The Pensions Regulator v A Admin Ltd & Ors

This claim is brought by the Pensions Regulator (‘the Regulator’) against five Defendants all of whom were involved in arrangements set up to receive funds transferred by pension scheme members from those members’ occupational or personal pension schemes (‘the Arrangements’). The claims are brought under sections 15, 16 and 19 of the Pensions Act 2004. Section 15 empowers the court on the application of the Regulator to grant an injunction if it is satisfied that there is a reasonable likelihood that a particular person will do any act which constitutes a misuse or misappropriation of any of the assets of an occupational or personal pension scheme. Section 16 empowers the court on the application of the Regulator to order a person to take steps to make restitution if there has been misuse or misappropriation of any of the assets of an occupational or personal pension scheme. Section 19 empowers the court to deal with money that has been liberated from a pension fund within the meaning of section 18(2) of that Act, for example by transferring recoverable property to a pension scheme. The Amended Particulars of Claim allege, broadly speaking, that all five Defendants have been involved in the Arrangements that invite people to transfer their pension funds out of their existing occupational or personal pension schemes into the trusts and corporate entities that comprise the Arrangements. The Regulator alleges that this constitutes misuse or misappropriation by the Defendants of assets of the original pension schemes.

The claim was issued on 23 July 2013 and on the same day the Regulator sought an interlocutory injunction to stop the Defendants from continuing to participate in or to solicit others to participate in the Arrangements. On 7 August after a day’s hearing before Hildyard J, all the Defendants, including the Fifth Defendant (‘Mr Baxendale-Walker’) gave an undertaking to the court in those terms. At that hearing in August 2013 Mr Baxendale-Walker was represented by counsel but more recently he has been acting as a litigant in person. Mr Baxendale-Walker issued an application on 11 December 2013 seeking to discharge or vary the undertaking given on 7 August 2013.

Mr Baxendale-Walker issued an application on 6 January 2014 seeking to strike out most of the claim. That application was accompanied by a very full Grounds of Appeal dated 6 January 2014 (‘the 6 January Grounds’). On 20 January 2014 at a case management hearing I directed that the strike out application should proceed by way of a determination of three preliminary issues (‘the Three Issues’). Those were set out in the Schedule to the order made on 20 January 2014 (‘the 20 January Order’):

“1.

On the true construction of the trust deeds governing the Schemes (as defined in the Amended Particulars of Claim), are the beneficial interests of the Members (as there defined) void for uncertainty?

2.

On the assumption that the Schemes constitute occupational pension schemes within the meaning of the Pension Schemes Act and the Pensions Act 1995 and if the answer to question 1 is no, on the true construction of the trust deeds governing the Schemes, do the beneficial interests of Members declared by the trust deeds constitute an entitlement to a pension or a right to a future pension within the meaning of s.91(1) of the Pensions Act 1995 (as amended)?

3.

Does s. 91(5) of the Pensions Act 1995 (as amended) limit the exclusion from the general prohibition of s. 91(1) of surrenders for the purpose of providing benefits for the relevant person’s widow, widower, surviving civil partner or dependants to surrenders where the new benefits are to be provided under the same scheme as the scheme providing the surrendered benefits?”

I shall refer to those Three Issues as ‘the Certainty Issue’, ‘the Future Pension Issue’ and ‘the Same Scheme Issue’. I also directed on 20 January that the hearing of the Three Issues and of the application to vary or discharge the undertaking should take place during the week beginning 24 March 2014 with a time estimate of 1½ days for reading and three days argument and I set a timetable for skeleton arguments to be exchanged by 17 March 2014.

Between 10 and 18 March 2014 a further seven applications were issued either by Mr Baxendale-Walker or by others supporting him, all with return dates for the same three days in March. None of those applications was an application to revoke or vary the 20 January Order but Mr Baxendale-Walker contended that some or all of those applications should be heard instead of the Three Issues at the three day hearing. The Regulator indicated that it did not agree to that course and that it wanted the Three Issues heard and determined. The skeleton argument for the hearing lodged by the Regulator on 17 March contained detailed submissions on the Three Issues. After two days of reading into the case, I concluded that the Three Issues were still live between the parties and should be heard as previously directed together with the application to vary the injunction. Most of the other applications would be adjourned to a later date. I told the parties of this decision the afternoon before the hearing. The result of this was that although there were lengthy skeleton arguments lodged in support of the other seven applications, there was no skeleton arguments lodged by Mr Baxendale-Walker or the other Defendants specifically relating to the Three Issues, although he had included submissions on some of them at least in his detailed 6 January Grounds.

At the start of the hearing on 26 March 2014 Mr Baxendale-Walker, appearing in person, said that he did not want to contest the Three Issues. It was not entirely clear what he meant by this. He did not, it appeared, mean that he was prepared to concede that the Three Issues should be answered in the way contended for by the Regulator because he was not prepared to agree a draft consent order to that effect prepared by the Regulator.

During the first day of the hearing Mr Rowley QC on behalf of the Regulator made his submissions on the Three Issues. Once Mr Rowley was finished, Mr Baxendale-Walker made some submissions generally about how the schemes worked; about announcements made by the Chancellor of the Exchequer in the Budget on 19 March 2014 and how they affected the operation of schemes such as those in contention in the current proceedings; about the kinds of pension scheme members who had taken advantage of the Arrangements by transferring value from their existing pensions; and about the mischief at which section 91 of the Pensions Act 1995, which I will come to later, is aimed. At the close of the day, I explained to Mr Baxendale-Walker that he needed to consider overnight whether there were further things he wanted to say more specifically about the Three Issues, having heard Mr. Rowley's submissions. I told him that once we had finished dealing with the Three Issues on the second day, we would turn to the application to vary or discharge the undertaking. Mr Baxendale-Walker said that he now wished to withdraw that application to vary and that he would prefer to make any further submissions on the Three Issues in writing rather than making oral submissions. This was because, as he put it, his days ‘do have a cost’ - no one was paying him to attend court and ‘there are many more remunerative things’ he could do than make submissions for the remaining two days set aside for the hearing. Later that evening, Mr Baxendale-Walker circulated by email a note of submissions on the Three Issues (‘the Note’) and indicated that he was withdrawing the application to vary the undertaking. He did not attend court on the second day of the hearing. Counsel for the First to Fourth Defendants did not make any submissions during the course of the hearing. Mr Rowley made submissions to me on the second day in relation to the general comments Mr Baxendale-Walker had made orally the previous day and on the contents of the Note. I am grateful to him for doing so despite having only received the Note quite late the evening before.

I record these events only to explain why the arguments that Mr Baxendale-Walker wants to advance on the Three Issues are rather sketchy so far as I am concerned. I have read carefully the relevant parts of his 6 January Grounds and the Note. The Note was brief and difficult to understand and might well have benefited from being supplemented by oral argument, had Mr Baxendale-Walker attended court on the second day for that purpose. If what follows shows that I have failed to grasp some of the subtleties of the points Mr Baxendale-Walker wished to make, then I consider that he really has only himself to blame.

Before turning to the Three Issues, I must explain a little about how the schemes challenged by the Regulator work. The following description of the arrangements is based on the documents in the Membership Establishment Pack and the Membership Completion Pack provided to would-be participants in the Arrangements. It is necessarily a brief and simplified description of what is a very complex network of inter-related agreements but it suffices for the purpose of this application. To take advantage of the Arrangements an individual who is currently a member of an occupational or personal pension scheme takes certain steps.

The Certainty Issue

The Schemes are defined in the Amended Particulars of Claim as the five umbrella trusts, LPA Umbrella Trust, LPA Umbrella Trust 2, LPA Umbrella Trust 3, LPA Umbrella Trust 4 and Palace Pension Fund Trust individually or collectively. Each of them contains essentially the same terms so I will consider the LPA Umbrella Trust as representative of them all. The LPA Umbrella Trust is set out in a deed made on 12 August 2011 between Lincoln PAL and the First Defendant (‘A. Admin’). In the deed, Lincoln PAL is referred to as ‘the First Principal Employer’ and A. Admin is referred to as ‘the Trustee’. The Recitals to the Deed state:

“RECITALS

(1)

The First Principal Employer wishes to establish a pension scheme which is a registered pension scheme for the purposes of English law.

(2)

The First Principal Employer wishes there to be provided under the trusts of the Scheme exclusively Prescribed Benefits.

(3)

The First Principal Employer has contributed the sum of £100 to be held subject to the trusts of this Deed”

The operative provisions then set out the following definitions:

There is then the declaration of trust whereby it is declared that A. Admin will hold the Fund on trust for the payment of the Primary Pension to each Beneficiary during his lifetime once he turns 75. The Trustee is prohibited from making any unauthorised payments for the purposes of Part 4 of the Finance Act 2004. The deed sets out other provisions dealing with the appointment, retirement and removal of trustees, the management of the scheme including the appointment of an actuary and the trustee’s powers.

Schedule 1 defines the Prescribed Benefits as follows (‘FA’ means Finance Act):

“1.

The benefits under the Scheme for any Member shall be exclusively the benefits of such kinds as are prescribed by Part 4 FA 2004 and shall be computed in accordance with the limits prescribed by Part 4 FA 2004.

2.

The amount of such prescribed benefits shall be 90% (ninety per cent) from time to time of the maximum amount permissible under Part 4 FA 2004.”

Both the definition of Prescribed Benefits and Schedule 1 to the Deed therefore direct the reader to Part 4 of the Finance Act 2004 for details of how to compute the Primary Pension in respect of any Scheme Member. However, there is nothing in Part 4 which sets out a method of computing pension benefits or gives any other assistance in working out what the benefits should be. The only possibly relevant provision is section 218 which, as from 6 April 2014, stipulates that the individual’s maximum lifetime allowance is £1.25 million. That section sets out a way of computing the effect on the lifetime allowance of various ‘lifetime allowance enhancement factors’ described in the Act but it does not set out a way of computing someone’s pension.

Mr Rowley submits that the trust purportedly set up by the deeds establishing the five umbrella schemes is therefore void for uncertainty. The test for voidness was described by the House of Lords in Whishaw and another v Stephens and ors, In Re Gulbenkian’s Settlement [1970] AC 508. That case concerned the question whether the class of potential beneficiaries described in the trust was so uncertain that the provisions could not be operated by the trustees. Lord Upjohn (with whom Lord Hodson and Lord Guest agreed) expressed the principle that the donor must make his intentions sufficiently plain as to the objects of his trust and that the court, which acts in default of trustees, must know with sufficient certainty the objects of the beneficence of the donor so as to execute the trust. He also held that the question of certainty must be determined as at the date of the document declaring the donor’s intention. Lord Reid noted that ‘the client must not be penalised for his lawyer’s slovenly drafting’ and that his task was to consider whether underlying the words used any reasonably clear intention can be discerned. Lord Upjohn gave further guidance as to the court’s approach:

“There is no doubt that the first task is to try to ascertain the settlor’s intention, so to speak, without regard to the consequences and then, having construed the document, apply the test. The court, whose task it is to discover that intention, starts by applying the usual canons of construction; words must be given their usual meaning, the clause should be read literally and in accordance with the ordinary rules of grammar. But very frequently, whether it be in wills, settlements or commercial agreements, the application of such fundamental canons leads nowhere, the draftsman has used words wrongly, his sentences border on the illiterate and his grammar may be appalling. It is then the duty of the court by the exercise of its judicial knowledge and experience in the relevant matter, innate common sense and desire to make sense of the settlor’s or parties’ expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it.”

Applying that test and following that guidance it is impossible in my judgment to work out what pension the Scheme Members could expect to receive under the trust. The clear reference to a method of computation set out in Part 4 of the Finance Act ‘leads nowhere’, to adopt Lord Upjohn’s phrase, since there is no method of computation set out in Part 4. It might be argued (though it does not appear that this is Mr Baxendale-Walker’s case) that the Prescribed Benefit is set at the sum of 90 per cent of the maximum amount permissible under Part 4 of the Finance Act. Assuming that the ‘maximum amount permissible’ is referring to the figure of £1.25 million in section 218, can one interpret the deed as providing that the Prescribed Benefit is £1,125,000? That is a hopeless contention since first, it does not make clear over what period the £1,125,000 is paid - is it annually or over some longer period? Further, it is most unlikely to be what the draftsman intended because it is expected that the Scheme Members will transfer greatly differing sums into the Scheme from their existing pensions. It is common ground that some of the Scheme Members in fact transferred very modest amounts into the trust. It can hardly have been intended that everyone automatically becomes entitled to a pension of £1,125,000 regardless of the amount that they have paid in.

I therefore accept Mr Rowley’s submission that one is at a loss to ascertain what the Prescribed Benefits are under the trust, and hence what the Primary Pension is and hence how A. Admin (or in default of A. Admin, the court) is supposed to carry out its duties of holding the Fund on trust for the payment of the Primary Pension to the Scheme Member. No amount of judicial knowledge or experience or innate common sense – or at any rate not the amount that I am able bring to bear – seems to arrive at a useful answer.

Mr Baxendale-Walker’s answer on this point can be divined from his pleaded Defence, from his 6 January Grounds and from his Note. So far as the pleadings are concerned, the Amended Particulars of Claim assert at paragraph 28.4 that the terms of the trust deeds are incapable of creating an occupational pension scheme since there is no method of computation provided for in the deed and the beneficial interests created by the deed are uncertain and therefore do not create a valid trust. Mr Baxendale-Walker’s Defence was prepared by leading and junior counsel who were acting for him at that stage. It contains the following averments that might be relevant to the Certainty Issue:

I do not accept that that is a tenable construction of the deed. First the pleading is contradictory. The pension cannot both be ‘calculated by reference to the Transfer Value(s) received by the Scheme’ and entirely at the discretion of the Trustee. Secondly, the wording of Schedule 1 is not apt to confer a discretion on the Trustee to determine the amount of the pension. There are many other places in the trust deed where a discretion is conferred on the Trustee with appropriate wording. For example, the deed confers on the Trustee a power to apply the trust monies ‘as the Trustees shall in their absolute discretion think fit’. Similarly, the power conferred on the Trustee to engage investment managers is expressed as allowing him to employ and remunerate such managers ‘on such terms as the Trustees think fit and to delegate to them all or any of the Trustees’ discretions in connection with the investment of the Fund’. Read as a whole, the deed demonstrates a clear understanding on the part of the draftsman of the difference between imposing duties (‘shall’ do something), conferring discretions (‘may’ do something) and also between conferring very wide or delimited discretions to act. I do not consider therefore that it is possible to construe the computation of the Primary Pension as being left to the broad discretion of the Trustee; that is simply not what the words say.

Mr Baxendale-Walker’s second argument expressed in the Note makes a different point, namely that there was no statutory requirement to set up the occupational pension scheme as a trust. There is nothing in the definition of an occupational pension scheme in either section 1 of the Pension Schemes Act 1993, as amended, or in section 150 of the Finance Act 2004 that requires that it ‘be written as a trust’, as Mr Baxendale-Walker puts it. Therefore, he submits, since the Lincoln Scheme does not need to be a trust in order to be a valid occupational pension scheme, whether or not its written instrument meets the test of certainty of subject matter or beneficial interest is irrelevant. He goes on to say:

“By contrast, the test for legal validity of a Deed [or] other written instrument evidencing such an agreement is whether the contracting parties know what their agreement was. Since the contracting parties had (on the Claimant’s own pleaded case) common directorship minds, the common law contractual test of certainty is met by definition.”

There are a number of flaws in this submission. First, the fact that the pension scheme could have been constructed in another way without using a trust does not assist in a case where clearly a trust was used. If the creators of the scheme choose to use the option of a trust mechanism for setting up their scheme then they must comply with the relevant rules in order for the scheme to be validly established.

As to the intention of the contracting parties, Mr Baxendale-Walker’s submission is wrong if it suggests that it is only the subjective intention of the parties to a contract that is relevant to determining the contract’s meaning. As Lord Hoffmann said in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896: “Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.” Further, as regards badly drafted contracts, Lord Bridge said in Mitsui Construction Co Ltd v A-G of Hong Kong (1986) 33 BLR 14, that poor drafting itself provides:

“no reason to depart from the fundamental rule of construction of contractual documents that the intention of the parties must be ascertained from the language that they have used interpreted in the light of the relevant factual situation in which the contract was made. But the poorer the quality of the drafting, the less willing the court should be to be driven by semantic niceties to attribute to the parties an improbable and unbusinesslike intention, if the language used, whatever it may lack in precision, is reasonably capable of an interpretation which attributes to the parties an intention to make provision for contingencies inherent in the work contracted for on a sensible and businesslike basis.”

Chitty on Contracts (31^st ed) at paragraphs 12-072 onwards sets out a host of ‘expedients’ adopted by courts to make sense of apparently nonsensical provisions. Those are particularly helpful when choosing between two possible interpretations of an ambiguous clause. I do not see that any of those expedients can assist here and it is significant, as Mr Rowley pointed out, that Mr Baxendale-Walker does not go on in the Note to explain what the parties’ common intention about how the Primary Pension should be computed actually was. If he is saying that their common intention was that the Trustee should have an absolute discretion as to how to compute the Primary Pension, then in my judgment that is not a conclusion open to me. The clear wording of the Schedule to the deed could not be construed by a reasonable person in that way.

In the 6 January Grounds, Mr Baxendale-Walker denied that there was any requirement in trust law for a ‘certainty of benefits’. He says that if that were the case, then many if not most trusts for occupational and private pension schemes would be void because they usually make provision for a discretionary death benefits fund for widows and dependants. This, however, misunderstands the point that the Regulator is making. It is not the fact that the amount of the benefit is uncertain that is the problem here, it is the fact that neither the Trustee, nor in default of the Trustee the court, knows from the deed how to go about computing the pension. The Regulator was not saying that a trust which confers a discretion on trustees to decide the amount of the benefit is void; that kind of power is capable of being exercised by the trustee or by the court. The difficulty is that this trust deed does not confer such a power, rather it directs the Trustee to compute the Primary Pension in accordance with a set of provisions which do not in fact set out a method of computation.

I therefore hold that it is impossible to work out from the wording of the deed how the Primary Pension was to be computed and no one reading the deed would have read it as meaning that this was left to the Trustee’s discretion. In my judgment, therefore, the Certainty Issue must be answered by saying that, on the true construction of the trust deeds governing the Schemes (as defined in the Amended Particulars of Claim), the beneficial interests of the Members (as there defined) are void for uncertainty.

The Future Pension Issue

The Future Pension Issue depends on the construction of section 91 of the Pensions Act 1995 which provides as amended:

“91 Inalienability of occupational pension

(1)

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

(a)

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

(b)

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

(c)

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

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

(2)

Where by virtue of this section a person’s entitlement to a pension under an occupational pension scheme or right to a future pension under such a scheme, cannot, apart from subsection (5), be assigned, no order can be made by any court the effect of which would be that he would be restrained from receiving that pension.

(3)

…

(4)

Subsection (2) does not prevent the making of—

(a)

an attachment of earnings order under the Attachment of Earnings Act 1971, or

(b)

an income payments order under the Insolvency Act 1986.

(5)

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

(a)

an assignment in favour of the person in question’s widow, widower or dependant,

(b)

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

(i)

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

(ii)

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

(c)

a commutation—

(i)

of the person in question’s benefit on or after retirement or in exceptional circumstances of serious ill health,

(ii)

in prescribed circumstances, of any benefit for that person’s widow, widower, surviving civil partner or dependant, or

(iii)

in other prescribed circumstances, …”

Broadly speaking, section 91 imposes a general rule that the rights under an occupational pension cannot be disposed of by the member of the scheme except in the limited circumstances set out in subsection (5). The rights in question are of two kinds; an entitlement to a pension under an occupational pension scheme or a right to a future pension under such a scheme. In the case of the Arrangements, it seems to be common ground that no one is actually receiving a pension pursuant to these Arrangements and that means that we are not considering the first kind of right. This is because there is authority that establishes that the reference to ‘entitled to a pension under’ a scheme is a reference to someone currently drawing a pension: see for example Aon Trust Corporation v KPMG [2005] EWCA Civ 1004. The question that arises in the Future Pension Issue is whether any of the Scheme Members have a right to a future pension under the Scheme.

The consideration of the Future Pension Issue proceeds on the assumption, contrary to my finding on the Certainty Issue, that there is a valid trust here. The Regulator says that it is clear from the wording of the deed and from the material that is provided to prospective participants in the Arrangements that they will be entitled to some kind of pension in future, albeit that it is not clear what that pension is. The wording of the deed indicates, the Regulator submits, that the Scheme Members expect to get a pension from the Scheme when they transfer their funds. The declaration of trust provides that the Trustee holds the Fund upon trust ‘for the payment of the Primary Pension to each Beneficiary during the life of such Beneficiary’ from the time they reach age 75.

Mr Baxendale-Walker’s argument in the 6 January Grounds and in the Note was that the Scheme Members do not have any right to a future pension because the Trustee has a complete discretion not only as to how to compute the Primary Pension for each Scheme Member but as to whether a Scheme Member will get any pension at all. The only ‘right’ that a Scheme Member has, Mr Baxendale-Walker says, is to be considered as a potential object of the Trustee’s exercise of his discretion whether to provide a Primary Pension.

Mr Baxendale-Walker argues that this does not prevent the scheme from being an occupational pension scheme but it does, he says, prevent the scheme from falling within section 91(1). First, he says that the Regulator’s own case is that there was no intention on the part either of the Trustee or of the participants entering into the Arrangements that they would actually ever draw a pension. The expectation was always that the participants would surrender their rights (whatever they are) thereby creating a surplus that would be paid over to their PMCs. It does not matter to the Scheme Members therefore whether they have a definite right to a pension or only a right to be considered by the Trustee as a potential beneficiary because they did not expect that there would be any such payments in the future whether by way of entitlement or by way of the exercise of discretion by the Trustee.

I do not accept that this is an answer to the Regulator’s point, or that the wider assertion that the overall purpose of the Arrangements was never to provide Scheme Members with the Primary Pension at all, is relevant to the determination of the Future Pension Issue. For the Arrangements to have the tax advantages for the Members which the Defendants claim they have, the constituent elements of the Arrangements have to be drafted so that they are valid and work on their own terms. There has to be a valid occupational pension scheme in order to serve the purpose for which the Arrangements were sold to participants, even if that purpose is not, in the end, to provide a pension. It may well be the case, as Mr Baxendale-Walker asserts, that if the documents had conferred a complete discretion on the Trustee whether or not to grant a pension as well as a discretion as to the amount of any such pension, they would still have created a valid occupational pension scheme. The question I have to ask is not that hypothetical question but a specific question about the interpretation of this particular deed as drafted.

As to whether this is a possible construction of the deed, I accept the Regulator’s submissions that no potential participant would read the trust deed as meaning that they hand over the ‘cash equivalent’ of their existing pension but without any certainty of getting anything back at all by way of pension. Further, it is also inconsistent with the Defence as drafted by leading counsel for Mr Baxendale-Walker. That Defence refers in a number of places to the Trustee’s discretion about the amount of the pension payable but not to any discretion as to whether or not to provide a pension. Mr Baxendale-Walker says in the Note that the Defence was written to meet different allegations not to deal with this point. That may be the case but the trust deed has a single meaning in this regard whatever challenges are made to it. It cannot be the case that the Arrangements confer a right to a future pension for the purposes of meeting one point raised by the Regulator but only a right to be considered as a potential pension recipient in answer to a different point.

Mr Baxendale-Walker’s main point in the Note is that a scheme can qualify as an occupational pension scheme even if it does not confer a right to a future pension but only an entitlement to be considered as a potential pension recipient in the exercise of the Trustee’s discretion. In the 6 January Grounds and in his Note, he relies on Bus Employees Pension Trustees Ltd and another v Harrod & Ors [2000] Ch 258. That case arose out of the privatisation of the bus services industry and the winding up of the pension scheme which had been operated for the benefit of the employees of the National Bus Company. The pension scheme was in surplus and the trustees had, under the original terms of the scheme, a discretion whether to apply the surplus to augment members’ pensions. As part of the privatisation, the scheme was amended to remove that discretion and provide that the surplus be paid over to the Government. There was a challenge to that amendment. Sir Richard Scott VC considered the definition of a member of a scheme for the purposes of section 124(1) of the Pensions Act 1995 and the circumstances in which a person was ‘an active, deferred or pensioner member’. Having found that it was not possible for the scheme to have active members, the Vice-Chancellor focused on whether the scheme had any deferred members. This in turn depended on whether members had ‘accrued rights’ under the scheme. He held that beneficiaries who were objects of the discretionary trust created in respect of the surplus under the original scheme were not deferred members because they did not have an accrued right to any benefit under the scheme. A deferred member was someone ‘who will at some point in the future, on retirement, on reaching a specific age, on death or whatever the event may be, become entitled to specific calculable pension rights’: see page 272H. The concept of a deferred member did not include people who were no more than beneficiaries under a discretionary trust and who may or may not, depending on the exercise of the discretion, receive anything. He held therefore that none of the statutory provisions which required there to be members of an occupational pension scheme for the statutory provisions to apply did apply in that case. Mr Baxendale-Walker’s argument was that, applying this reasoning to section 91(1), the Scheme Members under these Arrangements are not persons who have a right to a future pension under an occupational scheme so that the prohibition on alienation does not apply to them. The words ‘a right to a future pension’ replaced the earlier reference to ‘accrued rights’ – Mr Baxendale-Walker described the new wording as ‘the more modern way of expressing the vintage pensions law phrase ‘accrued rights’”. He submitted that this does not stop the scheme being an occupational pension scheme but it does prevent the application of the prohibition in section 91(1).

Mr Rowley was prepared to accept for the purposes of this application that if members of an occupational pension scheme have only the right to be considered as a potential object of the trustees’ discretion then they would not be persons with ‘a right to a future pension’ and so section 91(1) would not apply. He reserved the right to revisit that issue if this case goes further. But, he said, the Bus Employees case does not help Mr Baxendale-Walker because here it is clear on the documents that the scheme members did have a right to a future pension – they were not merely potential objects of the Trustee’s discretion.

I agree that Mr Baxendale-Walker’s point here, like some of his other points, is effectively that if the Arrangements had been drafted differently then they would have withstood the challenges that the Regulator makes. However, they were written in a particular way and their effectiveness must be assessed on the basis of what they actually do say, not on the basis of what they might have said. Given that I have accepted the Regulator’s submission that the deed as drafted does confer a right to a Primary Pension and does not grant the Trustee a discretion whether or not to provide a Primary Pension, the Bus Employees case is not relevant.

I therefore hold that the answer to the Future Pension Issue is that, on the assumption that the Schemes constitute occupational pension schemes within the meaning of the Pension Schemes Act and the Pensions Act 1995 and that they are not void for uncertainty, on the true construction of the trust deeds governing the Schemes, the beneficial interests of Members declared by the trust deeds constitute a right to a future pension within the meaning of section 91(1) of the Pensions Act 1995 (as amended).

The Same Scheme Issue

The Same Scheme Issue depends on the construction of section 91(5) which provides an exception to the general prohibition on the inalienability of pension rights in section 91(1). The question is whether, when the Scheme Members surrender their pension rights so that the transfer value they previously paid in to the Scheme can be paid out to their PMC, that amounts to a surrender that falls within subsection (5)(b). Section 91(5)(b) as amended covers the following kinds of surrender: (emphasis added)

“(b)

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

(i)

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

(ii)

acquiring for the person in question entitlement tofurther benefits under the scheme, …”

I have highlighted the two phrases in section 91(5)(b) because the contrast between them is what Mr Baxendale-Walker relies on in his submissions as to how this provision applies to the Arrangements. In his Defence at paragraph 4.9(4)(b) he says that the waiver/surrender of the transfer value to the Member’s PMC ‘was made for the purpose of benefiting the Member’s widow(er)s and dependants’ and accordingly that if section 91 did apply, the surrender was permitted by section 91(5)(b)(i) by way of exception to the prohibition in section 91(1). Similarly, in paragraph 13 of his Defence he refers to the Member’s action in effecting the surrender of his or her interest ‘for the benefit of his/her widow/widower and dependents, who were not beneficiaries under the Scheme but were beneficiaries under the umbrella trust’. Mr Rowley’s submissions proceeded on the basis that the point Mr Baxendale-Walker was making was that subsection (5)(b)(ii) refers expressly to an entitlement to benefits ‘under the scheme’ whereas the words ‘under the scheme’ are absent from subsection (5)(b)(i). Mr Baxendale-Walker’s argument seems to be therefore that provided that the surrender of the entitlement to pension or the future rights to a pension are for the benefit of the widow etc in a broad sense, then the prohibition on alienation in subsection (1) does not apply. The Regulator argues that the correct construction of subsection (5)(b) is that the benefits referred to in subparagraph (i) must be benefits under the scheme just as they must be in relation to subparagraph (ii).

In support of this contention, the Regulator relied on the Inland Revenue Superannuation Funds Office Practice Notes IR12 in various versions. The Note from May 1979 (IR12(1979)) explains the extent to which an employee may surrender part of his own pension to provide a pension for his widow or other dependant on his death after retirement. This is clearly referring to the surrender of benefits to provide the widow with a pension under the same scheme, not to provide her with benefits in a more general sense or even benefits under some different pension scheme or trust. Similarly, the later version IR12 (1991) states that no pension shall be capable of being assigned or surrendered except ‘on allocation of pension to provide a pension for a widow…’: see paragraph 7.20. The 1997 version of IR12 (1997) provides under the heading ‘Allocated Widows’, Widowers’ and Dependants’ Pensions’ that an employee may surrender or allocate part of his or her own pension to provide a pension for his or her widow etc. to commence on his death after retirement.

I am doubtful about the usefulness of these Notes as a comprehensive statement of the limits of section 91(5) rather than a description of the most frequent example of where it applies. I am also not convinced that it is appropriate to rely on HMRC’s published guidance as an aid to interpreting the legislation. Certainly such guidance has been relied on in cases where a tax payer seeks to hold HMRC to an interpretation given in the guidance from which HMRC wishes to depart. But that is not the case here. I do not regard the guidance as providing any great support to the Regulator’s arguments.

The second aid to construction relied on by Mr Rowley was what Mr Baxendale-Walker disparagingly referred to as ‘archaeological justification’, namely looking at the predecessor statutory provision to section 91(5)(b). This might show if there could be some reason why the draftsman left out the words ‘under the scheme’ in subsection (5)(b)(i) but included them in subsection (5)(b)(ii), other than because he intended that the benefits referred to in the former should not be limited to benefits ‘under the scheme’.

That predecessor provision is section 77 of the Pension Schemes Act 1993 (‘section 77’). This was in force between 7 February 1994 and 5 April 1997, the latter being the day before section 91 of the Pensions Act 1995 came into force. Section 77 dealt with people alienating the pension scheme benefits in a different and less comprehensive way than section 91. Section 77 applied only to short service benefits and it did not prohibit alienation outright but rather provided that a scheme must contain provisions preventing alienation. Subsection (4) dealt with the relevant exception to this rule: (emphasis added)

“77(4) A scheme may, at the option of the member, enable surrender—

(a)

to provide benefit for the member’s widow, widower or dependant;

(b)

to acquire for the member transfer credits under the rules of another occupational pension scheme or rights under the rules of a personal pension scheme or a self-employed pension arrangement;

(c)

to acquire for the member entitlement to further benefits under the same scheme, relating both to a period of pensionable service previously terminated and also to a subsequent period of service in relevant employment.”

Mr Rowley points to the fact that section 77 generally refers in other subsections simply to ‘benefit’ or ‘benefits’ when it clearly means a benefit or benefits under the scheme in question and not some broader class of benefits. So why are the words ‘under the same scheme’ included in subsection (4)(c) as qualifying the term ‘benefits’ when those words are not regarded as necessary elsewhere in the section where they bear the same meaning? This is because, Mr Rowley submits, subsection (4)(c) comes directly after subsection (4)(b). Subsection (4)(b) is referring to the ability of the member to surrender in order to acquire transfer credits under some different occupational pension scheme or personal pension scheme or self-employed pension arrangement. Subsection (4)(c) by contrast refers to the ability of the member to surrender in order to acquire further benefits under the same scheme. The words ‘under the same scheme’ are inserted not in contradistinction with subsection (4)(a) but with subsection (4)(b). When section 91 of the Pensions Act 1995 was enacted, the former section 77(4)(b) was removed presumably because it was not necessary in view of the statutory provisions enabling pension scheme members to take transfer values on changing jobs. All that needed to be brought forward for section 91(5)(b) was the old section 77(4)(a) and the old section 77(4)(c). These then became with some modification paragraphs (i) and (ii) of section 91(5)(b). The old wording ‘benefits under the scheme’ was brought forward from old section 77(4)(c) and the simple word ‘benefits’ was brought forward from old section 77(4)(a). But the draftsman did not thereby mean to expand the meaning of the word ‘benefits’ in section 91(5)(b)(i) beyond what it had meant in section 77(4)(a).

I found Mr Rowley’s exposition of the statutory history as an alternative explanation for the absence of the words ‘under the scheme’ in section 91(5)(b)(i) helpful and convincing. I am sure that the phrase ‘to provide benefit for the member’s widow, widower or dependant’ in section 77(4)(a) was limited to benefit under the scheme under which members surrender their rights. It enables members to decide that certain pension benefits payable under the scheme to them will be paid instead to their spouse. There is no indication that the equivalent wording in section 91(5)(b)(i) referring to ‘benefits for that person’s widow, widower, surviving civil partner or dependant’ was intended greatly to widen the kinds of benefits for the provision of which it was regarded as legitimate for scheme members to be able to surrender their pension rights. That would be the effect of the construction of section 91(5) for which Mr Baxendale-Walker contends.

The third plank of Mr Rowley’s submissions is reliance on the Goode Report, that is the Report of the Pension Law Review Committee chaired by Professor Sir Roy Goode, published on 30 September 1993. The Report recommended that inalienability of pension rights should extend from short service benefits to become a rule of general application: see paragraph 4.14.4. The Report poses the question: should pension rights be assignable during lifetime? The Report explains the mischief at which the inalienability rule is directed:

“4.14.3

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

I do not consider that the Goode Report goes quite as far as Mr Rowley contends since the policy goal to which the Report refers could equally be achieved by a rule which allowed surrender provided it was for the purpose of acquiring benefits for widows etc under another pension scheme but not under the Scheme of which the person surrendering rights is a member. But I agree that it makes clear that the policy behind the inalienability rule is precisely to prevent pension scheme members from doing what the Regulator claims the Arrangements allow, namely effecting a surrender which allows the pension pot to be released to the Member to use without restriction, provided that that use can be said in a broad sense to be for the benefit of the widow. I further accept that the courts have in the past found the Committee’s Report helpful in construing the relevant legislation so that it is legitimate for me to have regard to it: see Fisher v Harrison [2003] EWCA Civ 1047 paragraphs 23 onwards and Aon Trust Corpn v KPMG (a firm) and others [2005] EWCA Civ 1004 paragraphs 26 onwards. I therefore agree with the Regulator’s submission that section 91(5) falls to be construed against the background that it is an exception to the general policy, permitted because the dispositions intended to be covered are ones which do not conflict with the reasons underlying the general policy, namely that the State has an interest in ensuring that funds built up in pension schemes are used to make provision for members on their retirement and for their dependants on their death.

In the Note, Mr Baxendale-Walker made two new points arising from changes proposed in the Budget announced on 19 March 2014. The first was his submission that the Budget announcement showed that the Government had ‘recognised a lacuna in the surrender provisions and undertaken to legislate so as to close that gap’. He relied on TIIN 706 Press Release of 19 March 2014 which he annexed to the Note. That Press Release describes the measures to be adopted so as ‘to further tackle the growing threat of pension liberation fraud where individuals are encouraged to access their pension savings before they reach retirement’. The policy objective is described as closing ‘a loophole used in widely-marketed avoidance schemes’. Under the heading ‘Current Law’ the Press Release refers to pensions tax rules for registered pension schemes as set out in Part 4 of the Finance Act 2004. As regards surrenders, the current law is described as follows: (emphasis added)

“Where an individual surrenders rights under a registered pension scheme, the value of what is surrendered is treated as an unauthorised payment. This is intended to prevent individuals avoiding tax or liberating funds. There are two key exceptions: rights can be given up in favour of higher pensions for dependants; or rights can be given up to fund the making of an authorised surplus payment to the scheme’s sponsoring employer (section 172A of FA 2004) … ”

Under the heading ‘Proposed Revisions’ the Press Release says:

“A surrender of rights in favour of dependants will be prevented from being treated as an unauthorised payment onlywhen the dependants’ newly acquired rights are provided under the same pension scheme.”

Mr Baxendale-Walker’s submission was that ‘in simple terms, the Inland Revenue has just popped the Lincoln Scheme’s bubble’. As to the implications of the amendment announced in the Budget on the Regulator’s case in the present proceedings, he said:

“And the canons of statutory construction, as we all know, are that when the Government says, “Oh, oops, the legislation does not work so we are amending it”, you do not get to say that the legislation did work originally. That is the canon of statutory construction that we all work by otherwise we are in anarchy.”

I do not consider that the proposed amendment described in the Press Release helps with the construction of section 91 of the Pensions Act 1995. The proposed amendment is not to section 91 at all but to section 172A of the Finance Act 2004. There is no proposed amendment to the provision which I am construing in this case. Further, it is not the case that the Finance Act 2004 provisions mirror or follow the Pensions Act provisions. They contain different definitions of some fundamental concepts including the concept of an occupational pension scheme. The amendments made after the Budget to section 172A Finance Act 2004 do not indicate that the wording of section 91(5)(b)(i) bears the meaning for which Mr Baxendale-Walker contends. On the contrary they could, as Mr Rowley suggested, equally show that what the Treasury and HMRC are doing by the amendment to section 172A is to align the scope of that provision with what section 91(5)(b)(i) already covers.

Mr Baxendale-Walker made a second more general point about the Budget announcement which could, I consider, be regarded as countering the Regulator’s submissions about the mischief at which the Goode Report indicates the inalienability rule was aimed. He said in his oral submissions at the end of the first day of the hearing that the Budget signalled a major shift in policy away from the rather paternalistic flavour of the Goode Report to a more relaxed attitude towards what people can do with their pension pot:

“Anyway, we do know that the Government's policy is, "It's their money." As Pensions Minister, Steve Webb, said, "It is people's choice whether to buy Italian Lamborghini sports cars with their pensions' cash." That is where it all comes from. People are free to spend money in their own way. This is not Pensions Minister, Steve Webb, making it up. This is the policy of Her Majesty's Government. Mr. Cameron said that the changes will benefit 400,000 people who work hard, save and do the right thing. This is about our values, the Government's values. It is about saying that the best people to look after Mr. Kane's money are those who earned it in the first place. We are dealing in this case with an utterly artificial state of affairs created, like an ice sculpture, by the Regulator. While there was an unpublished etheric public policy of State control of pensions then there was a foundation, an etheric foundation granted, for the Regulator's case. What the Regulator's case amounts to at paragraph 3 is that it is not their money and that has been expressly stated in the skeleton argument. It is not their money. I am afraid Her Majesty's Government disagrees with the Regulator. … The policy of this Government is to treat the persons in this country who earn the money and save the money as the person who are sovereign with respect to that money. Any interpretation of any pensions legislation must pay homage and respect to that policy.”

After the conclusion of the hearing, the First to Fourth Defendants also provided me with copies of some published statements by the Regulator about the effect of the proposed changes.

Eloquently though the argument has been put by Mr Baxendale-Walker, I do not accept that it is right to rely on recent announcements of changes in Government policy as an aid to construction of the 1995 Act. Aside from the basic point that that would not be a reasonable approach to statutory interpretation, the changes Mr Baxendale-Walker describes have either been given only temporary effect by a resolution under the Provisional Collection of Taxes Act 1968 or are currently the subject of consultation. In both cases the changes will need to be debated in Parliament and may or may not make their way permanently onto the statute book. Further, they also do not comprise the wholesale abrogation of previous pension policy as Mr Baxendale-Walker suggests. The current proposal for unrestricted access to members’ pension pots is that only those over the minimum retirement age of 55 will be able to access their pension pot, subject to payment of tax at the member’s marginal rate on the excess over the tax free lump sum, and then only where the pension is a defined contribution pension not a final salary one. The Arrangements challenged by the Regulator in this case purport to allow anyone of any age to access their pension fund tax free, whether it is a final salary or a defined contribution scheme. I therefore do not consider that the recent changes should affect my consideration of this case.

In the light of those conclusions I hold that the answer to the Same Scheme Issue is that section 91(5) of the Pensions Act 1995 (as amended) does limit the exclusion from the general prohibition of section 91(1) of surrenders for the purpose of providing benefits for the relevant person’s widow, etc to surrenders where the new benefits are to be provided under the same scheme as the scheme providing the surrendered benefits.

I described at the start of the hearing the large number of applications that were issued prior to the hearing. In the email with which Mr Baxendale-Walker circulated the Note after the first day, he withdrew three of those applications: the application dated 11 December 2013 seeking to vary or discharge the undertaking given on 7 August 2013, the strike out application dated 11 March 2014 and the application dated 10 March 2014 in which he sought to exclude certain evidence on which the Regulator intended to rely. After hearing argument from Mr Rowley in Mr Baxendale-Walker’s absence, I dismissed those three applications and ordered Mr Baxendale-Walker to pay the Regulator’s costs on the indemnity basis.

There are a number of other applications that I adjourned at the start of what was expected to be a three day hearing. Some of those relate to a separate Part 8 claim against the Regulator issued by Mr Baxendale-Walker on 14 March 2014, alleging that the Regulator has no legal standing to institute or maintain the main proceedings. The applications which stand adjourned are:

Given that Mr Baxendale-Walker withdrew the three applications which might have been heard at the three day hearing in addition to the Three Issues, it is not now clear if the adjourned applications and the Part 8 claim more generally are going to be pursued. After the handing down of this judgment, there will need to be a case management conference to consider the effect of this judgment on the rest of the claim, to set a timetable for determining what relief the court should order if the parties are agreed that we now move to the question of relief in the main proceedings and to determine what directions should be made in relation to the Part 8 claim and other adjourned applications.