Edge v Pensions Ombudsman
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE CHADWICK |
| Judgment Date | 29 July 1999 |
| Judgment citation (vLex) | [1999] EWCA Civ J0729-27 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | CHANF 1998/0531/3 |
| Date | 29 July 1999 |
[1999] EWCA Civ J0729-27
Lord Justice Peter Gibson
Lord Justice Ward
Lord Justice Chadwick
CHANF 1998/0531/3
IN THE SUPREME COURT OF JUDICATURE No
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF THE VICE-CHANCELLOR
Royal Courts of Justice
Strand
London WC2
MR M HERBERT QC and MISS B RICH (Instructed by Messrs John Yolland of London) appeared on behalf of the Appellant
MR D UNWIN QC and MR J CLIFFORD (Instructed by Messrs Richards Butler of London) appeared on behalf of the Respondent
This is the judgment of the Court on an appeal from the order made on 5 December 1997 by the Vice-Chancellor allowing an appeal by the trustees of the Industrial Training Boards Pension Funds from a determination of the Pensions Ombudsman on a complaint made to him under Part X of the Pensions Schemes Act 1993.
The underlying facts
The underlying facts are fully set out by the Vice-Chancellor in the judgment which he handed down on 5 December 1997 (reported at [1998] Ch 512). It is sufficient to rehearse them in summary form:
(1) Industrial Training Boards ("ITBs") are corporate bodies established under the Industrial Training Act 1964 or its successor, the Industrial Training Act 1982, for the purpose of providing for the training of persons employed in the industries in relation to which, severally, they exercise their functions.
(2) The ITB Pensions Funds are administered by trustees under a scheme ("the scheme") constituted by a definitive trust deed dated 20 July 1979. The purpose of the scheme is the provision of retirement and other benefits for employees of ITBs and successor bodies ("employers") who are members of the scheme. The scheme is administered in accordance with rules. In the context of this appeal the relevant rules are those applicable to the Open Fund —that is to say, that part of the pension funds from which provision is made for the pension benefits to which members other than those who left service on or before 31 March 1982 (or after that date following changes made in consequence of the 1982 Act) are entitled.
(3) Rule 3 requires that the fund be constituted and maintained by means of contributions by members and employers in accordance with the rules. Rule 506 (in relation to members who commenced service after 31 March 1983) and rule 602 (in relation to members in service on 31 March 1983) prescribe the level of members' contributions. Rule 10.1 prescribes the level of employers' contributions. The effect of the rules as to contributions was described by the Vice-Chancellor, at [1998] Ch 512, 522E-F:
Rule 10.1 is in terms that are typical of so-called "balance of cost" schemes under which the employer's contribution liability is to top-up the employees' contributions so as to keep the scheme solvent. If and for as long as the scheme is solvent and the members' contributions can keep it so, the employer does not have to make any contributions. But rule 506.4 (and rule 602.4) prevents this scheme from being a true balance of cost scheme. The employers' periodic contributions must at all times be at least equal in amount to the members' periodic contributions. If the members, or some of them, are contributing at the rate of 6 per cent. of salary, so too must the employers contribute at least at that rate.
(4) Rule 227.1 provides for the appointment of an actuary to the scheme. His duties include making periodic valuations of the fund and of the liabilities under the scheme and reporting to the employers and the trustees with such recommendations as he may think fit.
(5) Rule 203 requires that, if any periodic valuation by the actuary discloses a surplus or deficiency in the fund, the trustees shall request the actuary to certify, for the purposes of rule 10.1, the contributions payable by employers. But, as the Vice-Chancellor pointed out, at page 523B-C in the report of his judgment, the actuary is inhibited by rule 506.4 (and rule 602.4) in relation to the certificate which he can give if the periodic valuation discloses a surplus:
The actuary cannot certify a level of employers' contribution which is lower than the level fixed for members' contributions for the year. He can bring the employers' contributions down to parity with the members' contributions but no lower. Any greater reduction would have to await the next financial year when a lower members' contribution rate for the forthcoming year could be prescribed and, consequently, a lower employers' contribution rate could be certified.
(6) In or about March 1993 the actuary made a valuation of the open fund as at 31 March 1992. That disclosed a surplus of £29.9 million on an on-going basis; that is to say, on the basis that employers' contributions would continue to be paid at a rate of 6 per cent of pensionable salaries until 1 April 1994 and thereafter at a rate of 12 1/2 per cent of pensionable salaries —those being the rates which had been fixed following his previous periodic valuation made as at 31 March 1989 —and that members' contributions would be paid at the rate of 6 per cent of pensionable salary prescribed by rule 506.1. The actuary's report included the following recommendations:
8.1 The result of the valuation shows that the fund is in a good financial position, with the assets being sufficient to meet the accrued and future liabilities and with a surplus of some £29.9m. being available. The bulk of surplus can be considered as available for contribution reductions, or benefit improvements, although it may be prudent… to carry forward some portion as a margin for possible adverse experience.
8.2 The employers' contribution reduction already made is unlikely to be sufficient to conform with the Inland Revenue requirements under the Finance Act 1986. The employers and managing trustees should consider taking further steps to reduce the surplus.
(7) The problem to which the actuary was referring in paragraph 8.2 of his report arose under the provisions formerly contained in section 46 of, and Part II in schedule 12 to, the Finance Act 1986; which had been re-enacted as section 603 of, and schedule 22 to, the Income and Corporation Taxes Act 1988. Unless the actuarial surplus was reduced, the scheme —which was otherwise an exempt approved scheme for the purposes of Chapter I in Part XIV of the 1988 Act —would lose the exemption from tax which it enjoyed under section 592 of that Act on some part of the income from its open fund investments. This was explained to the trustees in a letter from the actuary dated 25 March 1993 and at a seminar held on 14 April 1993.
(8) At a meeting of the trustees held on 30 April 1993 it was decided to adopt the actuary's report. It was further decided (i) to award additional years of service by way of credit to members in service on 1 April 1994, (ii) to reduce employees' contributions by 1 per cent from 1 April 1994 until 31 March 2004, and (iii) to reduce the employers' contribution rate from 6 per cent to 5 per cent from 1 April 1994 to 31 March 1999. The minutes record:
After substantial discussion it was unanimously agreed that no increase should be granted to pensions in payment apart from the cost of living increases already being paid.
Subsequently, on the advice of the actuary, it was agreed that the effective date for the payment of the reduced contributions should be advanced to 1 October 1993. The decision to put those proposals into effect was confirmed by the trustees, after further discussion, at a meeting on 9 July 1993.
(9) The proposals to which the trustees had agreed were estimated by the actuary to have the effect of reducing the projected surplus by £20.4m:
| (i) Additional service credit to members in service on 1 April 1994 | £ 6.6m |
| (ii) Reduction in employees' contributions | £ 2.9m |
| (iii) Reduction in employers' contributions | £10.9m |
| £20.4m |
There would then remain a surplus of £9.5m as a reserve against future contingencies.
(10) In order to implement the steps agreed by the trustees at their meetings on 30 April 1993 and 9 July 1993 it was necessary to alter the rules of the scheme. A power to alter the rules is conferred on the trustees by rule 205. In the present context the power was exercisable only with the consent of three quarters in number of the employers. But, in any event, the proposals could not proceed unless the employers adopted the actuary's report —rule 227.5. The consent of all the employers was obtained; and, on 17 August 1993, effect was given to the decisions of 30 April 1993 and 9 July 1993 by the execution of a deed of amendment. The deed made the necessary alterations to rules 506 and 602 (reducing the rate of employees' contributions) and introduced new rules (as rules 511.2 and 607.2) providing additional service credit for members in service on 1 April 1994. The alterations to rule 506 enabled the actuary to certify the reduced rate of employers' contributions under rule 10.1; which he duly did.
The trustees' reasons for their decision
The trustees' decision —implemented by the deed of 17 August 1993 —was explained to members in a letter (described as a "PEN letter") sent by the chairman in August 1993. He wrote:
The Trustees have now received and considered the Actuarial Valuation of the Open Fund as at 31st March 1992. The Valuation revealed that there was a surplus of £29.9 million.
The Trustees considered very carefully the question of how the surplus should be used and details are given later in this PEN letter.
The Trustees have persuaded Employers that a substantial part of this surplus, amounting to £9.4 million, should be...
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