pension. I must, however, be alert to the possibility that this was instead symptomatic of a more deep-seated confusion which led the Previous Trustee to lose sight of the obligation under the 1976 Rules to grant deferred pensions at the date of leaving service.

In June 1994 the Employee’s Guide was re-issued, with exactly the same description as in 1989 of the choice to take a deferred pension.

Meanwhile, a new form of letter to early leavers came into use, the earliest surviving version of which is dated 20 March 1992; it then continued in use, with minor variations, until at least March 2003. The letter was headed “Leaver’s options”, and a typical example, sent on 10 April 1995 to a Mr D Wallace, reads materially as follows:

“We have recently been notified that you have ceased active membership of the above pension scheme. As a result of this there are now various options available to you regarding your pension benefits and these are listed below.

…

OPTION 1 – DEFERRED PENSION

Pension at date of leaving £… p.a.

Scheme Retirement Date 14/07/2008

Your benefits will accrue interest in accordance with the terms and conditions set out in the Rules of the Scheme. At the time of your retirement, you will be advised of the options available to you.

OPTION 2 – TRANSFER

A transfer of benefits to another approved scheme (either a new employer’s scheme or an insurance policy).

PLEASE COMPLETE AND RETURN THE ENCLOSED FORM INDICATING YOUR OPTION

A deferred pension has been set up for you. However you retain the right to transfer the benefit elsewhere at any time between now and retirement. If you wish to investigate a transfer now please give details on the enclosed option form.”

I emphasise in particular the words “A deferred pension has been set up for you”, and the description of the deferred pension as “Pension at date of leaving”. The associated form which the member was asked to complete and return was probably leaving service statement category J (Mr Kennedy’s batch (6)), the relevant part of which reads:

“OPTION 1

I wish to preserve my pension of £ until my normal retirement date.”

In my view this language clearly presupposes that a pension has been granted, and it would have been entirely inappropriate if no pension was to be granted until the member’s normal retirement date.

It is also worth emphasising that throughout the 1990s the vast majority of the surviving leaving service statements fell into only two of Mr Kennedy’s batches, namely batches (13) and (14). The letters in batch (13) were all, or virtually all, in the same form as category G, and therefore contained the statement “A deferred pension has been set up for you”, or words to similar effect. The letters in batch (14) (category L) were in a form which dated back to at least March 1987 (the letter to Miss Moules referred to in paragraph 69 above), and all said that “a deferred pension has been preserved for you as follows”, or words to similar effect.

In or around late 1997 another form came into use which remained prevalent until at least March 2003. This was Mr Kennedy’s batch (15), or category M. It gave figures for the member’s “entitlement at date of leaving”, showing “total annual pension” as the sum of “1. Pre-1997 Excess” and “2. Post-1997 Excess”. The “Excess” referred to was presumably the excess over the guaranteed minimum pension formerly required by statute to be provided by schemes that had contracted out of SERPS. The statement then dealt with death before retirement, and asked the member to contact the Previous Trustee when approaching retirement age. A note said “This Certificate outlines your benefits in accordance with the Scheme rules and should be kept in a safe place”. At the bottom there was space for an “Authorised Signature”, and the date. There was no express reference in this form of leaving statement to a deferred pension having been set up or preserved for the member, but it still explicitly stated the member’s “entitlement at date of leaving” (my emphasis), and was clearly intended to be a certificate of the benefits that the member would receive on retirement, not a mere illustration of the benefits that he or she might hope to receive. The formal nature of the document was reinforced by the note at its foot and the reference to an authorised signature.

Under regulation 9 of the Occupational Pension Schemes (Disclosure of Information) Regulations 1986 (SI 1986 No. 1046) the Previous Trustee was obliged to produce an annual report containing specified information, including the audited accounts of the Scheme. The first surviving example of such a report is that for the Scheme year ended 31 March 1996, signed on 29 August 1996. Paragraph 12 of the report said this:

“INCREASES IN PENSIONS IN PAYMENT AND DEFERRED PENSIONS

The following rates of increase were applied during the year with effect from 1 April 1995 and constitute additions to the liabilities of the fund:

1 April 19951 April 1994

(a)

Pensions in payment 2.5% 1.9%

(b)

Deferred pensions 3.0% 3.0%

Increase (a) is wholly discretionary. It is secure by purchased annuities or paid through pensions payroll.

Increase (b) is also wholly discretionary. However, a flat rate 3% is notionally applied each year. At the time of retirement, an assessment is completed as to whether inflation has been more or less than 3% p.a. over the period that revaluation may be due. Subject to sufficient funds being available, the increase in the rate of inflation is applied, up to a maximum of 5%. The guaranteed deferred pension is the pension that can be purchased by pension capital (contributions plus compound interest at 4% per annum).”

Similar statements were then repeated in the surviving annual reports for the years ended 31 March 1997, 1998, 1999 and 2002.

These statements are puzzling. On the one hand, the information about the application of annual increases to deferred pensions is consistent with much of the documentation I have already examined, and clearly implies that the deferred pensions themselves were existing liabilities of the Scheme. On the other hand, the final sentence gives the impression that the only pension a deferred member is guaranteed to receive is one based on his Accrued Amount, and may be thought to imply that the basic amount of the deferred pension (and not just the annual increases) remained to be determined at the member’s date of retirement. It is worrying to see such apparent confusion in a formal document emanating from the Previous Trustee, and its repetition in subsequent annual reports suggests that it may not have been an isolated error.

A further strong indication that this was indeed not an isolated lapse is provided by the March 1999 version of the Employee’s Guide. Under the heading “Leaving the employer or opting out of the Scheme”, the deferred pension option was described as follows:

“If you leave pensionable service within two years you may choose a deferred pension as an alternative to a refund of contributions, or if you leave after two or more years pensionable service you will receive a deferred pension.

A deferred pension is calculated in the same way as your pension at retirement but is based on your pensionable service and pensionable salary at the date of leaving the Scheme, provided the “final salary” target continues to apply at your date of retirement. At the discretion of the Trustee, the pension is then increased over the period to Normal Pension Age by a minimum of 3% per annum or, if greater, by the increase in the Government’s Index of Retail Prices up to a maximum of 5% per annum compound, to offset the effects of inflation.

If the “final salary” target has ceased to apply, or should it produce a higher benefit at retirement, a deferred pension will be based on the contributions paid plus interest of 4% per annum compound.”

The passages which I have italicised give the clear impression that the provision of target benefits to a deferred member will remain uncertain until the member’s retirement, and that the alternative of a pension based on the member’s Accrued Amount alone will apply if either the provision of target benefits has been discontinued or it produces a better result for the member than a pension based on target benefits. Any such procedure would, of course, be incompatible with the practice which should have been followed of awarding deferred pensions at the date of leaving service and committing the necessary share of the Scheme’s assets to fund them.

It may be of relevance to note that these apparent changes in the Previous Trustee’s understanding of the position took place at around the same time as a number of changes of staff and an overhaul of the Scheme’s computer systems. In February 1999 the Senior Pensions Consultant, Mr James Wing, wrote the first in what was planned to be a series of newsletters to participating employers to keep them informed about developments with the Scheme. Under the heading “Staff changes”, he said “You may have found that over the last year or so changes have occurred with regard to your contact here at FPS”, and went on to list the people who dealt with the Scheme. Those people included the managing director (David Braithwaite), the finance director (Nick Jones), Mr Wing himself, the group pensions consultant (David Whelpdale) and the pensions administration manager (Kurt Howes). Under the heading “Computer systems”, he said that the decision had been taken in early 1996 to overhaul the Scheme’s computer systems “in order to keep up with the ever-increasing demands imposed on operating pension schemes and the volume of paperwork that goes with this”. An upgrade of the administration system had followed, and the computer hardware had been reviewed and changed by the IT Committee. According to Mr Wing, “we now have one of the most up-to-date administration and related services available”.

On the other hand, there is no indication of any change on the ground to the forms of leaving statements and related documents which were provided to members, and the forms most commonly in use were current pretty much throughout the 1990s.

The final years: 1999 to 2006

In March 2001 a new edition of the Employee’s Guide was issued, now entitled “Member’s Booklet”. The deferred pension provisions in the 1999 Guide were substantially recast, as can be seen from surviving drafts of the 2001 edition which show extensive manuscript alterations to the 1999 text. The new version of the deferred pension option on leaving service was as follows:

“DEFERRED PENSION

If you leave Pensionable Service within two years you may choose a deferred pension as an alternative to a refund of contributions, or if you leave after two or more years Pensionable Service you will receive a deferred pension.

A deferred pension is calculated in the same way as your pension at retirement. The aim is to provide you with a pension at retirement based on your Pensionable Service and Pensionable Earnings at the date of leaving the Scheme. The Trustee would then look to increase the pension by the annual increase in the Retail Prices Index up to a maximum of 5% per annum compound, to offset the effects of inflation.

The minimum benefit will be the pension that can be purchased from the Pensions Capital.

When you reach retirement you will have the same options available to you as those applying at Normal Pension Age.”

In substance, this wording appears to revert to the explanation which had been given in the pre-1999 versions of the Employee’s Guide, and to make it reasonably clear that the basic amount of the deferred pension was to be calculated as at the date of leaving service and then subjected to annual increases. In particular, there is no equivalent of any of the wording in the 1999 Guide which I have italicised in paragraph 83 above. True, there is still some ambiguity in the statement that “The minimum benefit will be the pension that can be purchased from the Pensions Capital”. The term “Pensions Capital” is here used in the sense of Accrued Amount (see the definition at the beginning of the Booklet), and the statement could be read as intended to apply at the date of retirement. However, coming as it does before a sentence beginning “When you reach retirement”, it is in my view more naturally read as a reference to the minimum benefit that could be bought with the member’s Accrued Amount at the date of leaving service, i.e. as the minimum amount of the basic deferred pension before annual increases. Furthermore, this would appear to accord with what had continued throughout to be said to members in the various forms of leaving service statements which were current.

The apparent continuity in the basic shape of leaving service statements may be illustrated by comparing a letter sent to Mrs Lowbridge on 23 October 2000 (category H), while the 1999 Employee’s Guide was still current, with a letter sent on 9 October 2001 to Mrs Gittings (category I), after the amendments were made in the 2001 Members Booklet.

The letter to Mrs Lowbridge said this:

“Thank you for your completed Option Form in respect of your termination of membership from the above Scheme. I am pleased to confirm the following deferred pension:

Pension at date of leaving £… p.a.

Service from 1/10/1994 – 31/1/2000

Normal Retirement Date 19/4/2022

Your benefits will accrue interest in accordance with the terms and conditions set out in the Rules of the Scheme. At the time of your retirement you will be advised on such options as are available. Please note that pension benefits may be drawn earlier (not earlier than age 50), but a reduction of 5% for each year will apply.

Should you require any information regarding the growth of the above benefits from time to time, please provide your written request …”

This wording clearly suggests to me that the basic pension of £… per annum had been fixed at the date when Mrs Lowbridge left service on 31 January 2000, and that annual increases would then be made to it until her retirement in 2022. As Mr Moeran pointed out, the reference to “the growth of the above benefits” implies that they could only increase over time, and would have been positively misleading if no deferred pension had yet been awarded.

In a similar way, the letter to Mrs Gittings in October 2001, described the options available to her following her withdrawal from the Scheme on 31 March 1999 with less than two years’ pensionable service, and set out the deferred pension option in these terms:

“OPTION 2 – DEFERRED PENSION

Pension at date of leaving £…

Scheme retirement date 22/07/2016

Your benefits will increase from date of leaving to normal retirement date, in accordance with the terms and conditions set out in the Rules of Scheme. At the time of your retirement you will be advised of the options available to you.”

Against this background of apparent continuity in what was said to members on leaving service, the question naturally arises whether the description of the deferred pension option in the 1999 Employee’s Guide had been a mistake. There are at least two indications that this may indeed have been the case. The first indication is the rapid reversion to the status quo in the 2001 Member’s Booklet, based on a deliberate redrafting of the relevant passage. The second indication is contained in the minutes of a meeting of the Previous Trustee which took place on 13 June 2000, attended by (among others) David Whelpdale and Steve Jones. Under the heading “Admin Issues”, the minutes recorded that the rules of the Scheme were “very old and need to be updated”, and that the Employee’s Guide “needs to be updated because there are a number of errors and updates required”. The minutes do not record the errors which had been identified, but in view of the changes made in 2001 it seems a reasonable inference that the description of deferred pensions was one of them.

A further indication of a settled understanding on the part of the Previous Trustee is provided by a draft or template for an Employer’s Administration Handbook, which is undated but appears to postdate April 2001 because it refers to concurrent membership of the Scheme and a Stakeholder plan, which would only have been possible after that date. The stated purpose of the Handbook was to assist the employer in the day to day operation of the Scheme and to give an explanation of the Previous Trustee’s administration system. There is a flow chart under the heading “Leaving Employment” which sets out the options available depending on the member’s length of service and age, and which uses the expression “Preserved Pension” rather than deferred pension. This option is then explained as follows on the next page:

“DEFERRED PENSION

If the member has completed more than 2 years pensionable service, or has not elected to take a refund (as above) and is not of retirement age, he will be granted a Preserved Pension. This pension would normally be left until the member reaches their normal retirement age, when it will be paid in the normal way.

Alternatively, a Transfer Value may be paid to another approved pension arrangement.

In addition, if a member is aged 50, or over, then there may be the option, with the Trustee’s consent, to be granted an early retirement pension instead of the above …

After the employer has notified FPS by means of Form 7, FPS will write to the member describing the benefits available. FPS then either settles the benefits or provides the member with a Preserved Pension Certificate.”

This language strongly suggests to me that the grant of a Preserved Pension was envisaged as taking place when the member left service, and that it would then be “preserved” until it became payable at normal retirement age. There also appears to be a clear contrast between a Preserved Pension Certificate, provided to a member entitled to a deferred pension, on the one hand, and the annual benefit statements provided to all active members of the Scheme, on the other hand. Statements of the latter type were expressly said to be “for illustrative purposes only”, and not in themselves to “confer right to benefit which is at all times governed by the Scheme rules and legislation” (see page 20 of the Handbook).

I now consider whether any light is thrown on the matter by the actuarial reports prepared for the Previous Trustee by the Scheme Actuary. In March 2001 a triennial actuarial report, with an effective valuation date of 31 March 2000, was provided by the Scheme Actuary, Mr G C Arnold of FPS Group Limited. Section 1 of the report recorded that the valuation had been based on the target benefit structure, with appropriate allowance being made for “a guarantee that the pension will not be less than that which can be purchased by the contributions paid in respect of pension benefits plus 4% a year compound interest (the Pension Capital) for each member”. Later on, after explaining his valuation method, the Actuary reported that in his opinion the assets and liabilities had been valued consistently, and that the projected ongoing funding level (i.e. the ratio of the value of the assets to the value of projected accrued benefits) was 136%. It is reasonably clear that this valuation was based on the provision of target benefits for both active and deferred members. Further, in section 8 of the report, which examined the position on a discontinuance basis (i.e. on the assumption that the Scheme had been discontinued, but not necessarily wound up, at the valuation date), the Actuary said that “The accrued benefits for deferred pensioners are the preserved benefits … to which they are entitled”, while for active members in pensionable service the accrued benefits were based on those to which they would have become entitled had they left pensionable service on the valuation date. The reference to “preserved benefits” in relation to deferred pensioners appears to fit comfortably with all the other evidence I have examined which points towards the actual grant of deferred pensions, on the target benefits basis, when a member left service.

It is only fair to add, however, that in section 9 of the report, dealing with the minimum funding requirement (“MFR”) introduced in 1997, the Actuary explained that for the purpose of ascertaining the MFR funding level he had assumed that the Scheme’s liability for all members other than pensioners (and therefore including deferred members) was based on the member’s “pensions capital”, i.e. the member’s Accrued Amount. On that basis, the MFR funding level was stated to be 165%. The Actuary then added that, if conventional MFR methods were used to value current active and deferred members’ target benefits (my emphasis), the notional MFR funding level would be reduced to 130%. Quite why the Actuary decided to value the benefits of deferred members, for MFR purposes, by reference to their Accrued Amounts, rather than their target benefits, is obscure, but the likeliest explanation is that he regarded their entitlement as uncertain before they reached normal retirement age, subject only to the guaranteed minimum represented by their Accrued Amounts. If that was indeed the Actuary’s view, he was in error; but it was an error reflected in various other documents then current, including notably the 1999 Employee’s Guide and the Previous Trustee’s annual reports. It is worth noting, in this connection, that the report would almost certainly have been prepared by Mr Arnold before the publication of the 2001 Member’s Booklet in March 2001.

The next actuarial valuation report was prepared as at 31 March 2002, one year earlier than usual. The reason for its accelerated production was concern about the financial position of the Scheme: see paragraph 32 of the June judgment, where I described this report as “the first cloud on the horizon”, revealing as it did a shortfall of assets to past service target benefits of £1.323 million on an ongoing basis. The report was prepared by a new Scheme Actuary, Mr Mark Lloyd of FPS Actuarial Services Limited. The date when the report was signed off was March 2003. The shortfall to which I have referred was identified in paragraph 3.3 of the report, where (among other things) a value of £10.872 million was assigned to the “existing accrued target benefits” of deferred pensioners. Read in isolation, this might suggest that deferred members were regarded as having an accrued entitlement to those benefits. However, there are at least two strong counter-indications. First, in the immediately preceding paragraph 3.2 the Actuary had said that the formal Scheme liabilities amounted to £54.43 million, “representing the guaranteed capital amount for active and deferred members, and the liability for pensions in payment”. This implies that in the case of both active and deferred members the only pension which they were guaranteed to receive was one based on their Accrued Amounts. Secondly, the MFR valuation, as in 2000, was evidently based on the Accrued Amounts of deferred members. Further confirmation to this effect is provided by an email dated 25 February 2009 from Peter Barnard, the Scheme Actuary who prepared the 2005 report, to his successor as Scheme Actuary in 2009, Nigel Jones, stating that the 2005 MFR valuation for deferred members had been based on “pensions capital” (i.e. Accrued Amounts), and that his recollection, as far as he could tell, was that the same practice had been followed “for the previous actuarial valuations as at 2002 and 1999”. The reference to 1999 appears to have been a slip for 2000, probably caused by a failure to remember that the 2002 valuation had come only two years after its predecessor.

The response of the Previous Trustee to the deterioration in the Scheme’s financial position revealed by the 2002 valuation was to make some relatively minor changes to the benefit structure of the Scheme and to decide to reduce the guaranteed rate of compound interest on contributions from 4% to 2%. The decision to make these changes was taken while the 2002 valuation report was still in draft, and in March 2003 members were informed of the changes in a document called “Review Summary for Members” sent out under cover of a letter from Steve Jones, the Senior Pensions Consultant. Nothing was said about changes to benefits for deferred members, apart from a change to transfer values which would now be paid by reference to the member’s “pensions capital” (in the sense of Accrued Amount). The implication of this, it seems to me, is that deferred members were not regarded as having an entitlement to a deferred pension based on target benefits, because in that case their entitlement would have had to be reflected in the transfer value, and it would not have been open to the Previous Trustee to make the proposed reduction to a transfer value based on Accrued Amount alone. The only basis on which the Previous Trustee could plausibly have considered that it could make the proposed reduction in transfer values would have been if it regarded the award of target benefits to deferred members on their retirement as discretionary. That this was indeed the Previous Trustee’s understanding is reinforced by the comment in the Review Summary, in relation to the reduction in transfer values for deferred members, that “This will be kept under review and may increase, should the Scheme surplus permit”.

Information about these changes was given to participating employers in a further report prepared by Steve Jones and distributed in March 2003. The changes to benefits were described in substantially the same terms as in the Review Summary sent to members. The changes were also summarised in the Previous Trustee’s annual report for the year ended 31 March 2003, signed by the directors on 27 November 2003.

In June 2003 Mr Jones and Mr Braithwaite produced and agreed a document entitled “Benefit Specifications”, in the light of the revisions to the Scheme which had been made on 1 April 2003. The introduction to the document explained that the Scheme had then changed from a targeted final salary scheme to a targeted revalued average salary scheme, and said that the attached benefit specifications “explain the calculation process for the annual processes that need to be carried out and for each type of benefit that spins off from the annual processes”. The annual processes were said to be “Calculation and maintenance of Pensions Capital” and “Calculation and maintenance of Target Pension”; the benefit routines included “Leaving service – Deferred Pension and Retirement”. “Pensions Capital” was then defined in the familiar, though inaccurate, sense of Accrued Amount, and it was stated that:

“The Scheme guarantees that the pension payable will not be less than the pension that can be purchased at retirement by the Pensions Capital.”

Paragraph 4 then dealt with the calculation and maintenance of Target Pension, saying that it would be paid “if it produces a higher pension than the Pensions Capital pension, which is usually expected to be the case”.

Paragraph 7 of the document dealt with leaving service, as follows:

“LEAVING SERVICE – Deferred Pension and subsequent Early and Normal Retirement

Both the Target Pension and the Pension Capital at date of leaving should be shown on the Member’s leaving statement.

The Target Pension is that at the previous 1 April updated for intervening service.

The Pensions Capital is that at the previous 1 April updated for extra contributions and transfers-in.

For the period between the date of leaving and the date of retirement the Target Pension is uprated by LPI at each 1 April (except at the 1 April immediately following leaving).

The Pensions Capital continues to be increased from the date of leaving by the guaranteed interest rates up to 1 April immediately preceding retirement.

[Provision was then made for the early or late retirement of a deferred pensioner.] ”

The impression given by this paragraph is that when a member left service both his target pension and his Accrued Amount would be calculated, and both would then be increased annually until his retirement, with the award of a pension (based on the higher of the two) being postponed until that date. This impression is confirmed by the detailed benefit specifications appended to the document, which make it clear that the pension payable to a deferred member on retirement is the greater of the target pension at normal pension age and a pension based on the member’s revalued Accrued Amount at the same date. Such a procedure would clearly be incompatible with the irrevocable grant of a deferred pension in a fixed amount when the member left service.

Although the new benefit specification document was not produced until June 2003, it must have reflected previous consultation between Mr Jones and Mr Braithwaite, and it seems reasonable to infer that it was intended to apply with effect from the start of the new Scheme year on 1 April 2003 when the changes to the benefit structure of the Scheme had either taken effect or been intended to take effect. To a large extent, support for this inference may be found in changes to the forms of leaving service statement issued to members. On the one hand, new forms of statement came into use which gave the departing member parallel information about his target benefits and his Accrued Amount, saying that the latter was the guaranteed minimum benefit available under the Scheme and that confirmation of the benefits payable would be available when the pension became payable at retirement. These forms of statement fall into Mr Kennedy’s batches (18) to (21) and categories N, O, P and Q of counsel for the members, who accept that it is impossible to contend that members who received statements of this type were awarded a deferred pension on leaving service. On the other hand, subject to a very few exceptions the forms of statement previously in use were no longer employed. It is unfortunately impossible to be certain about the precise date or dates when the new forms came into use, partly because the documentary record remains very incomplete even at this comparatively recent time, and partly because most of the surviving statements in the new forms are undated copies, which record the date when the member in question left service but not the date when the statement was sent out. Nevertheless, despite some room for doubt at the margins it is in my judgment unquestionable that there was a general change in the form of leaving service statements which came into effect at around the same time as Mr Jones and Mr Braithwaite agreed the procedure set out in the Benefit Specification document.

In order to complete my general review of the evidence, it is only necessary to record that the new forms of leaving service statement remained in use until July 2006 when the decision was taken by the Previous Trustee to stop awarding target benefits upon future retirements: see paragraph 33 of the June judgment. This decision was announced to active and deferred members of the Scheme in a letter dated October 2006, which referred to the deteriorating funding position of the Scheme and recent regulatory changes which had replaced the MFR test with a more stringent funding standard introduced by the Pensions Act 2004. The letter went on to say:

“(a)

These developments created a number of challenges. The product provider (FPS Group Limited which is owned by Capita Business Services Limited) has taken legal advice, which it has shared with the Scheme Trustee (Capita Pension Trustees Limited), on how to interpret the Scheme Rules in these circumstances.

(b)

This advice has led to the decision being made that for members retiring after 10 July 2006, the pension payable will be based on the annuity that can be purchased by your Pensions Capital guaranteed benefit and not on your salary related target benefit shown on previous benefit statements. You will be sent a benefit statement reflecting the change later this year from which you will be able to judge the effect on your retirement planning expectations.

(c)

If you have already received an illustration for retirement after 10 July 2006 a revised illustration will be sent to you.

(d)

A consultation exercise with the employers is currently being carried out.”

I must now stand back and consider the evidence as a whole, in order to see whether I can safely conclude on the balance of probabilities that the Previous Trustee validly exercised its discretion to award deferred pensions based on target benefits to members who left service at any time or times during the currency of the 1976 Rules.

In my judgment I can conclude with reasonable confidence that, at or around the time when the 1976 Rules were introduced, the Previous Trustee had a substantially correct understanding of the true meaning and effect of rules 11(2) and 19(1), and put in place appropriate administrative machinery to ensure that when a member left service he or she would be granted a deferred pension, payable at retirement, based on target benefits at the date of leaving service. My inference that this was, more probably than not, what actually happened is founded, in particular, on the following considerations to which I have drawn attention in my detailed review of the evidence:

I accept that there are some factors which may be thought to point in the opposite direction. In particular, there is no positive evidence that the Previous Trustee ever consciously sought to ascertain the necessary share of actuarial surplus which needed to be added to a member’s Accrued Amount in order to fund payment of the deferred pension. Similarly, the Previous Trustee seems in many cases to have proceeded on the basis that the member in question would be entitled to a guaranteed minimum pension based on target benefits at the date of leaving service, together with fixed or discretionary increases during the period of deferment. On a strict interpretation of the 1976 Rules, the Previous Trustee would in my view have been mistaken if it proceeded in either or both of those ways. However, I have already expressed the provisional view that neither error would have been fatal to a valid exercise of the discretion to award a deferred pension, provided that (a) the Previous Trustee had reasonable grounds for believing that the financial position of the Scheme was healthy enough to permit the continued provision of target benefits for all members on retirement, and (b) there was an immediate award of a basic deferred pension based on target benefits when the member left service, albeit subject to specified or unspecified annual increases during the period of deferment. Looking at the evidence as a whole, I see no reason to modify those provisional conclusions, and I infer that those conditions were indeed satisfied. In the light of the surviving triennial actuarial reports, there was no reason for anybody to doubt that the funding of the Scheme would continue to be sufficient to permit the payment of pensions based on target benefits to members when they retired, whether or not they were still in active service at that date. As to the second condition, the wording of the early leaving service statements strongly suggests to me that immediate awards of deferred pensions were indeed made to members when they left service.

The machinery by which this process was implemented is admittedly obscure, but after the lapse of some 35 years the absence of direct evidence is not necessarily surprising, and should not in itself lead to the conclusion that the Previous Trustee failed to perform its duty. It is material to remember in this connection that there is a similar absence of evidence about the procedure which the Previous Trustee followed when awarding target benefit pensions to active members on retirement, but nobody has ever suggested that such pensions were not validly granted. In my judgment it is open to the court to conclude, as a matter of inference from the available evidence, and supported (if necessary) by the so-called presumption of regularity, that a blanket decision was validly taken by the Previous Trustee, albeit on a date and in a manner which can no longer be reconstructed, to grant deferred target benefit pensions to members who left service, and who either opted or were required to be granted such pensions instead of a return of contributions or a transfer payment to another pension scheme. I consider that it is also open to the court to infer, as I do, that appropriate internal machinery was then put in place to implement this policy, and to grant appropriate authority to persons such as Mr Runciman to make the necessary calculations and communicate them to the members concerned.

On the assumption that these steps were taken at or around the time when the 1976 Rules came into force, I am on balance satisfied that the system then continued to operate in substantially the same way until at least the mid-1990s. My detailed review of the evidence reveals no major changes during this period, and there are on the contrary several positive indications that members who left service continued to be treated in essentially the same way. These indications include:

A more difficult question, to my mind, is whether the Previous Trustee then changed its policy in relation to deferred members during the late 1990s, in such a way as to postpone the grant of a pension until the member’s retirement, at which point (but not before) the member would be granted a pension based on the greater of his Accrued Amount or his target benefits. The clearest indication that such a change may have taken place is to be found in the March 1999 version of the Employee’s Guide: see paragraph 83 above. Further support for such a conclusion could be derived from the surviving annual reports of the Previous Trustee from 1996 onwards, and at least some parts of the actuarial valuation as at 31 March 2000 prepared by the Scheme Actuary in March 2001. On the strength of these pieces of evidence, and various other indications of a more ambivalent nature, counsel for the employers developed a powerful argument to the effect that the Previous Trustee never gave any proper consideration to the exercise of its discretion under rules 11(2) and 19(1), but merely operated an “underpin” approach whereby when members retired they would be paid the more favourable of their target benefits or whatever pension could be funded by their Accrued Amount. They submit that this comparison was always performed at retirement age, for deferred as well as active members. They point out that the target benefits of a deferred member would inevitably have crystallised at the date of leaving service, because after that date there could, by definition, be no further pensionable service and no increase in pensionable salary. The target benefits were therefore fixed in amount at the date of leaving service, subject to revaluation increases during the period of deferment. None of that, however, detracts from the point that the crucial comparison was not made until the date of retirement, and it was only then that the higher of a pension based on the revalued target benefits and a pension provided by the Accrued Amount (including fixed interest during the period of deferment) would be put into payment.

I acknowledge that this analysis has considerable attractions. I also acknowledge that, if adopted in relation to the later 1990s, it could then plausibly be regarded as casting retrospective light on some of the evidence relating to earlier years, including in particular the revaluations during the period of deferment which, on any view, did not strictly accord with the procedure mandated by rule 11(2). I have concluded that this procedure, although mistaken, was not incompatible with a valid exercise of the Previous Trustee’s discretion; but with the benefit of hindsight the procedure may arguably be seen as indicative of a more deep-seated error which had always been present but only became more apparent in the later 1990s.

As I say, these submissions have considerable persuasive force, but ultimately I find them unconvincing. In the first place, I think it is more logical to review the evidence in chronological, rather than reverse chronological order, and on that basis, as I have explained, the weight of the evidence satisfies me that the Previous Trustee did indeed adopt and implement a valid policy of granting deferred pensions to members when they left service. Secondly, there is circumstantial evidence which strongly suggests that the relevant part of the 1999 Employee’s Guide was an aberration which was corrected in the next 2001 edition. Thirdly, and to my mind most significantly, there were no noticeable changes in the basic forms of leaving service statement that were supplied to members between (say) 1996 and early 2002. This continuity at ground level, so to speak, suggests to me that there had been no deliberate change of policy on the part of the Previous Trustee, even if its corporate mind had become clouded and at least some people had lost sight of the rationale for the procedures that continued to be consistently applied when members left service.

It would be foolish to pretend that certainty, or anything approaching certainty, is possible, but the inference which I draw on the balance of probabilities is that the Previous Trustee continued to exercise its discretion in essentially the same way, and using essentially the same machinery, throughout the late 1990s and until early 2003. In the end, the most powerful point seems to me to be a very simple one. If there had been a conscious change of policy by the Previous Trustee, I would expect it to have been reflected in changes to the forms of leaving service statement which were sent to members who left service. I would also expect to find that the description of the deferred pension option in the 1999 Employee’s Guide had been repeated in the Member’s Booklet issued in March 2001, instead of reverting to the language of the pre-1999 versions of the Guide.

By contrast, however, I am satisfied that the original policy ceased to have effect broadly from the beginning of the new Scheme year on 1 April 2003. By this date it was clear to the Previous Trustee that the financial position of the Scheme was deteriorating, and members had been informed of changes to the benefit structure of the Scheme made in response to the accelerated 2002 actuarial valuation. The revised benefit specifications prepared by Mr Jones and Mr Braithwaite in June 2003 clearly exemplified the “underpin” approach contended for by counsel for the employers, and were reflected in the new categories of leaving service statement which counsel for the members rightly concede to be incompatible with any valid exercise of the Previous Trustee’s discretion. Without the benefit of oral evidence from Mr Jones and Mr Braithwaite, I prefer not to speculate on the reasons for the change of policy by the Previous Trustee, or the extent to which it was perceived as a change from previous practice. But as to the existence of the change there can in my judgment be no reasonable doubt, if I am correct in my conclusion that the previous policy had involved the award of deferred pensions based on target benefits to members who left service before retirement.

In view of the conclusion which I have reached, it is now necessary to consider the precise form of declaration which the court should make. Entrust is rightly concerned that any relief granted by the court should be both based on a clearly identifiable principle and administratively workable, while recognising that this process involves two stages. The underlying principle must be determined without regard to administrative workability, and it is only when that has been done that the court can consider how best to assist the Trustee in the practical application of the declaration which it has made.

The question of principle requires (a) a cut off date to be identified when the new policy came into effect, and (b) a decision on what the criterion should be for placing individual cases on either side of the cut off date. There appear to be two realistic possibilities. First, the Previous Trustee might have decided that all members who left service after the cut off date would not receive target benefits on leaving service, but that all who left on or before that date would do so. Alternatively, the decision might have been that all members whose deferred benefits fell to be computed after the cut off date would not receive target benefits, but that all those whose deferred benefits had been computed on or before that date would do so. I have little hesitation in preferring the former of these alternatives. The date of leaving service is the date when the status of the member changed from active to deferred, and when the entitlement to a deferred pension arose. It therefore seems logical that the member’s deferred pension should be calculated by reference to criteria in force on that date, even if the calculation was not performed until later. By contrast, the date on which a member’s deferred benefits were computed could have varied for a number of reasons, which may or may not have been within the Previous Trustee’s control. In my view the likelihood is that the decision to move to the new basis of calculation was taken by reference to the date when members left service, and I infer that this is indeed what happened.

The next question is what the cut off date was. At first blush, one might expect it to have been 1 April 2003, that being the first day of the new Scheme year. However, at least two leaving service statements in the new form were issued to members who left service on 31 March 2003, and after some initial hesitation counsel for the members submitted that this was the appropriate date, because it is otherwise very hard to understand why the starting date of the new policy should have been anticipated in this way. As with so many aspects of this case, certainty is impossible on the available evidence; but on balance I agree with the submission of counsel for the members, and I am encouraged to do so by the fact that 31 March 2003 was a Monday. It seems to me not implausible that the Previous Trustee may have decided to introduce the new policy at or around the start of the new Scheme year, and then for administrative convenience placed the cut off date at the beginning of the relevant working week.

If I am right this far, there remains a small handful of anomalous cases for which a solution needs to be found. There is one member, Ms Kathryn Martin, who left service on 31 October 2002, well before the cut off date, but nevertheless received a new style leaving statement, the surviving copy of which is undated but appears not to have been issued until 2005. On the available evidence, there is no explanation for this long delay, nor is it clear whether she had received any other leaving service statements in the meantime. In my view the first step should be for Entrust to revisit Ms Martin’s file to see if any further light can be thrown on the history of her case after she left service. Prima facie, she was clearly entitled to receive target benefits, because when she left service those administering the Scheme were still under instructions to make awards on that basis. If no further evidence emerges, I would incline to the view that she was indeed entitled to receive target benefits, and that she was erroneously sent a statement in the new form in 2005. It is easy to see how such an error could have occurred, since the new system had by then been in operation for some two years.

On the other side of the line, there are four known cases where members left service after the cut off date but nevertheless received old style leaving service statements. For example, Mrs L Roworth-Stokes left service on 6 June 2003, but was nevertheless sent a statement in the old form on 25 July 2003. In my view these few instances must be regarded as errors, and counsel for the members expressly accepted that they should be treated as falling on the wrong side of the cut off date. That conclusion is, of course, without prejudice to any personal claim that they may be able to bring against the Previous Trustee on grounds such as misrepresentation or estoppel.

Apart from the few anomalous cases which I have mentioned, the existence of which should occasion no great surprise in a Scheme as carelessly administered as this one at times appears to have been, there is as I understand it no conceptual or evidential difficulty in separating members who left service by reference to a cut off date of 31 March 2003, and in the vast majority of cases the leaving service statements are consistent with that conclusion. Accordingly, subject to any further submissions when this judgment is handed down, that is the nature of the basic declaration which I propose to make.