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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Mackie & Ors (Trustees of The Rex Procter & Partners Retirement Benefits Scheme) v Edwards & Anor [2015] ScotCS CSOH_83 (24 June 2015)
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Cite as: [2015] ScotCS CSOH_83

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OUTER HOUSE, COURT OF SESSION

[2015] CSOH 83


 

CA116/13

OPINION OF LORD DOHERTY

In the cause

P H MACKIE, A COOPER, J DEEGAN, C N ING, A LUPTON, PAUL J ARRANDALE and F A WHITELEY, as TRUSTEES OF THE REX PROCTER & PARTNERS RETIREMENT BENEFITS SCHEME

Pursuers;

against

(FIRST) ERIC EDWARDS and (SECOND) SCOTTISH WIDOWS PLC

Defenders:

Pursuers:  A R W Young QC, Richardson;  Burness Paull LLP

Defenders:  Currie QC, Barne;  Maclay Murray & Spens LLP


24 June 2015


Introduction


[1]        The pursuers are the trustees of the Rex Procter & Partners Retirement Benefits Scheme ("the Scheme").  Rex Procter & Partners (“the firm”) is a partnership of quantity surveyors and construction consultants.  It has offices in Leeds and Bradford.


[2]        In July 1966 the firm set up the Scheme. The Scheme took out a Pension Planner policy with The Scottish Widows' Fund and Life Assurance Society (“the Society”). The Society was a mutual life office. The policy was a with-profits deferred annuity guarantee contract (“DAGC”).  Under the Group Bond (Joint Bundle (“JB”) 11) contributions to the Scheme were used in two ways.  First, premiums were used to pay for life assurance benefits and pensions for spouses payable on death in service.  The rest of the contributions were used to buy with-profits deferred annuities from the Society.  In terms of the Bond the trustees were entitled to purchase deferred annuities at specified maximum premium rates, in return for which the Society undertook to provide guaranteed levels of annuity.  The deferred annuities came into payment when members reached retirement age.  The contributions were invested by the Society in its with-profits fund, with the Society using the funds invested to fund its obligations to the pursuers in terms of the deferred annuities.  In the event of the investments producing surplus assets over and above what was required to fund the deferred annuities the pursuers could also be granted annual and terminal bonus payments.


[3]        On 12 March 1997 the pursuers engaged the first defender as scheme actuary.  The first defender was an employee of the Society.


[4]        In July 1999 the Society announced that, for the reasons outlined below, the underlying investment in the DAGC with-profits fund would require to change.  Whereas investment had previously been predominantly in equities (70% equities/30% bonds), in the future it would be predominantly in bonds (20% equities/80% bonds).  The upshot would be that returns would not match the previous high levels of returns which had been obtained from equities. The payment of bonuses would be unlikely.  Contribution rates would have to increase.


[5]        On 3 March 2000 the Society was demutualised and became the second defenders, part of the Lloyds TSB Marketing Group.  In January 2009 the second defenders became part of the Lloyds Banking Group.


[6]        The pursuers claim damages for breach of contract and negligence in relation to the advice which the first defender gave the trustees in 1999 concerning their decision to switch the assets of the Scheme from a DAGC to a managed fund contract with a subsidiary of the Society.  The essence of the pursuers’ case is that it was an implied term of their contract with the first defender as scheme actuary that he would exercise the degree of skill and care reasonably to be expected of an actuary of ordinary competence.  They contend that he failed to give an impartial and balanced assessment of the advantages and disadvantages of the switch; that he failed to advise them of the value and importance of the guarantees in the DAGC;  and that he failed to advise them of the option of leaving existing contributions with the DAGC and investing future contributions in a managed fund contract (“the third option”).  The pursuers aver that the first defender owed the same duties in contract and delict.  On each basis they aver that no actuary of ordinary skill would have failed in those duties.  The pursuers claim that but for the first defender's advice they would not have switched to the managed fund contract with the Society’s subsidiary, and so would not have suffered loss.


[7]        The defenders maintain that the proper law of the contract between the pursuers and the first defender was English law, and that under English law the pursuers’ claim is statute barred in terms of the Limitation Act 1980.  Alternatively, if (as the pursuers contend) the proper law of the contract was Scots law the defenders aver that any obligation to make reparation to the pursuers has been extinguished by prescription.  In any case they deny any breach of contract or negligence by the first defender.  They aver that the first defender did not advise the trustees to switch, but merely to consider with their advisers whether they ought to switch; and that even if the first defender had given the advice the pursuers say he ought to have the trustees would still have switched.  They aver that any loss the pursuers suffered was caused or materially contributed to through the trustees’ own fault and negligence.


[8]        By interlocutor dated 4 February 2014 the court allowed a proof before answer. The court also appointed parties to lodge full signed statements or affidavits from all witnesses whose evidence was sought to be adduced, such signed statements to stand as their evidence in chief subject to such further examination as might be allowed by the court.  The evidence was heard over 16 days.  Parties then prepared written submissions, and I then heard oral submissions over one day and part of a further day.


 


Background


[9]        The Scheme provided retirement benefits for employees of the firm.  It was a final salary scheme.  The trustees invested contributions from the firm and its employees in a DAGC in the Society’s with-profits fund.  By investing in the with-profits fund the trustees became members of the Society (which was relevant in the context of the demutualisation which occurred in 2000).  Because the DAGC contained certain guarantees the Society held as underlying assets a slightly lower proportion of equity investments than under certain of their managed fund contracts.  In the context of the rising stock market in the 1980s and 1990s this meant that the DAGC achieved a slightly lower rate of return than those managed fund contracts.  There was as a result a trend in those years for pension trustees to transfer their funds from DAGCs to managed fund contracts.


[10]      Between 1 January 1997 and 31 March 2001 the trustees of the Scheme were three of the partners of the firm, Ian Armitage, Andrew Phillips and Arthur Emmett. The trustees normally transacted their business at meetings of the partnership. The firm employed an administrator, Ron Linton, as partnership secretary. While minutes of trustees’ meetings were signed by the trustees and the partnership secretary, all partners took part in decisions relating to the Scheme. The partners who had not been appointed as trustees acted as de facto trustees (references hereafter to trustees include the de facto trustees unless the context indicates otherwise).  In 1999 Andrew Cooper, Paul Mackie, and J.S. Watkins were de facto trustees.  Mr Armitage retired as a trustee with effect from 31 March 2001 and was replaced by Mr Cooper.  Mr Emmett retired as a trustee with effect from 31 March 2002 and was replaced by Mr Mackie.  Frank Whiteley and Christopher Ing were assumed as trustees with effect from 1 August 2002.  Mr Phillips retired as a trustee with effect from 7 April 2006 and was replaced by Joseph Deegan.  Mr Phillips remained a partner until 31 March 2009. Since the commencement of these proceedings the trustees have been the pursuers.


[11]      Section 47 of the Pensions Act 1995 introduced with effect from 6 April 1997 the obligation on the trustees or managers of an occupational pension scheme to appoint a scheme actuary, who had the role of giving independent actuarial advice to the trustees of the scheme.  In 1999 the first defender was scheme actuary of between fifty and sixty pension schemes, of which the Scheme was one.  He qualified as an actuary in 1992.  At all material times he was a member of the Faculty of Actuaries.  On 1 August 2010 he became a member of the Faculty’s successor body, the Institute and Faculty of Actuaries.  He was an employee of the Society and he became an employee of the second defenders on demutualisation.  He acted and acts as a pensions actuary.  He had no managerial role in the Society and has had no such role with the second defenders.


[12]      The Pensions Act 1995 (s. 56) also introduced the Minimum Funding Requirement ("MFR").  This involved a statutory minimum funding test by which the liabilities of a pension scheme were assessed using a prescribed set of assumptions.  If the assets of a scheme were less than 90% of the MFR, the contributors to the scheme were obliged to make up the shortfall to 90% in early course.  Prior to 11 June 2003 the MFR was also the level to which an employer was obliged to fund a scheme if the scheme was to be wound up.  In calculating the MFR, the liability of the pension scheme in respect of an employee who was ten or more years from retirement was adjusted to reflect movements in the United Kingdom equity market. In the ten years before retirement, the calculation of the liability in respect of a member was based increasingly on gilts in accordance with a sliding scale.  The scheme actuary had an obligation to certify whether or not the MFR was met at each triennial valuation of a scheme.  The Scheme, like many schemes, had a preponderance of members who had more than ten years to serve before retirement.  Accordingly the calculation of most of the MFR of the Scheme moved in line with the United Kingdom equity market. When a scheme was invested principally in equities, its value moved in large measure with the equity markets enabling it more closely to match the MFR.  But the value of a pension scheme which was heavily invested in bonds was likely over time not to match the MFR.  Such a scheme was vulnerable to a rise in the value of UK equities which was not matched by an increase in the value of gilts.


[13]      On 12 December 1997 the first defender produced his first triennial valuation as scheme actuary for the Scheme. The valuation was as at 31 July 1997.  He valued the Scheme assets at £921,100 and Scheme liabilities at £533,800, giving a surplus of £387,300.  Within the assets was a sum of £639,500 representing the value of pensions already bought.  The first defender recommended a funding rate of 8.1%.  In accordance with the normal actuarial practice at that time neither the assets nor the liabilities were valued on a market value basis. The assets (the deferred annuities purchased) were valued by discounting at the valuation rate of interest the benefits bought before the valuation date, resulting in a value of £639,500. Allowance was also made for future bonuses of £281,600. Liabilities were valued at £533,800 by discounting the future benefit outgo from the fund at the same rate of interest. The valuation noted that if the Scheme had been wound up at the valuation date the cost of buying the accrued leaving service benefits under deferred annuity bonds would have been higher than £639,500 but that it was still clear that the Scheme could have provided all the required benefits under deferred annuity bonds.


[14]      For many years up to and including 1999, because of the strong performance of the UK stock market, the return on the investments underlying the DAGC had considerably exceeded the guaranteed rate of return on that contract.  The Society had been able to declare bonuses which were used to purchase further deferred annuities.  Most actuaries at the time assumed a higher rate of return for schemes invested in equities than for schemes invested in bonds, and they were likely to advise that further contributions were needed for the latter schemes.


[15]      In the later 1990s long term interest rates fell from around 8% - 9% to 5% - 6%.  If long term interest rates continued to fall there was a real prospect of the guarantees in the DAGCs coming into play.  Further, as a result of economic changes and regulatory requirements, the Society had to hold substantial capital reserves to support its DAGCs.  This prevented it from investing that money more profitably elsewhere. The Society’s Appointed Actuary therefore decided that the ratio of investments underlying the DAGCs was to be switched from 70:30 to 20:80 between equities and bonds.  As a result, actuaries in the Society foresaw that it was very unlikely that DAGCs would benefit from declared bonuses in future.  It was necessary for the Society and scheme actuaries to inform trustees of the change in the investments underlying the DAGCs.


 


The first defender’s terms of appointment


[16]      The first defender wrote to the trustees on 5 March 1997 setting out the terms on which he would accept appointment as scheme actuary to the Scheme.  In that letter, under the heading of "Status and personal undertakings", he stated:

            "It is a requirement of the Act and of the actuarial profession that any actuary that you employ must be appointed personally, by name, regardless of who might be his/her principal employer. You will therefore be appointing me personally and I will at all times be personally responsible for any actuarial advice I give.


 

I am however an employee of Scottish Widows and my work there extends beyond pure actuarial work to other areas of pension scheme administration and advice which Scottish Widows provide, as well as to dealing with contracts issued by companies in the Scottish Widows Group and the terms thereof. I may therefore on occasion be supplying you with information or advice which is in respect of these other areas. Whenever I communicate with you I will make it clear the capacity in which I am doing so.

...

I may be appointed by any of the Companies which participate in your scheme to provide them with actuarial advice in relation to this scheme. Should I be, I am required to draw this to your attention formally. Further, in accepting appointment by others, conflicts of interest may arise. If in my opinion a conflict is possible, I shall immediately inform all the parties concerned and will consider after discussion whether it would be proper for me to withdraw from acting for one or other party."


 


The switch


[17]      On 26 June 1999 the Society and Lloyds TSB announced that they had entered into an agreement for the transfer of the Society’s business to Lloyds TSB (JB 71).


[18]      During 1999 the trustees’ “pensions advisers” were Entegria Limited. Their contact at Entegria was Roddy McVittie. Mr McVittie was employed by Entegria as a pensions consultant. The pursuers were among his clients.  He described his role as providing advice to the pursuers on matters such as changes in pensions legislation and regulatory requirements.  He was not authorised under the Financial Services Act 1986 to give regulated investment advice.  His evidence was that if the pursuers had asked for investment advice he would have referred the matter to a person within Entegria who was qualified to provide such advice.  He did not recollect any instance where the pursuers had requested that Entegria provide such advice.


[19]      By letter dated 12 July 1999 the first defender wrote to Mr McVittie enclosing advance copies of a letter and statement prepared by him which he proposed to send to the trustees, and a copy of a letter and notice to the trustees from Mr R J Hyder, a pensions manager with the Society, which was to be sent to them at the same time as the letter and statement.  The letter to Mr McVittie stated:

“Please note that we remain firmly committed to the final salary market - the Investment considerations which have prompted the changes in the Group policy do not apply our Managed Fund contract and administration. Therefore, we continue to provide high quality and cost effective administration and investment services for final-salary pension schemes. To illustrate this I enclose a separate leaflet which outlines the range of services which we offer in connection with our Managed Fund contract. I hope that you will be able to support our approach and recommend that the client switches to our Managed Fund.”


 


[20]      By letter dated 19 July 1999 the first defender wrote to Mr Linton:

“Dear Mr Linton,

Rex Procter & Partners Retirement Benefits Scheme

IMPORTANT: INVESTMENT STRATEGY

 

I refer to our telephone call today and the enclosed letter from Scottish Widows about the future investment strategy for the assets backing the with profit deferred annuity policy in which you are invested. As a result of this, as actuary appointed by the Trustees, here is my advice to the Trustees which they should consider before deciding on the future investment strategy for the Pension Scheme. Please pass a copy of this to all the trustees.

 

The trustees should consider this matter as soon as possible. I would like to attend a meeting when this is discussed, so please contact me as soon as possible to agree suitable dates for a meeting.

 

If you have any questions about this exercise please contact me on the direct number shown above.

 

Yours sincerely,

 

Eric Edwards

Pensions Actuary                   Copy to Entegria Limited”


 


The following statement was enclosed with the letter:

"I am writing this letter to the Trustees in my capacity as Scheme Actuary.

Statement to the Trustees of the Rex Procter & Partners Retirement Benefits

Scheme

IMPORTANT: INVESTMENT STRATEGY

Policy for matching the assets to the liabilities

I refer to today's letter from Scottish Widows about the future investment strategy for the assets backing the with profit deferred annuity policy in which you are invested. Here is my actuarial advice which you should consider before deciding on the future investment strategy for the Pension Scheme.

 

Please note that I am not able to give investment advice and this statement is restricted to a consideration of any constraints arising from the liabilities of the fund which might affect your investment strategy.

 

Recommendation

I recommend the Trustees consider urgently switching their assets to those which will offer a better match to the Minimum Funding Requirement (MFR) liabilities. This means moving to a fund with more equity investments than

will apply under the likely future investment mix of the present contract, for example by switching to a managed fund type of investment. If you do not do this, there is a risk that deficits will arise in future because of adverse stockmarket movements. In addition, the costs of the scheme may well increase in future if no action is taken and I will recommend an increase in funding rates. I now discuss this in more detail below.

 

Conflict of Interest

I must let you know that I may have a conflict of interest in giving you this advice. Scottish Widows are my employer and they would like you to take action as soon as possible. Indeed, they are offering an incentive to assist you in reaching your decision provided you reach this within the next 6 months. I have considered whether it is proper for me to act in these circumstances and have concluded that I am able to give you advice appropriate to your circumstances without it being affected by a conflict. It is of course open to you to take independent advice and I am sure you will consult with your independent advisors before reaching a decision.

 

Background

Scottish Widows has given notice of a significant change to the investment policy for the assets backing the with profit deferred annuity contract in which you are invested. The current policy is to allow the Investment Managers a considerable degree of investment freedom and this generally resulted in a high equity investment backing for your contract. In practice this means that the investment returns achieved by this contract have been very good because of strong growth in equity investment markets. Unfortunately, such high investment returns cannot now be expected in the future. Because of this factor alone, the Trustees must consider switching their investments to those which offer the possibility of higher investment returns in future.

 

As well as considering the long term investment returns for the scheme, the Trustees must consider the MFR position. The MFR requires that a minimum amount of money is held in the fund. This amount is adjusted from day to day in line with the movement in a theoretical portfolio of "matching" assets.  Provided the scheme is invested in those assets, there is little risk of divergence from the MFR position because of adverse movements in stockmarkets. However, being significantly mis-matched to the MFR is likely to cause problems in the future. This is because an adverse market movement could result in a deficit arising, and there are strict time-scales for recovering deficits from the employer. For example, if the value of the assets falls to below 90% of the value of the liabilities on the MFR basis, then the employer has to make up the shortfall within one year. This could result in a significant cash injection into the scheme at a time when the employer can least afford it.  Assuming such volatility of contributions is not desirable, it is essential that the position is reviewed urgently.

 

There is another risk which the Trustees need to consider. If the scheme winds up then you may need to buy-out the members' benefits with an insurance company. It would be unfortunate if wind up occurred when stock markets were depressed relative to the cost of insurance as this would worsen benefits.  The present insurance policy which you hold is reasonably matched to the liabilities of the scheme on wind up. However, as has been pointed out, this is now at the considerable expense of lower future investment returns. Therefore unless you expect the scheme to wind up in the near future, most Trustees would consider it appropriate to ignore the possibility of wind-up when deciding their investment strategy, and look to maximising investment returns, whilst controlling the MFR risk.

 

What options are available for the scheme?

 

Option 1

Do nothing - this means that in current financial conditions bonuses payable to your scheme will be much lower than in the past. Effectively, as far as the MFR is concerned, I will need to treat your scheme as if it were wholly invested in fixed interest securities. In practice, to have a reasonable match to the minimum funding requirement, you will need to hold a significant amount in equities. Therefore, this option would result in an unacceptably high risk of an MFR deficit arising, both from the point of view of the members as well as the employer. In addition, the long term costs of the scheme are likely to rise and I would need to recommend an increase in funding rates.

 

Option 2

The alternative is to transfer to a more suitable investment medium such as a managed fund. Because of the additional 5% enhancement Scottish Widows are offering (on top of the 3% enhancement which was previously available), this would result in an immediate improvement in the MFR solvency position of your scheme by 5%. In addition, it would then be possible to match the MFR as closely as required for example by investing in the UK equity tracker and fixed interest funds. However it would not be essential to match quite as closely as that and the Investment Manager might be offered some freedom for example to permit holdings in overseas equities and property.

 

If you switch to a managed fund with a free investment policy, I would not currently recommend any change to the long term funding rates for the scheme. However, separate from this exercise, we are reviewing our funding advice as a result of recent falls in inflation and interest rates, and my recommended funding rates may increase as a result. We will provide more information about this at the next funding review.

 

The next steps

I have given my recommendation in Paragraph 1 and I now await the decision of the Trustees. Before action is taken it should be discussed with the employer whose attitude to investment risk will also be important. If you need any further information please do not hesitate to get in touch.

 

Yours sincerely

 

 

Eric Edwards

Pensions Actuary

Fellow of the Faculty of Actuaries"


 


[21]      The first defender also enclosed a letter and notice from Mr Hyder to the trustees. The letter was headed "Important changes to your bond - request for your decision." In the letter Mr Hyder explained that the group pension contract was a with-profits contract which had been backed by an investment mix consisting mainly of shares and other "real" assets which had provided higher returns than fixed-interest investments.  As a result the Scheme had benefited through regular annual and terminal bonuses.  He explained that, as a result of (a) the prospect of very low inflation for the foreseeable future, (b) the extent of the guarantees in the Group Pension Bond, (c) changes in the valuation regulations and (d) changes to the taxation of pension funds, there were to be significant changes to the investment character of their Bond.  He stated:

"In order to match reasonably closely the guarantees in Group Pension Bonds, we are now having to invest the assets which we hold to back them mainly in fixed-interest investments instead of the previous wide mix of investments.  This may make your bond much less suitable for your scheme than it has been.  In particular it is, quite soon, likely to mean very low (or zero) bonuses under your bond for the foreseeable future."


 


[22]      Mr Hyder indicated that the scheme actuary was aware that he was writing to the trustees.  He advised that it was likely that many schemes would be advised by their scheme actuaries that they should consider switching to a different investment vehicle because of the change in underlying investment mix.  He explained that “if it would be suitable for your particular scheme” the Society would be very pleased if they were to switch the investment and administration of the Scheme to a managed fund contract offered by the Society’s subsidiary company, Pensions Management (SWF) Ltd.  An enhancement of 8% of the transfer value of the bond was offered to encourage the trustees to switch to the managed fund contract by the end of 1999. Mr Hyder also gave formal notice of changes to the terms on which pensions would be bought for future entrants to the Scheme.  Those changes included the removal for new entrants into the Scheme of the guaranteed maximum premium rates.  Mr Hyder concluded by asking for a response to his letter and advising that the trustees could discuss the options with their independent financial advisers or contact their scheme actuary.


[23]      Under a managed contract with Pensions Management (SWF) Ltd investors had the option of investing assets in one or more of twenty pooled unit funds. The funds were the Managed Fund, Cash Fund, Stock Exchange Fixed Interest Fund, Emerging Markets Fund, UK Equity Fund, Japanese Equity Fund, Safety Fund, Property Fund, Stock Exchange Equity Fund, Index Linked Protection fund, Overseas Bond Fund, European Equity Fund, UK Index Fund, Consensus Fund, Stock Exchange Fund, Pension Protection Fund, UK Bond Fund, North American Equity Fund, Overseas Equity Fund, and the Far East Equity Fund.  


[24]      On 10 October 1999 the Society wrote to the trustees confirming that trustee members of the Society who moved to a managed fund contract with its subsidiary would be viewed as continuing members of the Society until the completion of the transfer of the Society’s business to Lloyds TSB for the purposes of any compensation paid for loss of membership rights on the demutualisation.


[25]      On 18 October 1999 the first defender gave a presentation to the trustees and other partners at a meeting at the firm’s Leeds office. Mr Armitage, Mr Phillips and Mr Emmett (the three trustees) and Mr Cooper, Mr Mackie, and Mr Watkins (three de facto trustees) were at the presentation, as were Mr Linton and Mr McVittie.  The first defender gave a prepared presentation (JB 72) and spoke orally in relation to the presentation’s contents. Shortly after the presentation he made the following file note:

Corporate Pensions Meeting Note

3. Attendees

                         SW     Eric Edwards                    scheme actuary

                         IFA    Roddy McVittie                Entegria

                                    Ron Linton                        Partnership Secretary

                                    Various number of Trustees

 

This was one of my worse (sic) PensionPlanner meetings so far. Badly chaired (Ron Linton said next to nothing) and one of the Trustees kept rushing ahead to the conclusions, and then the meeting kept having to cover old ground that would have been covered if he had let me go through the presentation order. No-one there had a good feel for the issues either - another set of Trustees who wanted to think as little as possible about the pension scheme.

 

Meeting also disrupted by people leaving to answer mobile phones and by latecomers and non-Trustees arriving for the monthly partners meeting.

 

Should switch, but issue of MOP was raised by one. Windfall was also discussed, and again they had no idea of the potential size of it.”


 


[26]      On 20 October 1999 Mr McVittie wrote to the first defender.  In that letter Mr McVittie stated:

“Further to our meeting with the Trustees on 18 October, as you will appreciate, we now require a Managed Fund Report in the usual format, describing the services available and the relevant charges for these including investment.

 

From our conversation on 19 October, I appreciate that you are currently looking into the question of “sweetening the pill” as far as initial charges are concerned and that therefore, pending a decision in this respect, the Report may not be produced as promptly as normal.

 

I therefore look forward to hearing from you in due course.

 

In producing the Report could you also confirm the position regarding the enhancement, whether you retain all or some of the services in addition to investment, over the five year period or indeed, how the enhancement clawback would be affected if both the investment and services were placed elsewhere after three years say. From your presentation, provided the Employer and Trustees intend to continue with the provision of final salary benefits, there would appear to be little option other than to switch out of the current insured contract and, it is not my intention, if this route is adopted, that Procter’s should go anywhere other than with Scottish Widows. However, we will have to comment on the possible alternatives although, I suspect that these are relatively limited if services are to be provided at acceptable cost.”


 


[27]      On 12 November 1999 Mr McVittie wrote to Mr Linton confirming that the trustees had until the end of 1999 “to advise Scottish Widows of at least a decision in principle to switch to one of their alternative investment media should it be their intention to continue with the present Scheme and remain with Scottish Widows.”


[28]      The letter continued:

“I have produced a note which covers the main points made by Eric Edwards at the Trustee meeting on 18th November (sic) within which I make reference to the above…

 

From speaking to Eric this week, I understand that it is hoped to issue letters before the end of November giving members, including Scheme Trustees, an indication of the potential amounts of variable cash payment which would be paid following the transfer of business. He indicated that some comment on the question of potential future policy bonuses might also be made around this time and that he, as Actuary to the Scheme, needed to be aware of what is proposed in this respect before he gives any further opinion as to whether or not to discontinue the present contract and transfer to a Managed Fund investment. In effect what he has said is that if such potential bonuses are relatively small in relation to the size of the fund, he would adhere to what he has said previously but, if they were to be in any way substantial, he would have to rethink his previous comments.

 

From our conversation, he indicated that a decision in principle to switch could still be made but, that no final decision should be made until more information is available.”


 


[29]      The note which Mr McVittie prepared stated:

CHANGES IN SCOTTISH WIDOWS’ INVESTMENT STRATEGY

PENSIONPLANNER DEFERRED ANNUITY CONTRACT

As advised by Scottish Widows in their letters of 12 July 1999 and reinforced at the meeting with Eric Edwards, the Scheme Actuary, on 18th October, Scottish Widows have decided to make fairly major changes to the underlying investments for their Pensionplanner contract.

 

There are two principal knock-on effects of this and these are:

 

1 Future Investment Returns

 

There will be a move from the present position whereby around 75% of the underlying assets are invested in Equities to the investments being almost entirely in Fixed Interest stocks. The result of this is likely to be a considerable reduction in the returns on investment, with future bonuses being much depleted or indeed, nil.

 

The amount of deferred annuity purchased in each Scheme Year by the regular pension contributions already varies according to the financial conditions prevailing at each renewal date and will in the main have been reducing in recent years as interest rates generally have been declining. This in itself will lead to increases in the recommended funding levels in due course but will be accelerated by the change in investment strategy.

 

2 Minimum Funding Rate (MFR) Requirements

 

The Pensions Act 1995 introduced a requirement to ensure that Schemes are adequately funded when valued on a prescribed basis. This basis is “standard” in its assumptions but it is tailored to each scheme in the mix of the theoretical portfolio of “matching” assets. For example, in a scheme where all of the membership has more than 10 years until attainment of normal retirement age, it is assumed that the assets are 100% invested in UK Equities and that their value will change in line with movements in the market.

 

Whilst the Rex Procter Scheme may not be quite in this “extreme” position, clearly a move from the present position to an underlying investment of 100% in Fixed Interest stocks creates a considerable mismatch between the value of the assets and liabilities. At present the degree of mismatching is cushioned to some extent by the surplus in the Scheme. In future the degree of cushioning could be much less and, lead to a recommended increase in the funding rate and in some circumstances, the need for a cash injection.

 

Also, if the Scheme was to wind up, the value of the assets might be inadequate to meet the liabilities, creating a debt on the Employer.

 

Guarantees

 

The Pensionplanner contract provides guarantees to the extent that deferred annuities notionally purchased for members each year are guaranteed to be payable at retirement.

 

Further there is a guarantee that the deferred annuity rates applied to purchase deferred annuities at each renewal will not be worse than those in the Group Pension Bond applicable to the Scheme irrespective of financial conditions. This guarantee will not apply in respect of new entrants to this contract after 31 January 2000. Therefore, in time, the guarantee will have less value.

 

Options to consider

 

Option 1

 

Continue with the present contract, accepting the prospect of poorer investment returns (the annual bonuses have already been reducing over the past few years) and the effects of a considerable MFR mismatch and the likely cost increases.

 

Option 2

 

Transfer to a more suitable investment medium, such as one or more of Scottish Widows managed funds which a) gives the opportunity to better match the assets to the liabilities and b) gives the prospect of better returns in the future than under Option 1.

 

Further, if the Trustees are agreeable to switching to such a contract with Scottish Widows and keeping the investment and administration services with them for the following 5 years, the bulk surrender value otherwise available for transfer from the existing contract will be enhanced by 3%.

 

As this decision has been influenced by Scottish Widows’ change in investment strategy for the present contract, they are offering a further 5% enhancement to the surrender value if at least a decision  in principle to switch on this basis is made before the end of 1999.

 

If a switch to their managed fund(s) is made but, the administration services are moved elsewhere, the enhancement to the surrender value is less than the basic 3%.

 

If a switch is made on the terms on offer and then investment and administration moved elsewhere within the 5 year period, at least a part of the enhancement would be clawed back from the then value of the investment.”


 


[30]      By letter dated 23 November 1999 the Society wrote to Mr Linton indicating that the estimated variable compensation that trustees would receive for the loss of their right to share in the surplus assets of the Society were it to be dissolved was £578,858 with a further £500 fixed compensation for loss of voting rights.  (In fact the sum paid in August 2000 was £695,706).


[31]      On 26 November 1999 Mr Linton wrote to Mr McVittie indicating that the trustees had made a decision “in principle” to switch the Scheme investments to one of the subsidiary’s managed funds.  On 29 November 1999 Mr McVittie wrote to the first defender informing him of that fact and enclosing a copy of Mr Linton’s letter of 26 November 1999. The letter of 29 November continued:

“..I still await your final recommendation which, when we last spoke, you were delaying pending details of the potential “loss” of future bonuses arising from the terms for transfer of business to Lloyds TSB…

 

From the enclosed letter, it would appear that switching to other than a Scottish Widows Managed Fund is not contemplated…

 

Regarding which Fund(s) they should switch to, I appreciate that you cannot give investment advice and indeed, strictly speaking, neither can I. Presumably they should be aiming for funds which would match the MFR split, relevant to this Scheme but, would the current surplus and the now anticipated Variable Compensation allow a degree of mis-matching. Perhaps you could advise in this respect…”


 


[32]      By letter of 14 December 1999 the first defender wrote to Mr McVittie. He enclosed copies of correspondence he sent the same day to the trustees.  He added:

“Turning to your letter of 29 November, I can also confirm the following.

 

1. My advice as the scheme actuary has not changed following the further details now available regarding the potential “loss” of future bonuses from the “additional account”.

 

2. I confirm the variable compensation payment will be secure if a switch to Managed Funds is made and the transfer of business to Lloyds TSB proceeds.

 

3. The approximate MFR split of the liabilities is 85% in UK equities and 15% in UK gilts (mainly fixed interest but a small amount in index-linked gilts).”


 


[33]      The first defender’s letter of 14 December 1999 to the trustees enclosed a bulk surrender value quotation in the sum of £1,740,600.  The quotation offered an enhancement to that value of 8% provided a decision to transfer was received by the Society on or before 31 December 1999.  The letter also enclosed an authority form for authorising payment of the bulk surrender value to Pensions Management (SWF) Limited, a Trustees Resolution Form, and a Managed Fund proposal form.


[34]      By fax letter dated 20 December 1999 Mr McVittie advised Mr Linton as follows:

“I do not, as yet, have a copy of the Managed Fund Proposal form but believe that it requires an indication of/ instruction as to which fund(s) the Bulk Surrender Value and possibly future contributions should be invested in. Whilst the investment in these can be tailored to match the split of the MFR liabilities, which are approximately 85% in UK equities and 15% in UK gilts an exact match is not necessarily essential in this case. Eric Edwards has agreed that, given the present surplus and the enhancement to the bulk Transfer Value (to be followed probably by the expected Variable Compensation value next year), the assets in which the funds are invested need not exactly match the split of the MFR liabilities. Therefore, the Trustees might wish to consider investment in one of the funds available, initially, perhaps either the general Managed Fund or, the Stock Exchange Fund which is similar but excludes property investment.

An alternative to both is the Consensus Fund which is broadly a tracker fund reflecting the average spread of investment in different asset classes for Mixed with Property Pooled Funds (ie, akin to Scottish Widows’ own Managed Fund).

There is of course the option to redirect new and existing monies within the funds available, at any time, and the Trustees might wish to elect investment in one or more of the above funds with a view to redirection at a later date.”


 


[35]      On 20 December 1999 the trustees signed the resolution which the first defender had sent them.  The resolution was in the following terms:

“RESOLVED THAT

After due consideration of the correspondence received from Scottish Widows which highlighted investment changes to the group insurance policy, and having considered the written advice received from both our Scheme Actuary and an adviser who is appropriately authorised under the Financial Services Act 1986, we have decided to switch the investment of the scheme assets to the Managed Fund Policy operated by Pensions Management (SWF) Limited.”


 


On the same date the trustees signed a proposal form requesting Pensions Management (SWF) Limited to issue a managed fund policy; requesting that company to apportion each premium between the funds in accordance with written instructions to be given to it by the trustees or any person or persons authorised for the purpose on their behalf; and authorising Mr Linton to act on the trustees behalf for the purpose of giving such instructions.  On 23 December 1999 Mr Linton wrote to the Society enclosing a proposal form in which the default instruction given was that premiums should be invested 100% in Managed Fund units.  On 10 January 2000 the sum of £1,841,678 (the surrender value plus an 8% enhancement) was used to purchase units in the Managed Fund.


 


Events post-switch


[36]      At a partnership meeting on 17 April 2000 the partners resolved to reduce the funding rate for the Scheme from 8.3% to 7.3%.


[37]      By letters to Mr Linton dated 12 and 25 May 2000 Mr McVittie had suggested that when the demutualisation windfall payment became available the trustees should opt to re-invest it in the Managed Fund.  By letter dated 30 June 2000 to Mr Linton Mr McVittie repeated this recommendation.  The letter continued:

“Re-investment would be to the Managed Fund unless the Trustees wish otherwise. In which case, the Investment Instruction Form should also be completed and returned with the Selection Form.”


 


The Investment Instruction Form listed the twenty unit funds which were available for investment under the managed fund contract.  On 18 July 2000 the trustees completed the form and indicated that 100% of the windfall should be invested in the Managed Fund.  In August 2000 the windfall payment (£695,706) was invested in the Managed Fund.


[38]      In May 2001 the trustees indicated to Scheme members that they intended to use the windfall payment to improve benefits.  From 1 June 2001 certain level pensions were to increase in line with the Retail Price Index up to a maximum of 5%.  In June 2001 the trustees and the employer agreed that contributions for the period 1 June 2001 to 1 June 2006 should be 9.3%.  For the future, members were given the opportunity to opt, on payment of increased contributions, to accrue pension at the rate of 1/60th of pensionable income for each year of pensionable service rather than 1/80th.


[39]      In February 2001 the Scheme Financial Statements for the year ending 31 July 2000 disclosed that the value of the assets was £1,947,571. No annuities were purchased that year. Retirement benefits were met directly by the Scheme.


[40]      In July 2001 the first defender provided to the trustees his Actuarial Valuation as at 1 August 2000. As in the Actuarial Valuation for 31 July 1997, the first defender did not compare the market values of assets and liabilities.  Rather, assets and liabilities were compared by assessing future cash flows.  For liabilities, the future cash flows were the benefits payable. For assets, they were the income generated by the investments.  The actuarial value of the assets was £1,553,000 (compared to a market value of £1,934,000), and the actuarial value of the liabilities was £1,103,000, giving a surplus on an ongoing funding basis of £450,000.  However the valuation also noted that if the Scheme had been wound up at the valuation date it would perhaps only have been possible to provide active and deferred members with an insurance bond for around 70% of their benefits.


[41]      In February 2002 the Trustees’ Scheme Financial Statements for the year ending 31 July 2001 indicated that the value of the Scheme assets was £2,269,555.  The market value of investments had reduced by £290,409 but the value of the Scheme assets had increased overall because of the addition of the windfall payment received on 21 August 2000.  No annuities were purchased that year.  Retirement benefits were met directly by the Scheme.


[42]      On 5 September 2002 the first defender wrote to Mr Phillips highlighting that since the top of the equity market at the end of 1999 the All-Share index of UK share prices had fallen by around 35%;  that there had been almost three years with returns on pensions falling well below the returns on bonds and any additional returns assumed when planning the funding of schemes;  and that funding levels could have fallen significantly because of this.  He suggested that the trustees should take investment advice on the outlook for the progress of their funds; that they should consider asking the employer to increase contributions to the Scheme;  and that they should look closely at any plans to improve benefits to see whether they were still affordable.


[43]      On 21 January 2003 Mr McVittie wrote to the first defender. After raising a number of issues he observed:

“As I think you will be aware, the timing of the switch to the Managed Fund for this client (and no doubt a number of others) has been most unfortunate as the market has gone against them from the outset and this sits badly with Andrew Phillips in particular, not least because he has never fully accepted the explanation to the “saga” of the values used for accounting purposes pre and post the switch …”


 


[44]      By letter dated 10 February 2003 the first defender wrote to Mr Philips informing him that the Actuarial Statement dated 11 July 2001 (which covered the position as at 1 August 2000) required to be withdrawn because the value of the Scheme assets had fallen significantly since that date.  The replacement statement which the first defender provided stated that the resources of the Scheme would not be able to meet in full the Scheme liabilities as they fell due.  The first defender recommended that the Trustees should formally request additional funding from the employer.


[45]      On 10 January 2002 Mr McVittie wrote to the trustees and to Mr Linton to discuss options for funding the retirement benefits of three members who were about to retire.  The options identified were to insure the liabilities by the purchase of annuities, paying the pensions by the regular surrender of Managed Fund units, or to pay the pensions monthly from cashflow.  Mr McVittie advised on the market cost of the required annuities.  He continued:

“Whether to insure or to allow the fund to carry the risk is primarily an investment decision and the Trustees might feel that it would be better, particularly in the case of larger pensions to protect the fund by insuring the pensions at the time of retirement, effectively buying into Gilt yields, currently at around 4½%  to 5%  per annum. Alternatively, it might be felt that better returns can be achieved by continuing to invest the funds otherwise released in a broader mix of investments. However, the fund would require to earn in excess of the Gilt yield over a long period for this to be a successful decision. In the meantime, would the Trustees be happy to live with short term volatility.

The question of insuring pensions or carrying the risk in the Scheme is a subject which was discussed in conjunction with the last valuation and at that time the Actuary suggested that on the then liability profile and underlying assets, consideration should be given to insuring if new pensions were greater than £7,750 per annum. Of the above only [x]’s residual pension is close to this level. However, if the position is considered collectively rather than individually, the forthcoming retiring members’ pensions will be just in excess of £15,000 per annum.”


 


[46]      On 19 February 2003 the Scheme’s Financial Statements for the year to 31 July 2002 were issued. The value of the Scheme assets had decreased from £2,269,555 to £1,921,638. There had been net negative returns on investments of £399,531.  No annuities were purchased that year.  Retirement benefits were met directly by the Scheme.


[47]      On 27 February 2003 Mr Rod Cummins, Head of Pension Funds at Scottish Widows Investment Partnership, met with the trustees.  He delivered a report and gave them a presentation on the performance of the Managed Fund.  The valuation statement showed that a total of 43,341 units in the Fund had been purchased since 10 January 2000 at a total cost of £2,585,527;  but that by 31 January 2002 the value had fallen by £826,492 to £1,759,035. During 2002 the value of the Scheme assets had fallen by 17.5%.  He advised that there had been a sustained bear market in equities over the previous three years, but that there was room for long term optimism on equities.


[48]      On 25 February 2004 the Scheme’s Financial Statements for the year ending 31 July 2003 showed that the value of the Scheme assets had increased by £218,126 to £2,139,764. There had been a net increase in the value of investments of £96,682.  No annuities were purchased that year.  Retirement benefits were met directly by the Scheme.


[49]      In January 2004 the first defender provided the trustees with his draft Actuarial Valuation as at 1 August 2003.  He explained that it was no longer appropriate to continue valuing the Scheme assets and liabilities by discounting the income from assets and the outgo from benefit payments.  The move by companies away from providing returns to shareholders in the form of equity dividends made it harder to continue projecting the income from the assets and valuing it on long term assumptions.  Accordingly, he had taken the assets at market value and had valued the liabilities on assumptions related to current market returns.  At the same time he had allowed for two effects which had become clear since the last valuation, namely mortality improvement and the fact that inflation and long-term interest rates had come down to lower levels and looked likely to stay at such levels in the near term.  The market value of the assets was £2,127,000. Liabilities - benefits already earned - had a value of £2,526,000, leaving a deficit of £399,000.  The Valuation went on to note that if the Scheme had been wound up at the valuation date the assets would perhaps only have provided active and deferred members with an insurance bond for about 40-50% of their benefits.


[50]      At a meeting of the trustees on 9 February 2004 to discuss the draft report the first defender explained that pension schemes had been adversely affected by poor equity performance; by low returns on, and the high costs of, bonds; and by large salary increases. Had it not been for the deficit the future funding rate required to meet future benefits would have been be 16.1% of pensionable salary.  He recommended that in addition, to eliminate the deficit, a further 3% per annum be paid for 14 years.  He indicated that if some of the underlying assumptions were altered to be less conservative the recommended rate could be lowered.  One of the underlying assumptions in the draft report was that equities would return 2.5% more than gilts in the period before retirement.  Another was that the return after retirement would be based on investment in gilts.


[51]      Following the meeting the trustees and the partners approved increases in contribution rates for members and employers, closed the 1/60th scheme to future new members, and suggested that less conservative assumptions be applied in relation to returns from investments.  As a result in July 2004 the first defender prepared a revised Actuarial Valuation as at 1 August 2003 which showed assets of £2,140,000, liabilities of £2,258,000, a deficit of £118,000 (rather than £399,000), and a future funding rate of 14.1% of pensionable salary with an additional 1.2% per annum payable over 13 years to eliminate the deficit.  In the report the first defender explained that the trustees had asked him to assume that equities would return 3% more than gilts in the period prior to retirement, and that they had asked him to assume an additional return of 0.5% above gilts in the period after retirement to reflect the trustees’ policy of not investing in gilts to match pensions in payment.  The observations in relation to the position on a winding up which had been in the draft Valuation were repeated.


[52]      On 2 November 2004 the first defender ceased to be the scheme actuary for the Scheme.  He was replaced by David Watson, another employee of the second defenders.


[53]      In February 2005 the Scheme’s Financial Statements for the year ending 31 July 2004 showed that the value of the Scheme assets had increased to £2,364,492. There had been a net increase in the value of investments of £93,906.  No annuities were purchased that year. Retirement benefits were met directly by the Scheme.


[54]      Patrick Hand, Client Director at Scottish Widows Investment Partnership, prepared a report for the trustees which he presented at a trustees’ meeting on 1 December 2004.  It showed that as at 31 October 2004 the value of the Scheme assets was £2,544,332.19. Investments in the Managed Fund had grown by 8.9% in the 12 months to that date.  At the same meeting Paul Wilson of Entegria advised the trustees that they could reduce risk relating to retired members by purchasing annuities; but that it would involve paying a premium.  Mr Wilson was asked to obtain quotes for annuities for the three pensioners who received pensions out of the Scheme.  In addition the trustees decided to buy an annuity to pay the pension of a deferred member who was to retire in December 2004.  Mr Wilson was asked to obtain quotes for that annuity. 


[55]      One of the options considered to address the increasing deficit was winding up the Scheme. Mr Watson was asked to assess the deficit on a winding up basis.  As from 11 June 2003 the liability on a winding up required to be calculated having regard to the cost of purchasing annuities to meet the Scheme’s liability to pay benefits to members (Occupational Pension Schemes (Winding Up) Regulations 1996 (SI 1196/3216), reg. 4B, as inserted by the Occupational Pension Schemes (Winding Up and Deficiency on Winding Up etc.) Regulations 2004 (SI 2004/403), reg. 2).  On 5 April 2005 Mr Watson prepared an Actuarial Valuation for the trustees.  It disclosed that as at 1 February 2005 the market value of the Scheme assets was £2,730,000.  He estimated that at that date on a wind up basis the Scheme’s liabilities would be £5,921,000 and that the Scheme would have a deficit of £3,191,000.


[56]      In October 2005 the Scheme’s Financial Statements for the year to 31 July 2005 showed the value of the Scheme assets had increased during the year by £792,094 to £3,156,586.  Net returns on investments had been £562,665.  During the year an annuity was purchased. Other benefits were paid for directly by the Scheme.


[57]      In about November 2005 Mr Watson prepared a draft report of his Actuarial Valuation as at 1 August 2005 (the draft report was not a production).  He discussed its terms at a meeting of the trustees on 14 November 2005.  He reported that gilt yields had fallen since the last valuation which had increased the deficit by £580,000.  The valuation assumed that equities would outperform gilts by 3% for the period before retirement.  In June 2006 he provided a revised report of his Actuarial Valuation as at 1 August 2005.  He stated that the market value of the assets was £3,157,000 and that the liabilities (using market related assumptions and valued as an ongoing Scheme) were £3,876,000, giving a deficit of £719,000.  He assumed an extra return from equities over gilts of 2% (rather than the 3% which had been used in the draft valuation), and lower returns from gilts than had been assumed at the valuation of 1 August 2003. He made further allowance for continued improvement in life expectancy.  Mr Watson also reported that on a buy-out basis the assets of the Scheme at the valuation date covered only 48% of the accrued rights and entitlements. In order to cover the cost of buying an insurance bond to cover all the Scheme benefits an additional cash injection from the employer of in excess of £3.5 million would be required.


[58]      In February 2006 the partners gave the trustees notice that the final salary Scheme would close to any further accruals on 5 April 2006.  From that date a new stakeholder defined contribution money purchase scheme was provided for employees.  On 3 March 2006 the trustees wrote to members of the Scheme announcing the change. They attached a background note explaining the reasons for the partners’ decision:

“1.4  In 2005 new legislation regulations were introduced which re-assessed how Pension Scheme liabilities and funding are calculated.

 

The previous recommendations from the Actuarial Investment Advisers for funding schemes to satisfy the minimum funding rate (MFR) has now been proven to be flawed.

 

The Government and Investment Advisers have undertaken a thorough review of pension scheme funding. A new method of calculating the funding requirement for pension schemes has been identified and has resulted in a significant increase in funding to maintain an appropriate balance between assets and liabilities.

 

1.5  Notwithstanding the additional funding and increase in the financial market the liabilities/deficit within the Scheme have increased significantly due to the changing landscape affecting Pension Schemes generally and the volatility in the Pension Scheme market place.


 

The following statistics are now nationally recognised:-

 

1.5.1  Statistics now show that people in general are living longer (requiring a greater pension provision) and therefore the pressure on funding pension schemes generally has increased.

 

It is anticipated that the general levels of life expectancy will continue to increase further into the future.

 

1.5.2  Salary growth in our industry is growing at rates generally faster than the rate of inflation. Current indications are that this will continue.

 

1.5.3  The performance on gilt yields has been less than anticipated which is affecting the investment return for post retirement calculations.

                             

Gilts are Government backed investments with a guaranteed return. All pension scheme liabilities are calculated on the basis that funds are invested in gilts (government backed investments) and not equities (i.e. stocks and shares).

 

Lower gilt yields greatly affect the funding position of pension schemes generally…

 

1.5.5  Long term interest rates are predicted to remain relatively low, this places an additional cost on the Scheme as life expectancy increases…

 

2.9  The cost of purchasing annuities to provide for Pensions in retirement are at an all time high and are set to stay high…”

 


Information to similar effect was also contained in an enclosed Question and Answer paper.


[59]      In February 2007 the trustees approved the Financial Statements for the year to 31 July 2006.  The value of the Scheme assets had increased by £324,174 to £3,480,760.  During the year an annuity was purchased.  Other benefits were paid for directly by the Scheme.


[60]      In early 2007 the trustees discussed the performance of the Managed Fund and possible change of advisers and providers.  On 31 May 2007 the trustees and the partners wrote to Scottish Widows Investment Partnership to terminate their services with effect from 31 July 2007.  Thereafter, in late 2007 the Scheme assets were transferred to Scottish Equitable and invested in managed funds there.  An actuary with Scottish Equitable was appointed as scheme actuary.  The LEBC Group were appointed as the Scheme’s financial advisers.


[61]      In January 2008 the trustees approved the Financial Statements for the year to 31 July 2007.  The value of the Scheme assets had increased by £351,286 to £3,832,046.  No annuities were purchased.  Retirement benefits were met directly by the Scheme.


 


Limitation/Prescription:Applicable law


Introduction


[62]      In the first place I require to determine the proper law of the contract between the trustees and the first defender and the proper law of the alleged delict. The pursuers maintain that in each instance the proper law is Scots law. The defenders maintain that the proper law is English law, and that the claim is statute barred under the Limitation Act 1980. If the proper law is Scots law, the defenders say that any obligation to make reparation has been extinguished by prescription.


 


Proper law of the contract: the pursuers’ submissions
[63]      Mr Young submitted that the proper law of the contract was Scots law. The Rome Convention determined the applicable law (Contracts (Applicable Law) Act 1990, s.2(3)). Articles 3 and 4 provide:

Article 3 Freedom of choice

1. A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or a part only of the contract.

Article 4 Applicable law in the absence of choice

1. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3, the contract shall be governed by the law of the country with which it is most closely connected. Nevertheless, a severable part of the contract which has a closer connection with another country may by way of exception be governed by the law of that other country.

2. Subject to the provisions of paragraph 5 of this Article, it shall be presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his habitual residence, or, in the case of a body corporate or unincorporate, its central administration. However, if the contract is entered into in the course of that party's trade or profession, that country shall be the country in which the principal place of business is situated or, where under the terms of the contract the performance is to be effected through a place of business other than the principal place of business, the country in which that other place of business is situated.

5. Paragraph 2 shall not apply if the characteristic performance cannot be determined, and the presumptions in paragraphs 2, 3 and 4 shall be disregarded if it appears from the circumstances as a whole that the contract is more closely connected with another country.”


 


[64]      The parties had neither expressly nor impliedly made a choice of law in terms of Article 3 of the Convention.  Article 4 determined the applicable law.  It was plain that it was the first defender who was the party who was to effect the performance which was characteristic of the contract; and that the first defender’s principal place of business was in Scotland. Accordingly the presumption in Article 4(2) applied.  This was not a case where, by virtue of Article 4(5), and having regard to the circumstances as a whole, the court should conclude that the contract was more closely connected with England.  The first defender was based in Scotland. He was a member of the Faculty of Actuaries, the Scottish professional body. The great majority of the services under the contract were performed by the first defender in Scotland.  The factors relied upon by the defenders (in particular, that the trustees and the Scheme were based in England; and that the DAGC, the managed fund contract and the Scheme Rules were governed by English law) did not outweigh the factors connecting the contract to Scotland.


           


Proper law of the contract: the defenders’ submissions


[65]      Mr Currie submitted that on the facts the court should conclude that the parties had implicitly chosen English law as the applicable law governing the first defender’s appointment (Article 3).  The DAGC, the Scheme Rules and the managed fund contract were all governed by English law.  The trustees were domiciled in England and the Scheme was administered by them there.  The services provided under the letter of appointment were part of the overall administration services provided under the DAGC.  The first defender was an employee of the Society/second defenders and was remunerated by it/them, not by the trustees.  He had provided actuarial services to the trustees before his appointment as scheme actuary.


[66]      If there was no implicit choice of law, the court should nonetheless conclude - for substantially the same reasons as advanced in relation to Art. 3 - that in the whole circumstances the contract was more closely connected with England than with Scotland (Art. 4(5)).


 


The authorities referred to


[67]      Reference was made to the Giuliano-Lagarde Report; British Arab Commercial Bank PLC v Bank of Communications [2011] 1 Lloyd’s Rep 664;  Intercontainer Interfigo SC (ICF) v Balkenende Oosthuizen BV and another (Case C-13/08) [2009] ECR I-9687, [2010] QB 411; Caledonia Subsea Limited v Micoperi SRL 2003 SC 70;  Gard Marine and Energy Limited v Glacier Reinsurance AG [2011] 2 All ER (Comm) 208;  Schlecker v Boedeker [2014] QB 320; and Haeger & Schmidt GmbH v Mutuelles du Mans Assurances IARD (MMA IARD) [2015] QB 319, [2015] 2 WLR 175.


 


Decision and reasons


[68]      In my opinion it is clear that the pursuers and the first defender did not implicitly choose an applicable law to govern the first defender’s appointment.  Neither the terms of the contract nor any of the other circumstances of the case demonstrate with reasonable certainty that the parties made any such choice.


[69]      Accordingly, the applicable law falls to be determined having regard to Art. 4. There is no doubt that if Art. 4(2) applies the result would be that the contract is presumed to be most closely connected with Scotland. The first defender was the party who was to effect the performance which was characteristic of the contract.  At the time of the conclusion of the contract (indeed at all times) the principal place of business where he carried out his profession was in Scotland.  The critical question is whether it is clear from the circumstances as a whole that the contract was more closely connected with England than with Scotland.  If it was, in terms of Art. 4(5) the presumption in Art. 4(2) falls to be disregarded.


[70]      In Intercontainer Interfigo SC (ICF) v Balkenende Oosthuizen BV and another, supra, the Grand Chamber of the Court of Justice stated:

“26 Article 4 of the Convention is based on the general principle, which is enshrined in article 4(1) , that in order to establish a contract's connection with a national law, it is necessary to ascertain the country with which that contract is “most closely connected”.

 

27 As is apparent from the Giuliano and Lagarde report, the flexibility of that general principle is modified by the “presumptions” in article 4(2) to (4) of the Convention. In particular, article 4(2) sets out a presumption of a general nature, which consists in applying as the connecting criterion the place of residence of the party to the contract who effects the performance characteristic of that contract, whereas article 4(3)(4) establish special connecting criteria as regards contracts the subject matter of which is a right in immoveable property and contracts of carriage respectively. Article 4(5) of the Convention contains an exception clause which makes it possible to disregard those presumptions.

62 As is apparent from the wording and the objective of article 4 of the Convention, the court must always determine the applicable law on the basis of those presumptions, which satisfy the general requirement of foreseeability of the law and thus of legal certainty in contractual relationships.

63 However, where it is clear from the circumstances as a whole that the contract is more closely connected with a country other than that identified on the basis of the presumptions set out in article 4(2) to (4) of the Convention, it is for that court to refrain from applying article 4(2) to (4).

64 In the light of those considerations, the answer to the fifth question must be that article 4(5) of the Convention must be construed as meaning that, where it is clear from the circumstances as a whole that the contract is more closely connected with a country other than that determined on the basis of one of the criteria set out in article 4(2) to (4) of the Convention, it is for the court to disregard those criteria and apply the law of the country with which the contract is most closely connected.”


 


[71]      Subsequently, in Haeger & Schmidt GmbH v Mutuelles du Mans Assurances IARD (MMA IARD), supra, the Third Chamber of the Court of Justice observed:

“19 Article 4 of the Convention is based on the general principle, which is enshrined in article 4(1) , that in order to establish a contract's connection with a national law, it is necessary to ascertain the country with which that contract is “most closely connected”: the ICF case, para 26.

20 However, the application of that general principle is tempered by the presumptions laid down in article 4(2) to (4) of the Rome Convention .

21 In particular, article 4(2) lays down a general presumption, consisting in using as a connecting criterion the place of residence of the contractual party who effects the characteristic performance.

23 Article 4(5) of the Convention contains an exception clause which makes it possible to disregard those presumptions when the circumstances as a whole establish that the contract is more closely connected with another country: the ICF case, para 27.

45 …(U)nder article 4(2) it is presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of the contract, his or its habitual residence, central administration, principal place of business or other place of business which is to effect the performance.

46 Therefore, where the matter involves a contract which comes under article 4(2) of the Rome Convention and it is possible to identify its characteristic performance, the national court must first of all determine the applicable law on the basis of the connecting criteria set out in article 4(2) , as stated in para 35 above: the ICF case, para 62.

47 As is apparent both from the wording of article 4(2) of the Rome Convention , which makes express provision for the application of article 4(5) , and from the court's case law, that presumption may be disregarded when the requirements of article 4(5) are met: the ICF case, paras 63-64.

48 It follows from the foregoing that the court must ascertain, secondly, whether, in the light of the overall circumstances of the dispute before it, the solution it has reached applying article 4(2) must be disregarded. To that end, it must compare the connections existing between the contract and, on the one hand, the country in which the party who effects the characteristic performance has his or its habitual residence at the time of conclusion of the contract and, on the other, another country with which the contract is closely connected.

49 In fact the referring court must conduct an overall assessment of all the objective factors characterising the contractual relationship and determine which of those factors are, in its view, most significant: see, by way of analogy Schlecker (trading as Firma Anton Schlecker) v Boedeker (Case C-64/12) [2014] QB 320, para 40. As observed by the commission, significant connecting factors to be taken into account include the presence of a close connection between the contract in question with another contract or contracts which are, as the case may be, part of the same chain of contracts, and the place of delivery of the goods.

50 This interpretation is also supported by recital (20) in the Preamble to Regulation No 593/2008, which mentions that the existence of a very close connection between the contract in question and another contract or contracts may be a relevant connecting criterion.

51 In the light of the foregoing considerations, the answer to the third question is that article 4(2) of the Rome Convention must be interpreted as meaning that where it is argued that a contract has a closer connection with a country other than that the law of which is designated by the presumption laid down therein, the national court must compare the connections existing between that contract and, on the one hand, the country whose law is designated by the presumption and, on the other, the other country concerned. In so doing, the national court must take account of the circumstances as a whole, including the existence of other contracts connected with the contract in question.”


 


[72]      In my opinion, for the reasons advanced by Mr Currie, this is a case where, viewing matters objectively, the first defender’s contract of appointment was more closely connected with England than with Scotland.  Although the first defender was habitually resident in, and had his principal place of business in, Scotland (and notwithstanding that it was envisaged that by and large he would carry out his work as scheme actuary to the Scheme in Scotland) there were weighty factors connecting the contract with England.  The Scheme and the trustees were there. More importantly, the pursuers’ DAGC with the Society/second defenders was governed by English law, as were the Scheme Rules, and as was the managed fund policy to which the switch was made.  At the time he was appointed it was envisaged that, at least in large part, the DAGC would be the policy in relation to which the first defender would be providing actuarial advice.  The DAGC and the first defender’s appointment were related contracts.  When the first defender provided the pursuers with commercial services on behalf of his employers in relation to the DAGC those matters were governed by English law.  While the appointment as scheme actuary was of the first defender as an individual, it would be unrealistic to ignore the fact that it was the Society/second defenders, not the pursuers, which remunerated him.  Undertaking duties as scheme actuary was part of what he was employed to do by the Society/second defenders.


 


Proper law of the delict/tort: submissions


[73]      Sections 11 and 12 of the Private International Law (Miscellaneous Provisions) Act 1995 provide:

11.— Choice of applicable law: the general rule.

(1) The general rule is that the applicable law is the law of the country in which the events constituting the tort or delict in question occur.

(2) Where elements of those events occur in different countries, the applicable law under the general rule is to be taken as being—

(a) for a cause of action in respect of personal injury caused to an individual or death resulting from personal injury, the law of the country where the individual was when he sustained the injury;

(b) for a cause of action in respect of damage to property, the law of the country where the property was when it was damaged; and

(c) in any other case, the law of the country in which the most significant element or elements of those events occurred.

(3) In this section “personal injury” includes disease or any impairment of physical or mental condition.

12.— Choice of applicable law: displacement of general rule.

(1) If it appears, in all the circumstances, from a comparison of—

(a) the significance of the factors which connect a tort or delict with the country whose law would be the applicable law under the general rule; and

(b) the significance of any factors connecting the tort or delict with another country,

that it is substantially more appropriate for the applicable law for determining the issues arising in the case, or any of those issues, to be the law of the other country, the general rule is displaced and the applicable law for determining those issues or that issue (as the case may be) is the law of that other country.

(2) The factors that may be taken into account as connecting a tort or delict with a country for the purposes of this section include, in particular, factors relating to the parties, to any of the events which constitute the tort or delict in question or to any of the circumstances or consequences of those events.”


 


[74]      Mr Young accepted that elements of the events constituting the delict/tort occurred in both England and Scotland; and that there was some force in the view that the most significant elements had taken place in England. He submitted that the general rule in s. 11 was displaced by reason of the operation of s. 12.  He relied in particular upon the contract of appointment and upon his argument that the proper law of that contract was Scots law.


[75]      Mr Currie submitted that England was the country where the most significant elements of the events constituting the tort or delict had occurred (11(2)(c)): and that in any event the application of s.12 produced the same result.


[76]      Both counsel recognised that it would be peculiar if the proper laws of the contract and of the delict/tort were different, since the same subject matter was at issue.


[77]      Reference was made to the following authorities: VTB Capital plc v Nutritek International Corporation and others [2013] 2 AC 337, per Lord Clarke at para 198, 203, [2012] EWCA Civ 808, per Lloyd LJ at paras 147-9;  Morin v Bonhams & Brooks Ltd [2004] 1 Lloyd’s Rep 702, per Mance LJ at paras 14, 19;  Dornoch Ltd v Mauritius Union Assurance Co Ltd [2006] Lloyd’s Rep 1R 127, per Aikens J at para. 101 et seq.;  Kingspan v Borealis [2012] EWHC 1147 Comm, per Christopher Clarke J at para. 595 et seq.;  Trafigura Beheer BV v Kookmin Bank Co. [2006] 2 Lloyd’s Rep 455, per Aikens J at paras. 103-4;  Hillside (New Media) Ltd and Others v Baasland  [2010] 2 CLC 986, per Andrew Smith J at paras. 49-50.


 


Decision and reasons


[78]      Once again I find myself in agreement with Mr Currie’s submissions. In my opinion the most significant elements of the delict/tort occurred in England, and accordingly the presumption is that English law is the applicable law (s.11(2)(c)).  I am not satisfied that that presumption is displaced when the comparison exercise required by s. 12 is carried out. Indeed, it appears to me that the s.12 exercise also points to English law being the lex causae (particularly given my conclusion that the proper law of the contract is English law).


 


Limitation


Introduction


[79]      The defenders plead that under English law the pursuers’ claim is statute barred in terms of the Limitation Act 1980.  Expert evidence as to the English law of limitation was provided by Mr Ben Elkington QC (instructed by the pursuers) and Mr Nicholas Strauss QC (instructed by the defenders).  Both are experienced practising barristers.  Mr Elkington was called to the bar in 1996 and was appointed a Queen’s Counsel in 2012.  Mr Strauss was called in 1965 and has been a Queen’s Counsel since 1984.  Until January 2015 (when he reached the age of 72) Mr Strauss was a deputy High Court judge sitting in the Queen’s Bench and Chancery Divisions.  Mr Elkington prepared an Opinion.  Mr Strauss prepared a report and a supplementary report. Both also gave oral evidence.  Unsurprisingly, there was a good deal of common ground between them.


[80]      Any claim in contract which the pursuers may have had was subject to limitation after six years had elapsed from the date on which the cause of action accrued - the date of breach of contract (Limitation Act 1980, s. 5).  It was accepted that the breach of contract claim would be statute barred in terms of s. 5.


[81]      The primary limitation period for an action in negligence is six years after the cause of action has accrued (Limitation act 1980, s. 2).  A cause of action in negligence accrues when real (as opposed to minimal) damage is suffered.  Both Mr Elkington and Mr Strauss approached matters on the basis that such damage had been suffered at the date of the switch, and that the pursuers’ negligence claim was not brought within the primary limitation period.  As at that date the Scheme had suffered loss because it had concluded a transaction which was riskier, and less well suited to its requirements, than the DAGC (see Shore v Sedgewick Financial Services Limited [2008] EWCA Civ 863, per Dyson LJ at paras. 26-53).  Both experts accepted that the action was not brought within the primary limitation period.


[82]      The 1980 Act was amended by the Latent Damage Act 1986 which introduced sections 14A and 14B.  The purpose of the amendments was to avoid the injustice which otherwise might occur where a cause of action accrued by reason of the existence of damage without the plaintiff being aware of it.  Section 14A provides for a secondary limitation period of 3 years from the “starting date”, subject to a long stop of 15 years which is set out in s.14B.  Sections 14A and 14B seek to strike a balance between the interests of claimants and defendants.  On the one hand, claimants should be protected from the possibility that their claim becomes time-barred before they even realise that they have suffered a loss or have cause for complaint.  On the other hand, claimants are expected to act with reasonable expedition, and defendants are entitled to be protected from stale claims.


[83]      The pursuers rely upon the secondary limitation period for claims in negligence provided by s. 14A:

14A  Special time limit for negligence actions where facts relevant to cause of action are not known at date of accrual.E+W

(1) This section applies to any action for damages for negligence, other than one to which section 11 of this Act applies, where the starting date for reckoning the period of limitation under subsection (4)(b) below falls after the date on which the cause of action accrued.

(2) Section 2 of this Act shall not apply to an action to which this section applies.

(3) An action to which this section applies shall not be brought after the expiration of the period applicable in accordance with subsection (4) below.

(4) That period is either—

(a) six years from the date on which the cause of action accrued; or

(b) three years from the starting date as defined by subsection (5) below, if that period expires later than the period mentioned in paragraph (a) above.

(5) For the purposes of this section, the starting date for reckoning the period of limitation under subsection (4)(b) above is the earliest date on which the plaintiff or any person in whom the cause of action was vested before him first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action.

(6) In subsection (5) above “the knowledge required for bringing an action for damages in respect of the relevant damage” means knowledge both—

(a) of the material facts about the damage in respect of which damages are claimed; and

(b) of the other facts relevant to the current action mentioned in subsection (8) below.

(7) For the purposes of subsection (6)(a) above, the material facts about the damage are such facts about the damage as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment.

(8) The other facts referred to in subsection (6)(b) above are—

(a) that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence; and

(b) the identity of the defendant; and

(c) if it is alleged that the act or omission was that of a person other than the defendant, the identity of that person and the additional facts supporting the bringing of an action against the defendant.

(9) Knowledge that any acts or omissions did or did not, as a matter of law, involve negligence is irrelevant for the purposes of subsection (5) above.

(10) For the purposes of this section a person’s knowledge includes knowledge which he might reasonably have been expected to acquire—

(a) from facts observable or ascertainable by him; or

(b) from facts ascertainable by him with the help of appropriate expert advice which it is reasonable for him to seek;

but a person shall not be taken by virtue of this subsection to have knowledge of a fact ascertainable only with the help of expert advice so long as he has taken all reasonable steps to obtain (and, where appropriate, to act on) that advice.”


 


[84]      The action was raised on 6 February 2009.  The issue is whether the trustees had the requisite actual or constructive knowledge by 5 February 2006.  The burden of proving actual knowledge is on the pursuers and the burden of proving constructive knowledge is on the defenders.


[85]      In determining a limitation claim the court approaches matters on the basis that the claimant will establish the negligence which he claims.  That is so whether the question is being disposed of as a preliminary issue or after a trial examining the merits of the claim (see e.g. AB v Ministry of Defence [2013] 1 AC 78, per Lord Wilson at para. 2, Lord Mance at paras. 79-80;  Gravgaard v Aldridge & Brownlee (a firm) [2004] EWCA Civ 1529, per Arden LJ at para. 8;  Shore v Sedgewick Financial Services Limited [2008] supra, per Dyson LJ at paras. 6, 55).  (From a Scots perspective, it seems curious that that assumption falls to be made even after a trial on the merits of a claim.  However, the authorities in England seem clear on the point).


[86]      The leading authority on s.14A is the House of Lords decision in Haward and others v Fawcett (a firm) and Another [2006] 1WLR 682.  It is clear from Haward that "knowledge" for the purposes of section 14A means knowing with sufficient confidence to justify embarking on the preliminaries to the issue of a writ.  In Broadley v Guy Clapham & Co  [1994] 4 All E.R. 439, p. 449, Hoffman LJ considered the question of knowledge in the context of s. 14, an analogous provision. He referred to:

 “…the moment at which the plaintiff knows enough to make it reasonable for him to begin to investigate whether or not he has a case against the defendant …”.


 


Mere suspicion will not suffice - the claimant must know enough for it to be reasonable to investigate further.


[87]      The requirements for knowledge under s.14A are not to be interpreted strictly.  As Bingham LJ said in Spencer-Ward v Humberts [1995] 1 EGLR 123 at p.126:

“It is, I think, necessary that issues on this section should be approached in a broad common-sense way, bearing in mind the object of the section and the injustice it was intended to mitigate. There is a danger of being too clever and it would usually be possible to find some fact of which a plaintiff did not become sure until later. It would be a pity if a desire to be indulgent to plaintiffs led the court to be unfair to defendants.”


 


[88]      The material facts specified in s.14A(7) are determined objectively, being those which would lead a reasonable person who had suffered the same damage to consider it sufficiently serious to justify instituting proceedings against a solvent defendant who did not dispute liability (Gravgaard, per Arden LJ at para. 7).


[89]      Both experts were of the view that the live issues in relation to limitation in the present case were knowledge of the damage, knowledge of attributability, and constructive knowledge.


 


Knowledge of the damage


[90]      Mr Elkington identified “the damage in respect of which damages are claimed” as being the difference between the capital value of the deferred annuities surrendered in 1999 and the value of the Managed Fund units secured in 1999.  That damage had occurred because, after the switch, the Scheme no longer benefited from the DAGC guarantees and was exposed to risks which it would not otherwise have been exposed to.  Until the trustees had actual or constructive knowledge that there was a difference between the two values they did not have knowledge of the damage.  It was not enough for them to know that the value of the Managed Fund had fallen.  It was the comparative exercise which was critical. In order to have knowledge of the damage they had to have actual or constructive knowledge that they were worse off than they would have been under the DAGC.  In support of his analysis Mr Elkington relied upon Dobbie v Medway Health Authority [1994] 1 WLR 1234;  upon the disapproval in Haward of the decision in H.F Pension Trustees Ltd v Ellison [1999] Lloyd’s Rep. PN 489;  and upon Glaister v Greenwood [2001] PNLR 25.  Here, the trustees had known that they had made the switch and that the Managed Fund had fallen in value:

“However, they did not necessarily know that they had suffered damage, because that required a comparison between their actual position and the hypothetical position they would have been in had they not transferred to the Managed Fund” (para. 58 of Mr Elkington’s Opinion).


 


[91]      Mr Strauss disagreed with Mr Elkington’s analysis.  In his opinion the relevant damage was that instead of having an investment which was relatively safe and suitable to the Scheme’s needs they obtained a risky investment which did not have the benefit of the guarantees which had been contained in the DAGC.  That damage was suffered at the date of the switch.  The comparative exercise which Mr Elkington envisaged might, possibly, be relevant to the ultimate quantification of damages:  but it was not an exercise which the trustees required to have done in order to be aware that they had suffered damage. The relevant comparative exercise was to compare the suitability and risk characteristics of the DAGC and the Managed Fund.  On the material available to Mr Strauss he considered that the trustees had been in a position to do that.  They knew that their investment in the Managed Fund was suffering very significant losses and that they were not cushioned or protected by any guarantees from any of the consequences of those losses. They knew that prior to the switch the Scheme had had a significant surplus, but that within a few years of the switch it had a deficit. They cannot but have been aware by then that they were worse off because they were now invested in a much riskier investment than they would have been - and that the downside risks had come to pass.  Glaister, Dobbie and H.F Pension Trustees Ltd were distinguishable: in each of those cases the claimant did not know that the damage had been suffered. The situation in the present case was more akin to that in Susan Jacobs v Sesame Ltd [2014] EWCA Civ 1410, where the damage had been that monies were invested in a moderate risk fund instead of a cautious risk fund.


 


Knowledge of attributability


[92]      It is necessary to identify the acts and omissions which form the essential thrust of a claimant’s case and then consider when the claimant had knowledge that the damage was attributable to those acts or omissions (see Haward, per Lord Scott at para. 45, Lord Walker at para. 62, and Lord Mance at para. 118, (and the authorities there discussed)). That is done largely by looking at the claim made in the pleadings. Time will only start to run once the claimant knows that the advice may have been flawed (Haward, per Lord Nicholls at paras. 19-21, Lord Mance at para. 118).


[93]      What is required is knowledge that the damage is capable of being attributed to the alleged act of negligence as a matter of fact; knowledge of the legal position is irrelevant (s.14A(9)).  Knowledge that the damage is “attributable” to the act alleged to constitute negligence means “capable of being attributed” to it (Haward, per Lord Mance at para. 122). Knowledge that the damage would not have occurred “but for” the defendant’s actions is not enough: the claimant must know that the actions are “causally relevant” (Haward, per Lord Walker at paras. 19-21, Lord Mance at paras. 118-121).  In an action such as the present the defendant must know that the advice may have been flawed (Haward, per Lord Nicholls at paras.13-21, Lord Scott at paras, 48-9, Lord Walker at paras. 62-7, Lord Mance at 118-120). The extent of the knowledge required is modest. Knowledge of the detailed ways in which the defendant was at fault is not required, only the “broad essence” of the act or omission to which the damage is attributable (Nash v Eli Lilly & Co. [1993] 1 WLR 782;  Haward, per Lord Nicholls at para. 10).  Knowledge that the damage was "attributable" in whole or in part to the acts or omissions of the defendant alleged to constitute negligence within section 14A(8)(a) means knowledge in broad terms of the facts on which the claimant's complaint was based and of the defendant's acts or omissions, and knowing that there was a real possibility that those acts or omissions had been a cause of the damage. 


[94]      I understood both Mr Elkington and Mr Strauss to say that the essence of the claim was that the first defender failed to give the trustees balanced and impartial advice as to the relative advantages and disadvantages of continuing in the DAGC and switching to a managed fund with a high equity content; and that as a result of that failure the trustees gave up a relatively safe and secure investment which was well suited to the Scheme’s needs, and invested the Scheme’s funds in a much riskier investment which was less well suited to the Scheme’s needs.  In any event, whether they were wholly in agreement about that or not, it appears to me to be the thrust of the claim.


[95]      Mr Elkington maintained that if his analysis of the damage was correct (i.e. the difference between the values of the deferred annuities and the Managed Fund) the trustees would almost certainly have had knowledge of attributability at the same time as they acquired knowledge of damage (since they knew that the switch to the Managed Fund had taken place on the advice of the first defender).  On the other hand, if the damage was the fall in the value of the Managed Fund the trustees may not have attributed that fall to the first defender if there were other causes which appeared to them to be capable of explaining the loss.


[96]      Mr Strauss restated his disagreement with Mr Elkington’s identification of the relevant damage.  He agreed with Mr Elkington that knowledge of damage did not necessarily mean there was simultaneous knowledge that it was attributable to the defendant’s flawed advice; but in a number of cases, including Haward, Shore and Susan Jacob, the court had found that there had been knowledge of attributability.  In those cases the claimant knew that the investment had been an unsuccessful one and that the defendant had advised the claimant to make it. The test for knowledge of attributability is when the claimant knows, whether from information as to the outcome of the transaction or otherwise, enough facts to cause a reasonable person “to start asking questions about the advice he was given” (Haward, per Lord Nicholls at para. 21).  The existence of other possible causes does not necessarily preclude “knowledge” of attributability.  In Haward the plaintiff acquired actual knowledge when he discovered that the investment had turned out badly, despite the fact that he had been told of other possible causes (see Lord Walker at paras. 73-6 and Lord Brown at para. 83).  However, in the present case, in so far as the trustees were advised that the deficit was due to poor market conditions and the like, that was not truly another possible cause. The pursuers’ complaint is that they were exposed to investment risks and longevity risks they ought not to have been exposed to.  On being told there was a substantial deficit due to market conditions and increases in longevity they should have questioned why they had been exposed to such risks.


 


Constructive knowledge


[97]      Section 14A(10) provides that a person’s knowledge is not limited to their actual knowledge  but also includes knowledge which he might reasonably have been expected to acquire:

“(a) from facts observable or ascertainable by him; or

  (b) from facts ascertainable by him with the help of appropriate expert advice which it is reasonable for him to seek.”


 


A claimant who has taken expert advice is protected from shortcomings in that expert’s work by the proviso to the subsection:

but a person shall not be taken by virtue of this subsection to have knowledge of a fact ascertainable only with the help of expert advice so long as he has taken all reasonable steps to obtain (and, where appropriate, to act on) that advice.”


 


[98]      The approach which subsection (10) requires is an objective one. In Gravgaard Arden LJ opined:

“9. … For the purposes of constructive knowledge only, the question arises whether the claimant might reasonably be expected to have acquired knowledge of facts, and whether it was reasonable for him to seek advice. However, a claimant does not have constructive knowledge of facts simply because an expert, whom it was reasonable to expect the claimant to consult, could have obtained the knowledge or helped him ascertain facts. This is because, by virtue of the tailpiece in subsection (10), a person does not have constructive knowledge of matters which are ascertainable only with the help of an expert if he has taken all reasonable steps to obtain and, where appropriate, to act on that advice. If, therefore, he has timeously instructed an expert, it must be shown that he had actual knowledge of the facts specified in section 14A(6) or constructive knowledge on some other basis. This helps to prevent a claimant who acts properly from being penalised for shortcomings on the part of his expert…

20. There is, of course, an issue as to whether the court should, in determining whether it is reasonable to expect a person to seek legal advice, take into account the surrounding circumstances and any special characteristic or attribute of the claimant. Section 14A(10)  is silent as to the matters which the court must take into account and leaves such matters to the courts to work out. The test, however, is clearly objective. In my judgment, the court should take into account external surrounding circumstances, such as the significance of the issues to a reasonable person in the position of the claimant.

22. Section 14A(10) does not state that a person's knowledge includes knowledge “which a reasonable person might be expected to acquire” but rather that a person's knowledge includes knowledge “which he [she] might reasonably be expected to acquire” (contrast s. 14A(7) ). In my judgment, this choice of wording is significant. It means, in my view, that in general the court must have regard to the characteristics of a person in the position of the claimant, but not to characteristics peculiar to the claimant and made irrelevant by the objective test imposed by subsection (10). This conclusion is consistent with the general approach of section 14A. Section 14A attaches importance to the claimant having actual knowledge. Constructive knowledge applies only if the conditions of section 14A(10) are fulfilled. Moreover, as I pointed out earlier, section 14(10) does not automatically impute the knowledge of an expert instructed by a claimant to the claimant.”

 


[99]      In para. 73 of his Opinion Mr Elkington stated, under reference to Harris Springs Ltd v Howes [2008] BLR 229:

“If a claimant continues to rely upon the defendant for advice and the defendant does not inform him that there is a problem, then the claimant will not be fixed with constructive knowledge.”


 


Mr Strauss disagreed that there was any such general proposition of law.  Harris Springs was a decision on its own facts.  It showed that ongoing advice from a defendant might provide a valid explanation for a claimant not having acquired knowledge of facts relevant to whether he has suffered damage or to whether such damage is attributable to the defendant.  In his oral evidence Mr Elkington accepted the force of that criticism and agreed his observation ought not to be understood as setting out a proposition of law.


[100]    Mr Strauss opined that Harris was clearly distinguishable from the present case.  In Harris the claimant did not know that there was anything wrong with the foundations for which the defendant was responsible.  Here the trustees knew that their pension investment no longer benefited from guarantees, that it had fallen substantially in value, and that the first defender had advised them to switch to it.


 


Discussion


[101]    For the most part, the experts did not differ in their statement of the applicable law. The differences were rather as to the proper analysis of the facts and the application of the law to those facts. In so far as there were differences between the experts in stating the law, I found Mr Strauss’ exposition of the law to be more consonant with the authorities to which I was referred than Mr Elkington’s exposition.


[102]    The court has had the advantage of being able to consider more material than was available to the experts, and has had the benefit of seeing and hearing the witnesses.  Fact finding and proper analysis of the facts are, of course, ultimately matters for the court, not the experts: as is the proper application of the law to the facts. That said, where differences arose, Mr Strauss’ analysis of the facts and his application of the law to them appeared to me to be more appropriate than Mr Elkington’s approach.


[103]    I turn to examine the trustees’ knowledge of the material facts about the damage in respect of which damages are claimed.  In order to do that it is necessary first to identify the damage.  I agree with Mr Strauss that the relevant damage was that instead of having an investment which was relatively safe and suitable to the Scheme’s needs the trustees obtained a much riskier investment which did not have the benefit of the guarantees which had been contained in the DAGC.  That damage was sustained at the time of the switch, and it was sustained even if at the date of the switch the market value of the investment acquired in the Managed Fund was not less than the market value of the DAGC.  The relevant knowledge was knowledge that the new investment was much riskier and less suitable to the Scheme’s needs than the DAGC.


[104]    As already noted, the trustees during the relevant period were Mr Armitage (who retired on 31 March 2001), Mr Emmett (who retired on 31 March 2002), Mr Phillips (a trustee throughout), Mr Mackie (a partner/de facto trustee until 31 March 2002 when he became a trustee), Mr Cooper (a partner/de facto trustee until 31 March 2001 when he became a trustee), Mr Whiteley (appointed a member nominated trustee on 1 August 2002), and Mr Ing (appointed a member nominated trustee on 1 August 2002, but who became a partner in 2006). Mr Armitage had retired before problems with the Scheme became apparent. Mr Emmett, Mr Phillips, Mr Mackie, Mr Cooper, Mr Whiteley and Mr Ing all gave evidence in relation to their knowledge and state of mind during the relevant period.  A recurring theme was that at the material time they were looking forward, not back.


[105]    In the cases of Mr Whiteley and Mr Ing that is perhaps more explicable because they had not been involved at the time of the decision to switch. It is plain, however, that not long into their tenure as trustees both became aware of the very serious position which the Scheme found itself in. They appreciated that the investment in the Managed Fund had suffered substantial losses. They understood that for the very first time the Scheme had a substantial deficit. That revelation in January 2004 came as “a bombshell”.


[106]    Mr Emmett accepted that he was aware of substantial falls in the value of the Scheme’s investment in the Managed Fund.  He knew the Fund was invested in equities.  He knew the Scheme no longer had the guarantees it had had under the DAGC.


[107]    In cross-examination, under reference to the first defender’s letter to him of 5 September 2002 (JB 182), Mr Phillips accepted that by that point he was aware that equity returns had been well below the returns on bonds. It was put to him that had the trustees remained in the DAGC the Scheme would have been better off.  He replied: “That would have been evident.” While in re-examination he claimed that this answer was given with the benefit of hindsight, I am not persuaded that that was so.


[108]    Under reference to Mr McVittie’s letter to the first defender of 21 January 2003 (JB 189) Mr Phillips agreed that he had been conscious at that time that the markets had gone against the Scheme from the outset after the switch.  Under reference to the description in paragraph 1 of Mr Linton’s memo. of 13 May 2003 (JB 196) to Mr Ing and Mr Whiteley (“1. Switch from a scheme having Insured Benefits and guarantees to a scheme having Investments and Liabilities and no guarantees.”) he agreed that as at May 2003 he had understood that to be a fair summary of the switch.  He accepted that by January 2004 the trustees had been very concerned to see the Scheme had moved from a very considerable surplus to a significant deficit.  He agreed that by January 2004 the trustees knew that being invested in equities had exposed the Scheme to risk.  He accepted that they had understood that “a big chunk of the reason” for the deficit in January 2004 had been that equities hadn’t performed as well as had been assumed.  He agreed that at the trustees meeting on 9 February 2004 the first defender had said that pension schemes had been adversely affected by three factors (i) poor equity performance (ii) low return/high cost of bonds, and (iii) large salary increases.  None of that had come as news to him at the time.  In re-examination, under reference to the first defender’s letter to him dated 28 October 2002 (JB 185), he agreed that he was advised that decreasing bond yields had made pensions coming into payment more expensive and that he would have understood that.  Notwithstanding the predicament which the Scheme found itself in, he had no recollection of the trustees looking back to compare what the position might have been had the switch not been made.  Indeed, he went so far as to say (para. 15.3 of his witness statement) that he did not realise that the switch had not been in the Scheme’s best interests.


[109]    Mr Mackie confirmed that by January 2004, in light of the deficit, the trustees realised that the Scheme was clearly in a different position from where it had been previously. He indicated, however, that they did not start to question whether the Scheme would have been in a better position had it remained invested in the DAGC.


[110]    Mr Cooper stated that he recalled the falls in the value of the investment in the Managed Fund.  He had understood that the Scheme’s deficit was largely due to falls in the stock market, but that increasing mortality rates had also had a bearing.


[111]    Where they differ, I am inclined to attach more weight to the contemporaneous documents and correspondence than to the recollections of the trustees.  I do so for a number of reasons.  First, given the passage of time the documents are more likely to provide a reliable indication of the position at the time than these witnesses’ recollections at the proof.  Second, the contemporaneous documents suggest that the trustees’ financial knowledge and their knowledge of the detail of the workings of the Scheme were in fact much better than their evidence tended to indicate.  Third, at times during their evidence I found some of the trustees to be adversarial.  There was a reluctance (and on occasions refusal) to concede matters which plainly ought to have been accepted.  This was most marked with Mr Mackie; but it was also evident at times during the evidence of Mr Cooper, and even, on occasion, Mr Phillips.


[112]    The trustees knew that at the last actuarial valuation before the switch the Scheme had been in surplus on an ongoing basis and that on a buy-out basis its assets could have secured annuities sufficient to meet the whole liabilities of the Scheme.


[113]    By January 2001 they knew (from the draft Actuarial Valuation as at 31 July 2000) that the assets of the Scheme were no longer sufficient to secure an insurance bond which would cover full payment of members’ benefits.  On 10 February 2003 they were informed that the first defender had to withdraw the Actuarial Statement as at 31 July 2000 because of the fall in the value of the Scheme assets and because the resources of the Scheme would not be able to meet in full the liabilities as they fell due.


[114]    By January 2004 the trustees were well aware that between autumn 2000 and 2003 the Scheme had suffered swingeing losses because of the stock market crash.  At that time it was made clear to them that as at 1 August 2003 the Scheme was in deficit on an ongoing basis (to the tune of £399,000, later adjusted to £118,000 when less conservative assumptions were used at their request); and that if the Scheme had been wound up at the valuation date the assets would perhaps only have provided active and deferred members with an insurance bond for about 40-50% of their benefits.  By April 2005 they knew that as at 1 February 2005 the Scheme had a deficit of £3,191,000 on a wind up basis.  By November 2005 they knew that the deficit on an ongoing basis had increased by £580,000 between the Actuarial Valuations as at 1 August 2003 and 1 August 2005.


[115]    The trustees knew that bond yields had fallen and that the cost of bonds had risen. They knew from the information they were receiving (from the first defender, Mr Watson, Scottish Widows Investment Partnership, Mr McVittie and Mr Wilson) in the years after the switch that the cost of buying annuities had risen. They also knew that, although one of the reasons favouring a switch had been to keep down the cost of employers’ contributions, such contributions had in fact increased substantially. They knew that had they remained in the DAGC the Scheme would not have been invested in equities. With the possible exceptions of Mr Whiteley and Mr Ing, they were aware that after 2000 the with-profits fund would have been invested predominantly in bonds.  I am also satisfied that Mr Emmett and  Mr Phillips understood that but for the switch the Scheme would have been invested in the deferred annuities already purchased and in further deferred annuities purchased with contributions made after January 2000.


[116]    I conclude that before 6 February 2006 the trustees knew that the predominantly equity-based investment they had switched to was much riskier than the DAGC they had left, and that it was proving to be less suitable to the Scheme’s needs.  They were well aware that the Scheme’s predicament was largely due to it being invested in equities; and that had they not switched they would not have been exposed to that equity investment risk. They did not need comparative valuations of the investment they had given up and their investment in the Managed Fund in order to appreciate that, and to know that they were worse off because of the switch. They had no reason to think that the value of the deferred annuities the Scheme possessed at the time of the switch would have fallen because of the stock market crash.  On the contrary, they knew that the cost of bonds and the cost of annuities had been increasing.


[117]    In any case, even if they did not have actual knowledge of the damage by that date, in my view it was knowledge which they might reasonably have been expected to acquire before 6 February 2006 from facts observable or ascertainable by them (s.14A(10)).  The available sources of information included all the reports and other information provided to them in relation to the Scheme before and after the switch, including the terms of the Group Bond. For much the same reasons already outlined in relation to actual knowledge, they ought to have known that they had suffered that damage.  I do not think that the help of appropriate expert advice was needed in order for them to conclude that they had switched to a much riskier investment, and that it was less suitable to the Scheme’s needs than the DAGC.  It ought also to have been obvious that the deferred annuities which had already been purchased would have been unaffected by the stockmarket crash or any improvement in mortality rates, and that the Scheme was worse off having switched.  The rights and obligations under the deferred annuities would not have been affected by adverse market conditions.


[118]    If, contrary to my view, appropriate advice was needed, then it seems to me that it would have been reasonable for a (reasonable) person in the position of the trustees to have  sought it.  The trustees took no such steps.  It would have been reasonable, and very easy, to clarify with the first defender, Mr McVittie, Mr Wilson, or Mr Watson the liabilities the deferred annuities would have covered;  and that the rights and obligations under those annuities would have been unaffected by the stock market crash or by improvements in mortality rates after the annuities had been purchased.  Indeed, it would have been reasonable to have asked whether the Scheme was worse off having switched.  There can be no doubt that the answer would have been that it was.  Obtaining such clarification would not have involved the need for any actuarial or similar comparison of the values of the deferred annuities on the one hand and the investment in the Managed Fund on the other.  Broad and general clarification would have sufficed.


[119]    As far as attributability is concerned, the evidence of most of the trustees was that they only looked forward and never thought of looking back.  One of the trustees, Mr Emmett, accepted that by about February 2002, given what they knew, it would have been reasonable for the trustees to have started to investigate whether the first defender’s advice had been flawed.  My impression was that Mr Emmett understood what he was being asked, and that his answer was a fair and considered one.  There were certainly some grounds for beginning to investigate by then. By 5 February 2004 the grounds were even stronger; and the grounds were stronger still by 5 February 2006. The trustees knew, et separatim ought to have known, of the damage.  They knew that the switch had been made on the first defender’s recommendation. They knew that the Scheme had suffered substantial losses because of falls in the values of equities and that it had gone from having a significant surplus to having a very substantial deficit.  Having regard to these and the other factors already discussed I conclude that before 6 February 2006 a reasonable person in the position of the trustees would have started asking questions about the advice he had been given (Haward, per Lord Nicholls at para. 21).  He would not have done as most of the trustees maintained they did - only look forward.  In my opinion the explanations provided by the first defender for the losses and deficit would, if anything, have made it even more likely that a reasonable person in the position of the trustees would have questioned why it was that the Scheme had moved to an investment where it was so exposed to the risk of poor equity performance;  and why the trustees bore the entire risk of improved mortality rates in respect of all of the Scheme’s liabilities.


[120]    In my opinion in the whole circumstances the starting date for the purposes of s. 14A was not later than 5 February 2006.  By that date a reasonable person in the position of the trustees would have begun to investigate whether the first defender’s advice was flawed (Haward, per Lord Nicholls at para. 21).  He would have known enough to make it reasonable for him to begin to investigate whether or not he had a case against the first defender (Broadley, per Hoffman LJ at p. 449).  It follows that the pursuers’ claim is statute barred.


[121]    That is sufficient to dispose of the action.  However, in case the matter goes further, and in deference to the careful submissions made by Mr Young and Mr Currie, I think it is appropriate that I state my views on the merits, contributory negligence, and damages. Finally, on the hypothesis that the applicable law was Scots law rather than English law, I shall set out my conclusions in relation to the prescription plea.


 


The merits


Did the first defender recommend to the trustees that they switch out of the DAGC?


[122]    The pursuers’ position is that on a fair reading of the correspondence from the first defender of 19 July 1999, and having regard to the other evidence, he recommended to them that they switch from the DAGC to a managed fund type contract. That was what the trustees had understood him to be communicating to them;  and that was what reasonable recipients of the first defender’s advice would have understood he was saying.  Reference was made to Mannai Investment Co Ltd v Eagle Star Life Assurance Co [1997] AC 749.


[123]    The first defender took his stand on the terms of the correspondence of 19 July 1999 and the presentation of October 1999.  The terms of the recommendation in his statement of 19 July 1999 had been clear.  It had not been a recommendation to switch.  It had been a recommendation to consider switching. It had been plain from the terms of the statement and from the terms of the presentation that he was only giving actuarial advice, not investment advice; and that he expected the trustees to obtain investment advice before making a decision to switch.


[124]    The context of the first defender’s statement of 19 July was that in the accompanying letter from Mr Hyder the trustees were advised:

“Many schemes … are likely to be advised by their Scheme Actuaries that because of the change in underlying investment mix they should consider switching to a different type of investment vehicle.”


 


[125]    In his witness statement the first defender said of the advice which he had given:

 “…the main aim was to draw to the Trustees’ attention the need to take investment advice.” (para. 2.7)

 

“I stated that I could not give investment advice and that they needed to obtain this advice from their IFA.” (para. 5.12)

 

“While I expected the Trustees to rely upon the actuarial advice I gave, I had made clear that this advice was “restricted to a consideration of any constraints arising from the liabilities of the fund which might affect your investment strategy”…I had also said … that I was “not able to give investment advice”.  I expected the Trustees to take further advice when considering the switch and not reach a decision based on my restricted actuarial advice …Whether it was preferable in the long run to invest in equities or bonds was a matter of investment advice, which I stated I could not give. The Trustees were told to consult with their other advisors and with the employer before reaching a decision.”(para. 17.2)

 

 “The restricted advice I gave was only a recommendation to consider a switch. I made it clear the advice I gave was restricted and that the Trustees should consult their other advisors, so the Trustees should not have relied on me to provide a balanced assessment of the benefits and risk of each investment contract which they should have obtained from other advisers.” (para. 17.4)

 

“The key factual differences between the two contracts were brought to the Trustees attention. Whether it was better to retain a bond based deferred annuity contract providing guarantees or to switch to a contract allowing a more flexible investment strategy but no guarantees was a matter of investment advice. I would have expected the Trustees to obtain that advice from their IFA.” (para. 17.7)

 


[126]    The first defender noted that he was not able to give investment advice.   However saying that the statement was “restricted to a consideration of any constraints arising from the liabilities of the fund which might affect your investment strategy” was, as Mr Young submitted, at best opaque. The first defender recognised that this explanation of the scope and purpose of his advice was “actuarial speak”, and that it may not have been readily comprehensible to the trustees.


[127]    If the main aim of the statement was indeed to draw the trustees’ attention to the need to take investment advice before taking any decision, then in my opinion it failed to communicate that.  Nowhere in the statement was the need to take such investment advice before making a decision clearly stated. The first defender merely said that he was not able to give investment advice; and, in the context of explaining that he may have a conflict of interest in giving his advice he concluded that he was able to give it without being affected by any conflict, and observed “It is of course open to you to take independent advice and I am sure you will consult with your independent advisors before reaching a decision.”


[128]    In his oral evidence the first defender recognised that his witness statement overstated the position, and that it was incorrect to suggest that he had told the trustees that they needed to obtain investment advice from an Independent Financial Adviser.  He maintained, however, that what he did say made the position clear enough.  I disagree. What was said fell well short of saying that it was necessary to take independent financial advice on the long term prospects of equities outperforming bonds in the future, and on the merits and demerits of the switch.  It did not even highlight a need to take advice from a financial adviser.  Nor was it precise enough to convey that if the trustees had any concerns about the possibility of a conflict they should obtain independent actuarial advice on the merits and demerits of a switch.  It was one thing to say there was nothing to prevent the trustees from taking independent advice viz., that it was “open to them”.  It would have been quite another to say that the taking of such advice was necessary and was recommended.


[129]    In my opinion the first defender’s contention that he did not recommend a switch is not tenable when one has regard to the content, tone and thrust of the statement of 19 July. A fair and objective reading of it is that a switch from the DAGC to a more suitable investment vehicle was being encouraged. Without exception, that is how those involved in making the decision understood the statement. Whether or not the first defender considered himself to be recommending a switch, I agree with the pursuers that, viewed objectively, the gravamen of the statement was that a switch from the DAGC to an investment vehicle which would allow greater investment in equities was being advocated and recommended.


[130]    Does the evidence in relation to the presentation place a different complexion on that? I think not.  I accept the evidence that the first defender gave a reasonably lengthy and thorough presentation on October 1999.  In that regard I prefer the evidence of the first defender and the majority of those present to the evidence of Mr Mackie.  While the first defender has no clear recollection of precisely what was said, I accept that he followed largely his usual practice on that occasion.  I am not persuaded that the terms of the first defender’s file note of the meeting indicate that the presentation was other than thorough. The note records that the first defender was interrupted, and as a result required to take certain topics out of order: but it does not suggest that any of the topics were omitted.  The first defender explained that his observation that no-one there had a good feel for the issues had been his impression at the outset of the meeting rather than at its conclusion. Whether that is so or not I am satisfied that, subject to the qualification I shall come to in a moment, the first defender did explain each of the matters covered by the presentation.  I also accept that Mr McVittie’s note of the main points of the meeting, while by no means comprehensively recording all that was said, does provide a reasonably reliable summary. Although it was prepared after the presentation it is the nearest thing to a contemporaneous record which is available.


[131]    The qualification is that I do not accept that in the course of the presentation the first defender clarified that he was not making a recommendation to switch, but only a recommendation that the trustees should consider with their investment advisers whether to switch.  I reject as unreliable his evidence that he would have said that the key issue was an equity/bond issue and that on that issue trustees should take investment advice.  I bear in mind that in his witness statement he overstated what had been said in the statement of 19 July anent taking advice. That causes me to doubt the reliability of his oral evidence as to what was said at the presentation about taking advice. The trustees who attended the presentation did not speak to the first defender having told them that they should consider with their investment advisers whether to switch.  They left the presentation understanding that the first defender was recommending a switch. That, I think, was also how Mr McVittie understood matters.  Thus, in his letter of 20 October 1999 to the first defender he wrote:

 “From your presentation, provided the employer and the Trustees intend to continue with the provision of final salary benefits, there would appear to be little option other than to switch out of the current insured contract”(emphasis added).


 


Moreover, in his letter of 29 November 1999 he sought the first defender’s “final recommendation”. The first defender did not demur at the time from the terminology which Mr McVittie used.  He replied by indicating that his advice had not changed.  The exchange would have made little sense if Mr McVittie had understood the first defender to be recommending only that the trustees consider switching.


 


The expert actuaries


[132]    The expert evidence came from Mr Brian Spence and Mr Jonathan Punter.  Both are highly experienced consulting actuaries.  They are also very experienced pension and investment advisers.  Both have also acted as scheme actuaries. Both did so in 1999.  At all material times both were also qualified to conduct investment business, including the giving of regulated investment advice.


 


Breach of duty?


Conflict of interest


[133]    All that was said by the first defender in relation to conflict of interest was contained in the statement of 19 July. There was no discussion of conflict of interest at the presentation. The first defender was under a duty to disclose any conflict of interest of which he was aware. I do not accept that the disclosure in the statement of 19 July adequately explained to the trustees the conflict of interest which affected the first defender’s advice.  The clarity of what was said left much to be desired. In so far as the nature of the conflict was identified, all that was said was that it arose because (i) the Society was the first defender’s employer; (ii) it would like the trustees “to take action as soon as possible”; (iii) it was offering an incentive to assist the trustees in reaching their decision provided they did so within 6 months.


[134]    Most of the evidence and submissions relating to conflict of interest focussed on whether the first defender ought to have disclosed that the Society was keen to encourage DAGC policy holders to switch out of the DAGC and into a managed fund contract with its subsidiary.  Some of the Society’s internal documents (which the pursuers had recovered by commission and diligence) suggested that there was a project underway to attain that end, and that the aim was to have all DAGCs switch within two years.  While the internal documents were referred to during the evidence of the first defender and Mr Spence, they were not agreed documents and no evidence was led as to their progeny or accuracy.  The first defender’s evidence was that he did not think he had seen any of the documents containing that particular project aim;  and he had no recollection of the aim having been otherwise communicated to him.  I see no reason to doubt the first defender’s evidence on that matter.


[135]    Nonetheless, I am satisfied on the evidence that the first defender was well aware that his employers were keen to encourage DAGC policy holders to switch to a managed fund contract with their subsidiary.  I am also satisfied that he appreciated that if DAGC policy holders decided not to switch the Society would remain at risk of the guarantees kicking in, with consequent costs to it, if interest rates fell and annuity costs increased.  I found the first defender’s evidence on this issue to be rather evasive.  It was clear from the evidence of both Mr Punter and Mr Spence that the switch reduced the exposure of the Society to financial and longevity risks.  If the guarantees in a DAGC kicked in they would become a drain on the Society’s assets.  The first defender appeared to me to be reluctant to face up to what in my opinion, and having regard to the evidence of Mr Spence and Mr Punter, were obvious commercial risks for the Society.  He accepted that he had known in 1999 that the yield from the DAGC was about 5% per annum.  It was put to him that if long term gilt yields fell below that figure the Society would have to pay out more than the return on the underlying assets.  The first defender’s initial response was that since the Society intended to invest most of the underlying assets in gilts that should protect them against such a risk.  He suggested that, if there had been such a risk, the Society could have reinsured its portfolio of DAGCs with Legal & General.  I found the first answer to be unconvincing. It is plain that a change in the underlying assets from 2000 would not provide complete protection for the Society in respect of guarantees under the DAGC.  I find it surprising that the first defender did not accept that.  Deferred annuities had already been purchased by the Scheme.  The trustees were not at risk in relation to those assets if bond rates fell and annuity rates increased: the Society bore that risk.  Similarly, if bond rates fell and annuity rates rose above the maximum premium rates which the DAGC guaranteed, contributions would secure annuities at a cost less than the market rate.  That was a further risk which the Society bore.  In my opinion it was disingenuous of the first defender to introduce the possibility of obtaining reinsurance. Whether assets and liabilities could be disposed of on commercial terms was a different question from the one which he was being asked to consider.


[136]    It follows that in my opinion the first defender did not adequately disclose the conflict of interest which affected his advice.  He ought to have made clear that if the trustees switched from the DAGC his employers would no longer carry the risk of incurring losses if the guarantees kicked in, and that the investment and longevity risks would be transferred to the trustees.


[137]    Given my conclusion that the first defender did recommend a switch out of the DAGC to a managed fund-type vehicle, it might be thought that inherent in that recommendation was advice to surrender the DAGC for its surrender value, whatever that might be.  Plainly, in a question as to the appropriate surrender value the interests of the trustees and the Society might be opposed; and one might expect that to have been brought clearly to the trustees’ attention.  That does not appear to have been done at any stage, even after the proposed surrender value was intimated to the trustees


 


The expert evidence


[138]    Mr Spence’s view was that the first defender ought to have provided the trustees with a sufficient explanation of how the DAGC policy operated.  This should have explained that in relation to benefits already purchased the trustees had the certainty that whatever economic conditions might prevail over the lifetime of a pensioner, and however long the pensioner lived, the benefit was guaranteed by the Society: and that in relation to future contributions the guaranteed maximum premium rates would protect the Scheme in the event of market annuity rates rising to above the guaranteed maximum rate.


[139]    The value of the guarantees depended upon how likely they were to apply.  In 1999 they were “of potential value under certain changes in market conditions”.  In general terms, other things being equal, surrender of the DAGC policy was likely to be beneficial for the trustees if future returns from investing in equities exceeded returns from government bonds by a sufficient margin.


[140]    Mr Spence opined that in 1999 any reasonably competent scheme actuary would have advised the pursuers of the need for, or provided the pursuers with, a sensitivity analysis and/or a scenario analysis which set out the likely consequences for the Scheme of remaining in the DAGC and of transferring to a managed fund contract in different economic conditions.  The aim would have been to impress upon the trustees that each option had advantages and disadvantages, and that there were circumstances in which each would be likely to prove the better choice.  While accepting that it was not possible to be prescriptive as to the scenarios which an ordinary competent actuary would have provided, or recommended be provided, Mr Spence considered that “it might have been appropriate” for the first defender to have considered the following three scenarios:


In Mr Spence’s view such an analysis would have highlighted the importance of the DAGC’s guarantees in adverse economic conditions against the potential advantages of a managed fund approach in more benign conditions.


[141]    The first defender should also have advised the trustees to seek an assessment of the extent to which the surrender value plus enhancement reflected the value of the benefits being given up.  In Mr Spence’s view that would have involved an assessment of the investment return which would need to be achieved to provide funds for purchasing annuities equivalent to those secured under the DAGC policy.


[142]    Mr Spence considered that the first defender’s advice gave undue prominence to MFR considerations because (i) by 1999 the MFR was already known to be a flawed valuation method which was likely to be replaced soon; (ii) standing the surplus which the Scheme had at that time the risk of future MFR deficits ought not to have been a major consideration (all the more so because a substantial windfall payment was anticipated).  


[143]    Mr Spence also opined that the first defender ought to have advised the trustees to explore the possibility of retaining the DAGC policy in respect of past contributions but investing future contributions in a managed fund.  If that had been done the trustees could have held on to the advantages of having the guarantees for the existing assets but increased the Scheme’s exposure to equities in respect of future contributions.


[144]    Mr Punter did not accept that the first defender had recommended a switch.  He was clear that if no switch had been recommended, the first defender had not been negligent in the advice which he gave.  However, he also addressed the scenario that a switch had been recommended. In that event he accepted that the first defender ought to have done more than he did. His advice would have been incomplete.  He would have required to have done more to set out the risks and benefits of switching and the risks and benefits of remaining invested in the DAGC.  He ought also to have provided some indication of the value, if any, which the guarantees in the DAGC had.  That could have been done either by advising that the cost of replacement of the DAGC should be compared with the surrender value; or by providing an indication of the critical yield inherent in the DAGC so as to give an indication of the return which would have to be obtained from an alternative investment if the guaranteed return was to be exceeded.  There would have been a potential conflict of interest in giving such advice and it would have been preferable if the first defender had recommended that independent advice be obtained.  In Mr Punter’s opinion the inherent value of the guarantees in 1999 had been very low or nil.  The first defender ought to have advised that if bonds were expected to outperform equities over the long term the trustees would be better off remaining in the DAGC; whereas, if equities were expected to outperform bonds over the long term the trustees were likely to be better off switching to a managed fund.  It would have been uncommon in 1999 for an actuary to provide a sensitivity analysis in such circumstances.  Such an analysis would have been complicated to do at that time.  Over the years, with improved technology, it had become easier. It would have been extremely rare to provide a scenario analysis.  In 1999 a reasonably competent actuary exercising ordinary care would not have required to do, or recommend the obtaining of, either a sensitivity analysis or a scenario analysis.  In any event, the first scenario suggested by Mr Spence (very low inflation, very low interest, low growth) would not have been regarded as a plausible scenario in 1999.


[145]    Mr Punter accepted that if there was a recommendation to switch it would have been the first defender’s duty to describe to the trustees the nature of the guarantees provided under the DAGC.  In his report (JB 292, para. 5.161) and in examination-in-chief Mr Punter felt “unable to reach a firm conclusion as to whether and to what extent adequate descriptions of the guarantees were given” at the presentation.  However, during re-examination he assented to the proposition that if what was contained in Mr McVittie’s note had been said by the first defender it would have been an adequate description.


[146]    Mr Punter did not accept the thrust of the criticisms made by Mr Spence about the first defender’s reference to the MFR requirements.  The emphasis to be placed upon the MFR requirements had been a matter of degree and judgement.  Mr Punter might not have given them as much prominence, but it could not be said that no reasonably competent actuary would have said what the first defender had about the MFR.  In 1999 the MFR was the funding basis which scheme actuaries were required to use.  It had been particularly prescriptive.  Within the actuarial profession at the time there had been a lot of emphasis on it.  There had not been any consensus either as to when it was likely to be replaced or what was likely to replace it.  It was true that the scheme had been in surplus at the Actuarial Valuation in 1997, but a very substantial part of that surplus (£281,600 of £387,300) had been made up of anticipated future bonus payments which would not be likely to accrue given the change in the assets backing the DAGC.  While in Mr Punter’s view it had been wrong for the first defender to describe the risk of an MFR deficit as being “unacceptably” high, that was because questions whether risks were unacceptable were for the trustees and the employer, not the first defender.  The MFR funding level of the Scheme would have been volatile had the DAGC been retained, and the surplus could have become a deficit within a relatively short space of time.  Mr Punter did not consider that any reasonably competent actuary exercising ordinary care ought to have advised the trustees to explore the possibility of the third option.  If Mr Punter had been advising the trustees at the time, and if he had been aware that the third option was a possibility, he would have raised it with them.  But so far as the first defender had been aware the option had not been an available one.  In Mr Punter’s view the most important decision facing the trustees had been what to do with the significant pool of assets already in the DAGC.  The investment of future contributions would have been less important.


 


Discussion


[147]    On the basis that the first defender recommended a switch, there was in fact a good deal of shared ground in the expert evidence.  Both actuaries accepted that it had been the first defender’s duty to provide balanced advice, and that he ought to have done more than he did.  There was also some consensus as to what that further advice ought to have been. Before turning to that I shall examine some of the respects in which the expert evidence differed, viz. (i) whether the first defender required to do more than he did to describe the nature of the guarantees; (ii) whether the first defender’s advice in relation to MFR considerations was negligent; (iii) whether the first defender ought to have provided, or advised the trustees to obtain, a sensitivity analysis and/or a scenario analysis; (iv) whether he ought to have advised that the third option should be explored.


[148]    Mr Young and Mr Currie were at one that for the pursuers to establish a breach of the first defender’s contractual (or parallel delictual) duties they required to meet the familiar tests of professional negligence in Hunter v Hanley 1955 SC 200.  The delictual duties arose because the first defender assumed responsibility towards the trustees in respect of the advice which he gave them (Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465;  Williams v Natural Life Health Foods [1998] 1 WLR 830);  which advice, as I have found, included advice to switch.  It was not in dispute that the House of Lords in Bolitho v City and Hackney Health Authority [1998] AC 232 had set out the correct approach for the court to take when the evidence of professional experts was in conflict in relation to a practice that was a matter of professional judgement.  In Trustees of WTL International Ltd Retirement Benefits Scheme v Edwards and Another [2010] CSOH 34 (another case against the first defender arising out of advice given by him in relation to a switch from a DAGC), at para. 74, Lord Hodge referred to Bolitho and provided a concise description of the correct approach:

“In short, it is not the function of the court to prefer one school of thought held by responsible professionals to another. But a judge cannot conclude that a defender has not been negligent just because he leads evidence that other responsible professionals would have done what he did. That is because, in exceptional cases, the court may conclude that a practice, which responsible professionals support, does not stand up to rational analysis. Thus, where a judge is satisfied that a body of opinion, on which a defender relies, is not reasonable or responsible, he may find the defender guilty of negligence. Similarly, if the judge were to conclude that an expert's opinion was based on a mistaken or incomplete understanding of the facts or lacked a logical basis, he could reject the opinion supporting the defender.”


 


 


(i) Nature of the guarantees


[149]    While I accept that it was the first defender’s duty to explain the nature and effect of the guarantees under the DAGC, it was reasonable for him to assume that the trustees had a basic understanding of the general nature and operation of the DAGC.  The DAGC policy had been in existence for more than 30 years.  The duties of the trustees included a duty to inform themselves as to the nature of the assets held by the Scheme.  One of the means of doing so was to read all the relevant material available to them, such as the Group Bond and the correspondence, reports and actuarial valuations relating to the policy. Anyone who had done that would have been aware of the general nature and operation of the DAGC, and of the basic nature of the guarantees which it provided.


[150]    However, I am content that the first defender did adequately explain the nature of the guarantees at the presentation.  I accept his evidence that it was his practice at presentations to do so. Mr McVittie’s note provides substantial and direct support for the first defender having done so on this occasion.


[151]    The evidence of the trustees does not lead me to a different conclusion. Mr Emmett’s evidence that the presentation was thorough tends to support the first defender’s evidence. Both his evidence and Mr Armitage’s evidence point to the trustees having had a basic understanding of the nature of the guarantees in the DAGC, and that the guarantees would be given up if there was a switch from the DAGC.  Mr Phillips (in cross-examination under reference to slides 3 and 8) accepted that he had understood that if the trustees switched there would be no guarantees.  He had no recollection of the first defender explaining the nature of the guarantees, but he could not say that the first defender had not done so.  In cross-examination Mr Cooper said that he had been aware that as a result of the switch guarantees would be being given up, but he had not been aware of the precise nature of the guarantees or how they worked.  He believed the first defender went through all the bullet points on all the slides, but he did not really remember what had been said in relation to any of the bullet points.  He did not think the first defender had explained that the DAGC was an insurance policy with guarantees;  but it was possible that he had and that Mr Cooper had forgotten.  Mr Mackie indicated that he had not understood the nature of the guarantees at the time of the switch and he did not recall their nature being discussed by the first defender at the presentation.  He claimed he did not know that the effect of the switch was that the guarantees would be given up.  He maintained that the first defender had rushed through the presentation very quickly and that it had been very difficult to understand.  In cross-examination he indicated that the presentation lasted only 25 minutes.  In re-examination he revised that estimate to “within an hour”.  Mr Mackie’s evidence of the presentation having been rushed is at odds with the other evidence. I reject his account as being unreliable in that regard. In light of that unreliability - on a significant matter - I am unconvinced of the reliability of his evidence that he did not understand the nature of the guarantees, or that the effect of the switch would be that the guarantees would be given up.


[152]    Even if the description of the guarantees given was fully noted by Mr McVittie, Mr Punter’s evidence was that that explanation would have been adequate.  I am not persuaded that that view should be rejected.


 


(ii) MFR


[153]    I do not accept that the advice which the first defender gave concerning MFR funding was negligent.  I see no reason to conclude that Mr Punter’s evidence on this issue is not representative of a respectable body of professional opinion, or that there is any good basis for rejecting it.


[154]    In any case, I find Mr Spence’s opinion to the contrary to be unpersuasive.  I do not accept his evidence that in 1999 no competent actuary would have advised as the first defender did in relation the MFR requirements.  First, I am not content that by 1999 any reasonably competent actuary ought to have concluded that less attention should be paid to MFR requirements because a review was underway.  There was no consensus at that time as to what the outcome of the review would be, or when it would be likely to have effect.  The MFR remained a prescriptive statutory requirement. It is plain from Mr Punter’s evidence that actuaries continued to advise on the need to comply with it (and indeed the Mercer report (JB 63) and the Punter Southall report (JB 162) provide examples of just that).  Second, Mr Spence’s opinion appears to take no account of the presentation of 18 October.  In my view, even looking at the terms of the statement of 19 July, the envisaged risk of a deficit was a future one (and that was certainly how Mr Emmett understood the advice).  In any case it is evident from Mr McVittie’s note of the presentation that the first defender made it clear that the Scheme was in surplus and that the risk of an MFR deficit was a future risk rather than an imminent one.  Third, I am not convinced that the first defender ought to have taken account of the windfall payment when discussing MFR.  As Mr Punter made clear, it was generally inappropriate to have regard to contingent assets when carrying out actuarial valuations.  Whether there would be a windfall payment was dependent on the demutualisation taking place, which was subject to a vote by Lloyds TSB and the members of the Society.  Even if a windfall payment was received, whether it tended to increase net assets would depend on how it was used.  If it was used to improve benefits there might indeed be a corresponding (or perhaps even greater) increase in Scheme liabilities.


 


(iii) Sensitivity analysis and scenario analysis


[155]    I am not persuaded that any reasonably competent actuary exercising ordinary care would have prepared a sensitivity analysis or scenario analysis for the trustees, or advised that one be obtained.  Mr Punter’s evidence was to the effect that it would not have been ordinary practice for actuaries to have done that in 1999.  I see no reason to reject his evidence on that matter.  Once again, it is sufficient to say that this aspect of the case against the first defender fails because a respectable body of professional opinion supports the view that it was not ordinary practice to follow the course which the pursuers suggest ought to have been followed.


[156]    Moreover, I found this aspect of Mr Spence’s evidence to be unconvincing.  He was unable to pray in aid any relevant professional guidance which supported it;  nor did he produce any documentary evidence of sensitivity analyses or scenario analyses which had been prepared at or before the relevant time.  I formed the distinct impression that in relation to this matter Mr Spence’s conclusions had been arrived at with the benefit of hindsight; and that he was seeking to impose more demanding standards than those which had in fact been prevalent. 


 


(iv) Third option


[157]    The first defender did not advise the trustees to explore the option of retaining the existing scheme assets in the DAGC but paying future contributions into a managed fund contract.  His evidence was that he understood that the terms of the Group Bond did not permit that.  His understanding was that at a later time, during 2000, the Society did agree to waive the prohibition in relation to some schemes.  None of that evidence was challenged in cross-examination.  However, the first defender was referred to a report prepared in about July 1999 by financial advisers to trustees of another pension scheme where he had been scheme actuary (JB 63).  He thought he would have seen the report at around 22 July 1999 - the date of the trustees’ meeting at which the report was on the agenda.  In the report the financial advisers discussed the merits and demerits of those trustees switching from a DAGC to a managed fund. They advised inter alia:

“It would be possible to retain the existing assets in the Group Bond and start to pay future contributions to a pooled fund. The Trustees may want to consider this if the surrender value appears to be poor value for the guarantees given up.”


 


Mr Young contends that since the first defender had had sight of this passage in the report he ought to have been aware of, and considered, the possibility of a third option in the present case.


[158]    I do not find that argument compelling. The report expressed the advisers’ view. It was not the first defender’s understanding of the position under the Group Bond at the material time.  (It is also noteworthy that the advisers were not recommending retaining existing assets in the DAGC in preference to switching.  Rather, it was suggested as a possible fall-back if the surrender value offered was unsatisfactory.)


[159]    Mr Spence’s evidence proceeded on the premise that the terms of the Group Bond did not permit the third option:  but he proposed that it would have been open to Scottish Widows to waive that, and that they had agreed to do so in subsequent cases.


[160]    During closing submissions Mr Young suggested for the first time that the terms of the Group Bond did not in fact prohibit the third option: and that the first defender’s understanding could therefore only have been based on the Society’s practice.  In response Mr Currie protested that if such a point was to be taken it ought to have been raised during the evidence of the first defender.  The basis of his understanding could then have been fully explored with him, and it could have been considered by Mr Punter during his evidence.  In my view there is substance in Mr Currie’s protest.  The unchallenged evidence of the first defender was that the terms of the Bond did not permit the third option.  Both parties’ expert witnesses gave their opinion evidence on that basis.  The defenders would be prejudiced if the pursuers were permitted to depart from that basis.  The scenario which Mr Young sought to posit after proof had been heard was not one in relation to which the views of the first defender or Mr Punter had been obtained.


[161]    Mr Punter’s view was that while in 1999 he himself might have suggested exploring consideration of the third option if he had known it was available, he did not consider that the first defender could be criticised for not mentioning an option when he did not believe it was available.  In his view reasonably competent actuaries exercising ordinary care could have followed the same approach as the first defender in the circumstances.  I see no reason to reject that evidence.  In my opinion the pursuers have failed to establish that it was negligent of the first defender not to suggest that the third option be explored.


 


What the first defender ought to have done
[162]    I return now to what the first defender ought to have done.  While I accept parts of Mr Spence’s evidence, in my opinion he tended to approach matters with the benefit of hindsight; and he sought to impose over-elaborate and unduly onerous duties upon the first defender.  The suggestion that sensitivity analysis and scenario analysis were essential was but one example of that.


[163]    It is clear, however, that the first defender did fail to perform a number of duties which were incumbent upon him.  First, as discussed above, in my opinion he failed adequately to disclose the conflict of interest which affected his advice.  Second, he ought to have advised that independent advice was required as to whether the surrender value offered fairly reflected the value of the DAGC.  I accept as logical and persuasive Mr Punter’s explanation that this could have been done either by calculating a critical yield for the DAGC assets and assessing the merits of the surrender value (including the enhancement) having regard to it; or by estimating the costs of securing the deferred annuities in the open market and comparing that with the surrender value.  I also accept Mr Punter’s view that, because of the conflict of interest affecting such advice, it would have been better for the first defender to have advised that the trustees should seek independent advice on this issue, rather than him performing the exercise himself.  Third, the first defender ought to have advised that if bonds were expected to outperform equities over the long term the trustees would be better off remaining in the DAGC; whereas, if equities were expected to outperform bonds over the long term the trustees were likely to be better off switching to a managed fund which was substantially invested in equities.  That was the essence of what the trustees should have been told.  They ought also to have been advised that they should take independent investment advice as to the relative likely performance over the long term of bonds and equities.


 


Causation


[164]    Having held that the first defender breached certain of the duties which he owed to the trustees, it is necessary to consider whether but for those breaches the trustees would not have switched from the DAGC (see e.g. Trs of WTL International Ltd Retirement Benefits Scheme v Edwards and Another, supra per Lord Hodge at paras. 78-79).


[165]    The gist of the evidence of the trustees who made the decision to switch was that, had the true nature of the conflict of interest been explained to them, they would have been likely to have sought independent advice as to whether to switch.  I accept that evidence.


[166]    The other evidence of the trustees as to what they would have done if they had been given the advice Mr Spence suggested they ought to have been given was as follows.


[167]    In his witness statement Mr Phillips stated:

“16.6  If someone had said we were losing valuable guarantees we wouldn’t have proceeded with the Switch.

16.12  If we had been advised at the time that we were giving up guarantees which had a significant value in return for receiving the financial incentive the decision may have been different. That was not spelled out to us.”


 


In oral examination he indicated that if the trustees had been given the advice Mr Spence suggested they ought to have been given they would have acted on it. They would have considered it and gone to another consultant if necessary.  If they had been told that the DAGC guaranteed a long term return of 5-6% they would have had to have taken advice as to the significance of that.


[168]    In his oral evidence Mr Emmett said that if the trustees had been given the advice Mr Spence suggested they ought to have been given they would have sought an expert’s recommendation, and would have been likely to have accepted the expert advice.


[169]    In his witness statement Mr Armitage stated:

“12.8  If it had been fully explained to me that we were losing valuable guarantees under the switch and in return the risks of falls in the stock market and members living linger was being transferred from Scottish Widows to the trustees, which I understand is what happened, I do not believe we would have done it.”


 


In cross-examination he indicated that had the trustees been properly advised they would have undertaken any further investigations which were necessary and would have taken advice. He agreed that if the trustees had properly understood the circumstances in which the guarantees might become valuable they would have to have weighed that against other factors.  It was put to him that he could not say what decision the trustees would have come to if they had properly considered all the issues and balanced them against each other.  He agreed, adding “Not without taking advice from others.”


[170]    In his oral evidence Mr Cooper indicated that if the trustees had been advised to obtain an assessment of the extent to which the surrender value plus enhancement reflected the value of the benefits given up they would have done that.  If they had been told that the DAGC guaranteed a return of 5-6% they would have looked for advice on that.  If they had been advised to get a scenario analysis they would have obtained one, but they would have required advice explaining its significance.


[171]    In his witness statement Mr Mackie said:

“16.6 … I do not specifically recall what I would have known at the time of the Switch about guarantees I doubt I know what they really meant. I now understand that they were very valuable.

 

16.7  I do not think anyone knew at the time … that the Scheme had valuable assets that were being given up.

 

16.8  From my perspective it was never clearly articulated or explored with us what we were giving up. If we had known that we were losing something very valuable I believe that would have impacted or at least influenced our discussions at the time and the decision to Switch.

 

16.9  If we had been made aware of how valuable the guarantees were and that we were giving them up it would have influence (sic) our decision significantly.

16.13  From my recollection the financial incentive from my perspective were (sic) an important factor in the decision to Switch. If we had been advised that in return for receiving the financial incentive we were giving up valuable guarantees we would have had to consider the matter carefully. But we were not told this.”


 


In his oral evidence Mr Mackie indicated that if the first defender had recommended obtaining an assessment of the investment return required to fund the deferred annuities already purchased, that would have been obtained. He was asked what the position would have been if he had been advised that the deferred annuities already purchased guaranteed a return of 5-6%. He replied: “That seems quite attractive.” He was asked what conclusion he would have reached had he been told that that guaranteed return was long term. He responded: “Why switch?”  He was asked what the position would have been if he had been told the Scheme was well funded on an MFR basis.  He answered: “That would raise the question ‘Why do we want to change from that Scheme’”.


[172]    All of these trustees were being asked to indicate the course it is likely they would have taken had they received different advice.  Even if they had been firm in their views, their evidence would not necessarily have been determinative of the issue.  The court would still have required to assess that evidence; to have had regard to all the considerations which would have been likely to have influenced the decision at the time; and to weigh that evidence and those considerations with the other evidence bearing upon what trustees in their position would have been likely to have done.


[173]    In their witness statements Mr Phillips and Mr Armitage said that if they had been told that they were giving up “valuable” guarantees they would not have switched. However, as Mr Punter made clear (and I accept), the guarantees were not inherently valuable at the time of the switch.  They had the potential to become valuable, particularly in adverse economic circumstances, but they did not yet have a substantial value.  Mr Punter’s evidence in that regard is supported by the valuation exercises in relation to the surrender value which he and Mr Martin carried out.  Had the first defender duly performed his duties that would not have resulted in the trustees being advised that the guarantees had any substantial value at the time of the switch.  Accordingly, in my opinion the evidence of Mr Phillips and Mr Armitage that they would not have switched proceeded on the basis of a false premise. Similarly, Mr Mackie’s evidence wrongly proceeded on the basis that the guarantees were “valuable” and “very valuable” at the time of the switch.  In my view it is clear that the evidence of each of these witnesses was given with the benefit of hindsight.  It attached greater importance to the guarantees than the trustees were likely to have done at the time had they been properly advised.  Another example of hindsight was provided by Mr Mackie’s evidence that a 5-6% return would have seemed quite attractive.  A return of that order would have been significantly less than the returns which had been enjoyed in the period before the switch, and significantly less than the returns actuaries and investment advisers were assuming would be obtained from investment in equities.  Mr Mackie’s evidence on this matter was also surprising given his avowed lack of even basic financial knowledge at the time. It may be contrasted with the evidence of the more financially experienced Mr Phillips that if he had been told that the DAGC guaranteed a 5-6% return he would have needed to seek advice as to the significance of that.  Looking at the evidence of the trustees as a whole I think it likely that if they had been given the advice which they ought to have been given about the pros and cons of switching from the DAGC to a managed fund type vehicle they would have sought independent advice as to (i) the adequacy of the surrender value having regard to the value of the assets held by them under the DAGC; (ii) whether over the long term it was anticipated that surrender of the DAGC and investment in equities would be likely to provide a better return than retaining the DAGC; (iii) whether they should switch. They would have weighed that advice against other considerations. It was an important consideration that the return they had enjoyed from the DAGC would be likely to be reduced in the future because of the Society’s change of investment strategy in respect of the assets backing the policy. A switch to a managed fund mostly invested in equities offered the prospect over the long term of higher returns than would be obtained from the DAGC. The enhancement offered was attractive. The prospect of higher contributions if the trustees remained in the DAGC was unattractive to the trustees (particularly in their capacity as employers). 


[174]    All the indications are that if the trustees had sought advice in relation to the adequacy of the surrender value they would have been advised that it was fair.  Mr Martin and Mr Punter were of that view, and Mr Spence did not contend otherwise.


[175]    Further, had the trustees sought independent financial advice at the time of the switch it is probable they would have been advised that over the long term returns, from equities would be likely to exceed returns from bonds.  That was undoubtedly the view of most investment advisers at the time.  I accept Mr Punter’s evidence on that matter.  Mr Martin’s evidence is consistent with that, as is Mr Wilson’s.  Mr Spence did not really contest that that had been the prevailing view.  He did contend (in chapter 9 of his report (JB 293)) that by the summer of 1999 there was considerable uncertainty as to future economic growth and the likely direction of the financial markets.  I agree with Mr Punter that that was not then the generally held view; and that it was not a view which was reflected in the performance of the market at the time.


[176]    It is fairly clear that most investment advisers at the time of the switch would have recommended that the majority of the Scheme’s assets be invested in equities, and that they would have advised the trustees to switch. That was Mr Punter’s evidence.  It would have been the advice which he would have given qua investment adviser in the circumstances.  There was no evidence to the contrary.  Mr Punter also opined that he would have expected the majority of trustees in the position of the Scheme to have made the decision to switch, with perhaps only those who were particularly risk averse choosing to retain the DAGC.


[177]    While the trustees who gave evidence claimed that they were particularly risk averse, I am not convinced that the objective evidence of their decisions in relation to the Scheme supports that contention.  If they had been particularly risk averse it seems unlikely that they would have been happy to invest about 85% of the Scheme’s assets in equities - which is what they did by opting for the Managed Fund rather than another pooled fund under the managed contract which had a lower proportion of equity investment.  They chose to invest all of the windfall payment in the same fund.  The Scheme remained invested in the Managed Fund during and after the stockmarket crash, until the switch to another managed fund provider in 2007.  While they remained in the Managed Fund the trustees’ equity investment strategy appears to have been a conscious one “geared to maximise the return on investments over the medium to longer term” (see e.g. JB234, JB243, JB 259 item 6). At the time of the switch to the new provider it appears that equity investment remained the mainstay of the trustees’ investment strategy.  Had the trustees been particularly risk averse I would not have expected them to use the windfall payment to provide more generous benefits for members (with a resultant increase in the Scheme’s liabilities).  A more conservative and risk averse approach would have been to hold the windfall as a reserve against future adverse experience.  Indeed the general approach of the trustees in improving Scheme benefits late in 1999 and during the following years - at a time when the trend was for final salary schemes to be replaced by less generous provision - was not suggestive of risk averseness.  As Mr Mackie indicated, having an attractive pension scheme was a valuable tool for the firm in terms of staff recruitment and retention.  Moreover, the trustees’ decision in February 2004 to ask the first defender to use less conservative assumptions in his Actuarial Valuation was not indicative of their being risk averse.


[178]    I am satisfied that the trustees were in fact well aware that the reason for making the switch was to enable a high proportion of the fund to be invested in equities, which would provide the possibility of better returns than if they remained invested in the DAGC. That prospect of higher returns from equities was attractive to them. They had benefited for many years from the with-profits fund’s investment in equities.  In my view the trustees generally, and Mr Phillips in particular, were aware that the value of equities could rise or fall. Mr Phillips described his approach at the time as taking “a balanced view of risk”. The indications were that Mr Phillips took a leading role in relation to the switch and that his views were influential with the other trustees and partners.  The 8% enhancement was also attractive to the trustees.  On the other hand, the likelihood of increased contributions being required if they remained invested in the DAGC was unattractive to the trustees  (particularly qua employers), and it was a very material consideration. These were all factors which supported making the switch.  Had the trustees obtained independent advice they are likely to have been advised (i) that the surrender value was fair; (ii) that over the long term it was anticipated that surrender of the DAGC and investment in equities would be likely to provide a better return than retaining the DAGC; and (iii) that a switch was recommended.  In the whole circumstances I am not satisfied that the trustees would have decided not to switch had the first defender given them the advice which he ought to have given.  It follows that the pursuers have failed to prove their case.  I go further.  I think it is much more likely than not that the pursuers would still have switched even if the first defender had duly performed the duties which were incumbent upon him.


[179]    Mr Currie raised a further matter in relation to causation.  He highlighted the fact that, apart from Mr Phillips, each of the trustees who gave evidence appeared to have been under the misapprehension that receipt of the windfall payment was conditional upon making the switch.  The first defender bore no responsibility for that misapprehension, but it could not but have been a material factor in the decision to switch.  Mr Young acknowledged the misapprehension; but he suggested that if the first defender had duly complied with his duties the likelihood would have been that independent advice would have been obtained. In the course of that process it was probable that the misapprehension would have been corrected by the adviser or by Mr Phillips.  He submitted that the true position would have been likely to have “come out in the wash”.


[180]    The trustees had been advised by the first defender that the windfall did not depend upon the switch being made.  There was no criticism of his advice in that respect.  Had he duly performed the duties which were incumbent upon him that aspect of his advice would have been unchanged.  That advice was not affected by any conflict of interest. It was not a matter in relation to which independent advice was required.  If the misapprehension would have been corrected by the independent advice which was required in relation to other matters, it would have been an incidental and fortuitous consequence.  However, I can see that if, properly advised, Mr Phillips would have been against the switch but co-trustees would have favoured it because of their misapprehension of the windfall position, the error would probably have emerged during discussions between them and would have been corrected.  But since I do not think it likely that a properly advised Mr Phillips would have been against the switch, it is very far from clear that the misapprehension would have been dispelled.  Even if no account is taken of this factor the pursuers have failed to prove that the trustees would not have switched: but I agree with Mr Currie that, if regard is had to it, it provides an additional reason for holding that causation has not been established. 


[181]    I would have come to the same conclusions on causation, for substantially the same reasons, even if, contrary to my view, (i) the first defender did not adequately explain to the trustees the nature of the guarantees; and/or (ii) the advice which the first defender had given in relation to the MFR had been negligent; and/or (iii) the first defender ought to have raised the question of the third option. In relation to the MFR advice it was plain that Mr Phillips understood the Scheme’s MFR position to be good: he did not consider that it played any significant part in the trustees’ decision. In addition, in his fax of 20 December 1999 Mr McVittie made clear that, because of the surplus and the enhancement, the assets in which Scheme invested need not exactly match the split of the MFR liabilities. While I have concluded that it was not the first defender’s duty to advise that a scenario analysis was required, if I am wrong about that I think it very unlikely indeed that the trustees would have incurred the substantial cost (£5,000 - £10,000 according to the first defender) of such an analysis.  The trustees were cost conscious. In relation to the third option, the gist of the evidence of the trustees was that if the option had been mentioned it would have been considered with input from advisers.  I am not satisfied that they would have preferred the third option instead of the switch.  Largely the same considerations would have been in play as would have been in play in the decision whether to switch from the DAGC to a managed fund.  There would have been no enhancement had the third option been followed; and the fact remains that most investment advisers would have anticipated equities providing a better return and would have recommended a switch.


[182]    It follows from the above that had the merits of the pursuers’ claim been a live issue I would have sustained the defenders’ eighth plea-in-law and pronounced decree of absolvitor.


 


Contributory negligence


[183]    If, contrary to my view, the claim is not statute barred and the pursuers had proved that they would not have switched but for the first defender’s negligence, the question of contributory negligence would have arisen.


[184]    At common law trustees must bring to trust management the same care and diligence which a man of ordinary prudence would be expected to use in his own concerns (Wilson & Duncan, Trusts, Trustees and Executors (2nd ed.), para. 22-16).  It is their duty to take appropriate advice when a person of ordinary prudence would have done so.  The trustees here were also subject to the statutory duties in relation to investment set out in s. 36 of the Pensions Act 1995.  In terms of s.36 (3) and (6) they were obliged to obtain and consider proper advice on the question whether an investment was satisfactory.  It was not disputed that in the circumstances that advice ought to have been from a person authorised to provide regulated investment advice; and that the pursuers did not obtain and consider such advice before proceeding with the switch. Mr McVittie was not authorised to give that advice.  He attended the presentation, summarised it later for the trustees, liaised on their behalf with the first defender, and advised them on certain matters; but there is no indication that either he or Entegria were instructed by the trustees to provide investment advice in relation to the switch.  (Notwithstanding that, Mr McVittie does appear to have given the trustees advice on choice of pooled fund.  Whether such advice ought to have been given only by someone authorised to give regulated investment advice was not explored with Mr McVittie or the experts; but it would be surprising if that was not the case.  It appears to fall within the definition of regulated investment advice in the Financial Services Act 1986, Schedule 1).  My strong impression was that the trustees had not applied their minds to what Mr McVittie’s role was or should be; and that he seems to have been invited to participate in the proceedings on the basis that he was the trustees’ pensions adviser.


[185]    In the circumstances the trustees do appear to me to have been at fault in failing to obtain regulated investment advice on the merits and demerits of the switch.  In my opinion they should bear a portion of the responsibility for what happened; but not the major portion.  While it is arguable that in terms of causative potency the failures of the trustees and the first defender had equivalent effect, I regard the first defender’s negligence as having been much more blameworthy.  Had I been awarding damages I would have reduced the award by one-third in respect of contributory negligence.


 


Damages


[186]    The pursuers aver that but for the first defender’s negligence they would have retained in the DAGC.  In Cond. 7 they claimed damages of £3.71 million, being the difference between (i) the actuarial value the deferred annuities which they surrendered would have had in August 2012 (£6.28 million) and (ii) the value which the Managed Fund units which they purchased in January 2000 would have had in August 2012.


[187]    In Answer 7 the defenders deny liability for any losses. They further aver that any loss suffered by the pursuers “crystallised” on the day the trustees switched to the Managed Fund, and that they are not responsible for any losses flowing from falls in equities. They also aver:

“Esto the first defender is liable for the pursuers’ loss arising out of falls in the equities markets, there is no basis for assessing that loss as at August 2012. Valuing the Scheme at that date, as opposed to (for instance) early 2008 when the pursuers aver that they were contacted about the advice the Trustees had received in 1999, increases the losses. In any event, the pursuers have failed to mitigate their loss.”


 


No specification of the respects in which the pursuers were said to have failed to mitigate their loss was provided.


[188]    Mr Alan Martin, an experienced Consulting Actuary, was instructed by the pursuers to calculate the Scheme’s losses following the switch.  He prepared three reports, which he spoke to in evidence.  The first report was dated 25 September 2012 (JB 298), the second was dated 16 October 2012 (JB 299), and the third was dated 28 October 2014 (JB 301).  In his opinion there had been no significant difference between the value of the deferred annuities and the surrender value paid at the time of the switch.  He indicated that the deferred annuities would have been worth £6.28 million in August 2012 and £5.69 million in October 2014.  The Managed Fund units would have been worth £2.57 million in August 2012 and £3.01 million in October 2014.  He estimated the pursuers’ loss as at October 2014 to be £2.68 million (£5.69 million - £3.01 million).  During cross-examination certain points of detail were clarified with Mr Martin, but it was not suggested to him that his general approach or methodology were seriously flawed.


[189]    Mr Punter also prepared an expert opinion report on quantum (JB 300) which he adopted as part of his evidence.  In the report he commented on the approach taken in Mr Martin’s first and second reports.  He discussed Mr Martin’s third report during his oral evidence.  He identified certain relatively minor differences in view between himself and Mr Martin, but he did not disagree fundamentally in any respect with Mr Martin’s approach. He observed that Mr Martin’s methodology was logical;  that his use of a buy out basis did not seem unreasonable; and that his key actuarial assumptions were “broadly reasonable”. He stressed that while he did not take serious issue with the methodology and assumptions Mr Martin had used given his premise that the loss should be assessed as at October 2014, in his view whether that premise was correct was a legal issue.


[190]    Mr Young submitted that, if anything, Mr Martin’s approach is likely to have understated the pursuers’ loss because, for the sake of simplicity, no attempt had been made to value any loss attributable to deferred annuities which would have been purchased after January 2000.  There had been no substantial challenge to Mr Martin’s approach, and no alternative valuation had been put forward. In those circumstances the best guidance which the court had was Mr Martin’s evidence.  It was not the case that as a matter of law there was only a single correct approach to the assessment of damages in a case such as this: Haberstich v McCormick & Nicholson 1975 SC 1.


[191]    Mr Currie submitted that the loss “crystallised” at the date of the switch, and that that was the date at which it fell to be assessed: but no claim on that basis had been made.  The claim which had been advanced was thus irrelevant. It did not represent the loss caused by the switch. In any event it was unsatisfactory and entirely hypothetical.  It was very hard to see why loss should be assessed as at 2014.  By 2007 the trustees had taken separate independent financial advice, had surrendered their Managed Fund units, and had invested elsewhere; and, on their own account, by 2008 they had been alerted to the fact they may have suffered loss.  Mr Martin’s quantification did not take account of the pursuers’ actual investment experience between 2000 and 2014, or the actual mortality of members and any affect that may have had on the value of the deferred annuities.  The wide discrepancy between Mr Martin’s valuations in 2012 and 2014 underscored the arbitrary and hypothetical nature of the valuation basis.


[192]    As already discussed, there was a concurrence of injuria and damnum at the date of the switch.  However, non constat that the only damnum was suffered at that stage (see Haberstich v McCormick & Nicholson, per Lord Cameron at p.12);  or that as a matter of law damages fall to be assessed and measured at that date.  The general compensatory principle is that a pursuer should be put in the same position as if the contract had been properly performed/the defender had duly performed the delictual duties incumbent upon him. Whether damages ought to be assessed at the date of breach or at a later date, and what the measure of damages should be, depend upon the circumstances of the case, and which approach would more justly give effect to the overriding compensatory principle (See as to damages for breach of contract, e.g. Haberstich, per Lord President Emslie at pp. 9-10; McBryde, The Law of Contract in Scotland (3rd ed.), para. 22-91:  as to delictual damages see e.g. Stair Memorial Encyclopaedia of the Laws of Scotland, vol. 15, “Obligations”, para. 892 and the authorities there cited; and Pomphrey v James A Cuthbertson Ltd 1951 SC 147, per Lord Mackay at p. 156.  See also Trs of WTL International Ltd Retirement Benefits Scheme v Edwards and Another, supra per Lord Hodge at para.78).  Assessing loss as at the date of proof or trial may be an appropriate way to proceed in order to restore the pursuer to the position he would have been in had the contract, or the delictual duty, been duly performed.


[193]    In the present case both parties looked to the difference between the value of the deferred annuities and the value of the investment (of the surrender value) in the Managed Fund. The critical difference was the valuation date.  The only competing option put forward by the defenders was valuation at the date of the switch.  It was not contended, for example, that the appropriate valuation date was 2007/2008.  They did not seek to establish what the difference in value would have been at any date other than the switch or 2014.


[194]    In my opinion it is plain that assessing damages by reference to values at the date of the switch is wholly inappropriate in the present case.  I reject that approach.  It would fail to compensate the trustees for their loss.  As a result of the switch they were in a much riskier and less suitable investment, but they were not yet aware that they had suffered loss. Subsequently, as a result of the switch they suffered equity losses and their investment became much less valuable than it would have been had the Scheme remained invested in the deferred annuities.  Those consequences arose naturally and directly from the switch.


[195]    The consequence of rejection of valuation at the date of the switch is that the only remaining valuation of the pursuers’ loss is the valuation carried out in 2014.  I am not persuaded that I should reject Mr Martin’s valuation.  It is, of course, an imperfect calculation of the pursuers’  loss.  Mr Martin has taken a broad approach.  He has not attempted to follow through each and every financial consequence that may or may not have arisen. That would have been an elaborate, if not impossible, exercise.  It is likely to have reached an answer which was no more certain because a number of uncertainties and contingencies may have been involved.  I am not persuaded that the broad approach requires to be discarded because the trustees moved to a different managed fund provider in 2007.  There was no suggestion that the managed fund(s) to which the pursuers moved had a radically different investment policy as regards the proportion of equity investment.  Mr Punter’s own comparison exercise to 2013 (JB 300, paras. 4.49-4.54) compared investment in a notional managed fund portfolio with the cost of deferred annuities.  Mr Martin’s approach appears to me to have a rational basis. His methodology was not subjected to any serious criticism by Mr Punter.  Had I been awarding damages I would have felt content that Mr Martin’s approach represents a fair guide to, and a reasonable estimate of, the pursuers’ loss.  On the evidence before me I am not persuaded that the pursuers’ actings at any stage since the switch have been unreasonable, or that they have broken the causal link between the breach complained of and the loss claimed.  Nor have the defenders pled or made out a case that the pursuers have failed to mitigate their loss in any identified respects.  If the defenders wished to show that there were reasonable steps which the pursuers ought to have taken to limit their loss during the period up to 2014 it was for them to put the matter in issue and establish the relevant facts.


[196]    Accordingly, had the pursuers succeeded in the action I would have assessed damages at £2.68 million (on a full liability basis).  For the reasons indicated above, I would have reduced those damages by one-third in respect of contributory negligence.  I would have put the case out by order to hear submissions in relation to interest.


 


Prescription


[197]    In light of my conclusions on the merits, the issue of prescription does not arise even if (contrary to my view) Scots law is the applicable law.  The defenders never had an obligation to make reparation to the pursuers.  However, for the sake of completeness, I shall provide a brief indication of my views on prescription (on the counter-factual hypothesis that the pursuers would not have switched and on the hypothesis that the applicable law is Scots law).


[198]    Mr Young submitted that the prescriptive period had not begun until after 5 February 2004.  He relied upon bringing the pursuers within s. 11(3) of the Prescription and Limitation (Scotland) Act 1973.  Separately, he founded upon s.6 (4) to exclude the period up to 6 February 2006 from the computation of the prescriptive period.  In each case he accepted that the onus was on the pursuers to establish that s.11(3) and s.6(4) applied in the circumstances and had the consequences for which the pursuers contended (Pelagic Freezing Limited v Lovie Construction Limited [2010] CSOH 145, per Lord Menzies at paras. 86-89).


[199]    It was common ground that there was concurrence of injuria and damnum at the date of the switch in January 2000.  The general rule is that the obligation to make reparation in respect of the alleged act, neglect or default is to be regarded as becoming enforceable on the date of such concurrence (s. 11(1) of the 1973 Act;  Dunlop v McGowans 1980 SC (HL) 73, per Lord Keith of Kinkel at p. 81;  David T. Morrison & Co. Ltd v ICL Plastics Ltd 2014 SC (UKSC) 222 supra, per Lord Reed at para. 11).  S. 11(3) sets out a special rule which applies where on the date of the damnum the creditor was not aware, and could not with reasonable diligence have been aware, that the damnum had occurred (David T. Morrison & Co. Ltd v ICL Plastics Ltd, per Lord Reed at paras. 13, 16,19-37).  Mr Young maintained that the pursuers were not aware, and could not with reasonable diligence have been aware, of having suffered loss, injury and damage more than five years before the raising of the action on 6 February 2009.  In relation to reasonable diligence reference was made to Glasper v Rodger 1996 SLT 44; Peco Arts Inc. Hazlitt Gallery Ltd [1983] 1 WLR 1315;  Adams v Thornton 2005 1 SC 30;  Royal Bank of Scotland plc v Halcrow Waterman Ltd [2013] CSOH 173.


[200]    In the present case, at the time of the switch the trustees were not aware of the occurrence of loss, injury or damage. The special rule in section 11(3) applies.  The critical question is when did the trustees become aware, or when could they with reasonable diligence have been aware, of loss, injury or damage having occurred?


[201]    I am satisfied on the evidence that by 5 February 2004 the trustees had become aware that they had suffered loss or damage.  The relevant evidence in relation to events and knowledge up to that date has already been fully rehearsed above in the chapters dealing with the events post-switch and with limitation.  The trustees knew by 5 February 2004 that the Scheme had suffered very substantial losses on its investment in the Managed Fund, and that that had arisen because of the Fund’s very substantial exposure to equities. They were aware by that time that the cost of bonds and annuities had been rising.  They knew that the Scheme had gone from being a Scheme which could cover its liabilities on a buy out basis to one which fell far short of being able to do so. They also knew that on an ongoing basis the Scheme’s resources had become insufficient to meet its liabilities. The first defender’s letter of 10 February 2003 informed them that the Actuarial Statement as at 31 July 2000 had to be withdrawn because of the fall in the value of the Scheme assets and because the resources of the scheme would not be able to meet in full the liabilities as they fell due. The draft Actuarial Valuation received by them in January 2004 highlighted the fact that the Scheme was in deficit on both on ongoing and a buyout basis.  It was evident to them that investment in the Managed Fund, and its substantial exposure to equities, had been a much riskier and less suitable option than staying in the DAGC; and that the exposure to equity risk had resulted in large losses.


[202]    If, contrary to my view, the trustees were not aware by 5 February 2004 that the Scheme had suffered loss or damage, then it becomes necessary to consider whether they could not with reasonable diligence have been so aware.  In that regard I am not satisfied that an ordinarily prudent person in the circumstances of the trustees would not have inquired whether the losses and deficit which the Scheme experienced would have been suffered had there been no switch;  and I am not satisfied that having done so such a person would not have become aware of the occurrence of damage before 6 February 2004.


[203]    It follows that the pursuers have not established that the starting date for prescription should be later than 5 February 2004.


[204]    The pursuers also rely upon s. 6(4) of the 1973 Act. They aver that

“during the period from 1999 until at least February 2006, the Trustees were induced to refrain from making a claim against the defenders as a result of an error on their part as to the cause of the losses incurred by the Scheme induced by the words and conduct of the defenders.”


 


Mr Young submitted that in his dealings with the trustees the first defender had at no time alerted them to the fact that the Scheme was worse off because of the switch from the DAGC to the Managed Fund.  Poor performance of the Fund had been attributed to stock market volatility; and the deficit had been attributed to the poor performance of the Fund, to improved mortality rates, and to changes in pensions legislation.  Guidance as to the proper approach where a creditor relied on s.6(4) was provided by BP Exploration Operating Co Limited v Chevron Shipping Company 2002 SC(HL) 19;  Adams v Thornton, supra; and ANM Group Limited v Gilcomston North Limited 2008 SLT 835.


[205]    In my opinion the starting point is, as I have held, that by 5 February 2004 the trustees were aware that as a result of the switch the Scheme had moved from a relatively safe investment in the DAGC (deferred annuities and guarantees) to a much riskier investment in equities (without any guarantees).  By that date the obligation to make reparation which is relied upon had become enforceable, and the prescriptive period had begun.


[206]    I am not persuaded that there is any period which ought not to be reckoned as part of the prescriptive period in terms of s.6(4).  I am not satisfied that any words or conduct of the first defender induced the trustees into any relevant error.


[207]    Mr Young says that the first defender did not advise the trustees that they were worse off because of the switch.  He does not suggest that the first defender was under an obligation to do so, so the point is not even put forward as being one of negligent omission. In any event in my view the absence of such advice was not “conduct” falling within the ambit of that term in s. 6(4)(a)(ii).  On an ordinary construction “conduct” involves a positive act (see the discussion in Johnston, Prescription and Limitation (2nd ed.), para. 6.126).


[208]    Mr Young also suggests that the first defender induced error by what he said in July 2001 in the Actuarial Valuation for the year to 1 August 2000 (JB 176). The first defender had made reference to the recent change from a DAGC to the Managed Fund whereby the deferred annuities had been surrendered and invested “instead in unitised funds” (sic) and had continued “This has not changed my approach to the funding of your scheme.” That, Mr Young submitted, induced the trustees to erroneously believe that the Scheme had not suffered any loss by switching. In my opinion that statement, read in context, did not convey information capable of inducing such error, and it did not do so.  Properly read it communicated only that the same actuarial approach to funding continued to be applied to the Scheme notwithstanding the change in investments.


[209]    The trustees were aware before 6 February 2004 that they had switched to a much riskier investment.  None of the matters raised by Mr Young induced the trustees to think otherwise.  It was not suggested that any of the relevant information provided by the first defender had been inaccurate.  The fall in value of the Scheme’s investment in the Managed Fund had indeed been largely attributable to the poor performance of equities.  Improved mortality rates had resulted in an increase in the Scheme liabilities, as had regulatory changes affecting the way such liabilities were to be valued. The diminution of assets because of poor investment performance and the increase in liabilities had each contributed to the deficit.


[210]    The first defender’s indication (an indication not only given by him, but by others at various times) that the fall in value of the investment in the Managed Fund was attributable to the poor performance of equities did not induce any erroneous belief that the switch had not been to a much riskier investment.  Nor did it induce any erroneous belief that the reason that the Scheme found itself exposed to that riskier investment was something other than the switch.  The same observations apply mutatis mutandis to the information about improved mortality rates and changes in pensions legislation.  I am not persuaded that any of the words and conduct of the first defender which are relied upon induced error which caused the trustees not to make a relevant claim.


[211]    It follows that had prescription been a live issue I would have sustained the defenders’ fifth plea-in-law and pronounced decree of absolvitor.


 


Disposal


[212]    The pursuers’ claim is statute barred in terms of the Limitation Act 1980.  I shall sustain the defenders’ fourth plea-in-law and pronounce decree of absolvitor.  I reserve meantime all questions of expenses.


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