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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Law Debenture Trust Plc v Lonrho Africa Trade & Finance Ltd & Anor [2002] EWHC 2732 (Ch) (17 December 2002) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2002/2732.html Cite as: [2003] PLR 13, [2003] Pen LR 13, [2002] EWHC 2732 (Ch) |
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CHANCERY DIVISION
Strand, London. WC2A 2LL |
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B e f o r e :
____________________
The Law Debenture Trust plc |
Claimant |
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- and - |
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(1) Lonrho Africa Trade & Finance Limited (2) David Simpson |
Defendant |
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Christopher Nugee QC and Jonathan Evans (instructed by Mayer Brown Rowe & Maw)
for the First Defendant
Jules Sher QC and Caroline Furze (instructed by Eversheds) for the Second Defendant
Hearing dates : 25th - 27th November 2002
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Crown Copyright ©
Mr Justice Patten :
Introduction
The 1989 Rules
"11.1 Review of Pensions
The trustees in consultation with the principal employer shall in each year review all pensions whether currently in payment or deferred for the purpose of determining whether the powers conferred by this section should be exercised.
11.2 Increases in current pensions
The trustees, acting on actuarial advice, may increase pensions in course of payment in accordance with the following provisions of this rule
(a) subject to rule 11.5 the trustees, with the consent of the principal employer, may increase any pension or payment by such amount as they may decide;(b) the pension referred to in paragraph (a) shall exclude after state pension age, or in the case of a pension payable to a widow, the guaranteed minimum pension except to the extent referred to in rule 13.3(d);(c) the increase under paragraph (a) above shall be a proportionate increase if the pension commenced in the preceding twelve months and for the purpose of deciding when the pension commenced any deferred pension shall be deemed to have commenced when it was first granted and not when it came into payment and any widow's pension following the death of a pensioner or deferred pensioner shall be deemed to have commenced when the pensioner's payment commenced or the deferred pensioner's pension was granted.
11.3 Increases in deferred benefits
The trustees, acting on actuarial advice, shall grant increases in short service benefits granted under section 9 or any other deferred benefits granted under section 8 or section 9 which have not yet come into payment (all of such being referred to in this rule as "deferred benefits") in accordance with the following provisions of this rule:-
(a) subject to rule 11.5 the trustees with the consent of the principal employer may increase any deferred benefits by such amount as they may decide, acting on actuarial advice;(b) the increase under paragraph (a) above shall be a proportionate increase if the member left the service in the preceding twelve months or, in the case of a benefit granted under section 8, if the allocation took place in the preceding twelve months.
11.4 Increases in additional pensions
The trustees, acting on actuarial advice, may from time to time increase the additional pensions payable to members under appendix I at rates which are the same as or different from the rates of increases granted under rule 11.2 or 11.3. (Increases under this rule will only be granted if the rates of accretion to the AVC Scheme so permit).
11.5 Statutory increases
Nothing in this section shall prejudice the operation of:-
(a) Sections 41A and 41B of the Pensions Act which provide for increases to maintain the value of the guaranteed minimum pension up to state pension agewithout prejudice to the continued payment of the full amount of the benefits in excess of the guaranteed minimum pension; and(b) Section 52B and Part I of Schedule 1A to the Pensions Acts (introduced by the Social Security Act 1985) as amended, which provisions lay down (in general terms and not so as to prejudice their operation) that deferred benefits which have accrued since 1st January 1985 shall be increased by 5% per annum or the rate of inflation, whichever is the lower up to the date on which they come into payment.
11.6 Augmentation of pensions
The trustees shall have power, in their absolute discretion, to augment any benefit payable or prospectively payable under the rules by such amount as does not or will not cause the limits set out in section 10 to be exceeded; and, in augmenting any such benefits, the trustees may impose such terms as to payment of additional contributions, whether by way of lump sum or periodical payments, and either by the employer or the member or both of them, as they shall, acting on actuarial advice, decide."
The controversy centres on the interpretation of rule 11.6.
i) that the power in 11.6 to impose terms about additional contributions is only exercisable so as to make such contributions a condition of the increase, which both the employer and the member are free to reject;
ii) that 11.6 is only exercisable in relation to pensions currently in payment or to deferred pensions and does not apply to the accrued and prospective benefits of active members (i.e. those still currently in service with a Scheme employer);
iii) that even if 11.6 does apply to active members, it only does so in relation to their accrued benefits and does not entitle the trustee to vary, for example, the rate of future accruals of benefit;
iv) that whatever its scope as between classes of beneficiaries, the rule 11.6 power can only be exercised to deal with individual cases rather than with class-wide increases in benefits, which are the province of rules 11.2 and 11.3;
v) that the rule 11.6 power cannot be used to augment benefits in a way which would be inconsistent with the existing rules of the Scheme. Such changes must be effected by an amendment of the rules, which under section 16 requires the consent of both the trustee and the principal employer;
vi) that, on the evidence, the provisions of rule 11.6 are intended to provide a measure of "predator protection" by safeguarding the fund, and in particular any surplus, from the hands of a corporate raider determined to asset-strip the participating companies. The power is therefore only exercisable in such limited circumstances.
The Approach to Construction
"A practical, purposive approach does not necessarily provide an easy route to a simple answer. Occupational pension schemes are of great importance to millions of scheme members and pensioners and it would be a very good thing if the terms of pension schemes were always clear and unambiguous to lawyers and laymen alike. But all pensions professionals know that unfortunately the terms of pension schemes are often complicated and obscure. The funding of pension schemes is inevitably a technical subject. Pension scheme documentation tends to be a patchwork put together partly by way of reaction to legislative change, including (but not limited to) changes as to contracting-out, preservation of benefits, equal treatment and taxation
Major legislative or economic changes of that sort are often the reason (or 'mischief') behind amendments to occupational pension schemes and a purposive construction requires them to be taken into account. Such amendments often result in a loss of uniformity in drafting, and difficulty in seeing how one part of the scheme is intended to fit in with another part. In construing a pension scheme the court will try to reconcile inconsistencies so far as possible, but the purposive approach cannot justify rewriting different parts of the text (and possibly misinterpreting both parts) in an attempt to avoid apparent inconsistency between them."
"The solution to the present problem lies within the terms of the scheme itself, and not within a world populated by competing philosophies as to the true nature and ownership of an actuarial surplus."
The History of the Scheme
"11.1 Increases in current pensions
Any pension or annuity (including children's allowances and pensions payable to a beneficiary in accordance with section 8) currently payable out of the fund may from time to time be increased by such amount and at such times as the trustees, acting on actuarial advice, shall decide and so that the trustees may in their absolute discretion:-
(a) exclude from the provisions of any general increase any pension payable to the member which is derived from the AVC scheme if the trustees are satisfied that acting on actuarial advice, such increases are not warranted;(b) restrict the amount of the increase to the reduced pension payable to the member where he hassurrendered part of his pension under the provisions of rule 6.10 or section 8;(c) contract that any deferred benefits secured by the allocation of a member under the provisions of section 8 shall be increased prior to payment by the same increases as are granted in respect of current pensions under this rule;(d) exclude from any increase that part of any pension which is equal to the guaranteed minimum pension or widows guaranteed minimum pension, as the case may be, payable to the member or which would have been payable if a female member had not elected to pay reduced rate contributions under section 3(2) of the Pensions Act and the regulations made thereunder.
11.1 Increases in deferred benefits
Any short service benefits granted under section 9 which have not yet come into payment and any other deferred benefits referred to in rule 11.1(c), may from time to time be notionally increased by such amount as the trustees, acting on actuarial advice, shall decide and so that, without prejudice to the generality of the foregoing, the notional increases in deferred benefits need not correspond to the increases in pensions in course of payment under rule 11.1. When short service benefits or such other deferred benefits come into payment the member shall be entitled to the notional increases as of right.
11.2 Augmentation of pensions
The trustees shall have power at their absolute discretion to augment any benefit coming into payment by such amount as does not cause the limits set out in section 10 to be exceeded, and on such terms as to payment, whether by way of lump sum or increased contributions by the employer or the member or both of them, as the trustees, acting on actuarial advice, shall decide."
Question 1: Is the Rule 11.6 Power to Augment Benefits exercisable only with the
Consent of the Principal Employer?
Question 2: Is the Power in Rule 11.6 to require Additional Contributions only
exercisabie with the Consent of the Employer or the Member Concerned?
"set out the terms upon which members may elect to make additional voluntary contributions to the Scheme in order to secure additional relevant benefits on retirement or payable on death."
But that makes obvious sense in the context of an arrangement which is itself wholly voluntary. The position seems to me to be much less obvious in relation to the Scheme under which contributions by members are compulsory. Employers' contributions to the Scheme are dealt with under section 5 of the 1989 Rules. Rule 5.1 mirrors the provisions of rules 11.1 to 11.3 by requiring the employers to contribute such amounts as shall be determined by the trustee acting on actuarial advice after agreement with the principal employer. Additionally the principal employer is given power under rule 5.3 to reduce or suspend contributions due under rule 5.1. These provisions do not, however, deal with the liability to contribute which may arise under rule 11.6. They are confined to contributions agreed as part of the annual process of review.
Questions 3 and 4: (a) Does the Rule 11.6 Power extend only to Current and Deferred
Pensions and not to Active Members; (b) If it applies to Active Members, does it apply
so as to allow Augmentation of both Accrued and Future Service Benefits?
Question 5: Is the Rule 11.6 Power restricted to dealing with Individual
Augmentations?
Question 6: What is the Relationship between the Rule 11.6 Power and the Power to
Amend the Rules contained in Section 16?
Question 6: Is the Rule 11.6 Power only exercisable in order to provide Predator
Protection?
"The need to consider the circumstances in which the surplus has arisen does not lead to the conclusion that the trustees are bound to take any particular course as a result of that consideration. They are not constrained by any rule of law either to increase benefits or to reduce contributions or to adopt any particular combination of those options. Nor does the need to consider the circumstances in which the surplus has arisen lead to the conclusion that the trustees are not required to take - or are prohibited from taking - any other matters into account in deciding what course to adopt. They must, for example, always have in mind the main purpose of the scheme - to provide retirement and other benefits for employees of the participating employers. They must consider the effect that any course which they are minded to take will have on the financial ability of the employers to make the contributions which that course will entail. They must be careful not to impose burdens which imperil the continuity and proper development of the employers' business or the employment of the members who work in that business. The main purpose of the scheme is not served by putting an employer out of business. They must also consider the level of benefits under their scheme relative to the benefits under comparable schemes; or in the pensions market generally. They should ask themselves whether the scheme is attractive to the members whose willingness to continue paying contributions is essential to its fixture funding. Are the benefits seen by the members to be good value in relation to the contributions ; would the members find it more attractive to pay higher contributions for higher benefits; or to pay lower contributions and accept lower benefits? The main purpose of the scheme is not served by setting contributions and benefits at levels which deter employees from joining; or which causes resentment. And they must ask themselves whether the benefits enjoyed by members in pension have kept up with increases in the cost of living; so that the expectations of those members during their service - that they were making adequate provision for their retirement through contributions to an occupational pension scheme - are not defeated by inflation.
The matters to which we have referred are not to be taken as an exhaustive or a prescriptive list. It is likely that, in most circumstances, pensions trustees who fail to take those matters into account will be open to criticism. But there may well be other matters which are of equal or greater importance in the particular circumstances with which trustees are faced. The essential requirement is that the trustees address themselves to the question what is fair and equitable in all the circumstances. The weight to be given to one factor as against another is for them.
Properly understood, the so-called duty to act impartially - on which the ombudsman placed such reliance - is no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant. If pension fund trustees do that, they cannot be criticised if they reach a decision which appears to prefer the claims of one interest - whether that of employers, current employees or pensioners - over others. The preference will be the result of a proper exercise of the discretionary power."
"In my judgment, the validity of a power of substitution depends on the circumstances in which it is capable of being exercised and the characteristics which must be possessed by the company capable of being substituted; while the validity of any purported exercise of such a power depends on the purpose for which the substitution is made. The circumstances must be such that substitution is necessary or at least expedient in order to preserve the scheme for those for whose benefit it was established; and the substituted company must be recognisably the successor to the business and workforce of the company for which it is to be substituted. It is not enough that it is a member of the same group as, or even that it is the holding company of, the company for which it is substituted. It must have succeeded to all or much of the business of the former company and have taken over the employment of all or most of the former company's employees. In my judgment, the proposed power to substitute I.B.L.'s holding company for I.B.L. in undefined circumstances is far too wide, alters and is capable of defeating the main purpose of the schemes, and is ultra vires."
Conclusions