Entrust Pension Ltd v (1) Prospect Hospice Ltd (2) Yvonne Hunter

Hearing dates: 31 January and 1, 2 and 6 February 2012

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Introduction

This case raises questions about the true meaning and effect of various provisions relating to benefits in the documentation governing an industry-wide occupational pension scheme in the healthcare and educational sector which was established in 1966 and is now called the Federated Flexiplan No. 1 ("the Scheme"). The claimant, Entrust Pension Limited ("Entrust"), is the present trustee of the Scheme ("the Trustee"), having taken over from the previous trustee, Capita Pension Trustees Limited, in 2007.

The Scheme was closed to the future accrual of benefits with effect from 1 February 2010, so it no longer has any active members in current pensionable service. As at 31 March 2011, there were exactly 3,000 current members of the Scheme, comprising 1,370 pensioners already in receipt of pension benefits and 1,630 "deferred" members who left pensionable service in the past with an entitlement to a future pension, typically due to become payable when they reach their normal retirement age. At the same date, there were 263 employers participating in the Scheme, and the Scheme's assets were valued at £69,255,782.

The Scheme has an unusual benefits structure. It is neither a defined benefits scheme, nor a money purchase scheme, in the usual sense of either of those generic descriptions. Instead, and in broad outline, the Scheme provides a member with an entitlement, on retirement, to a cash sum which comprises the contributions paid by the member, and by the relevant employer on the member's behalf, plus a guaranteed rate of interest on those contributions. It is convenient to refer to this sum as the member's "Accrued Amount". In addition, the Accrued Amount may be augmented by the Trustee adding to it an amount representing a share of any "surplus" in the Scheme. The extent to which there may be an entitlement to a share of surplus, and how and when it should be calculated, are questions which lie at the heart of the construction issues on which the court is asked to rule.

Whatever the answer to those questions may be, however, it is common ground that the Scheme was in fact administered from its inception until July 2006 in a way that replicated a conventional final salary scheme, that is to say a scheme under which benefits are computed by reference to a member's salary when leaving the Scheme. Such benefits were described in the booklets and other explanatory literature circulated to members, and in the periodic actuarial reports commissioned by the Trustee, as "target benefits", although that term appears nowhere in the Scheme rules themselves.

In the early days of the Scheme, members were informed that the expectation was that their target benefits would equate to one sixtieth of final remuneration for each year of pensionable service. Following the introduction of the state earnings-related pension ("SERPS") under the Social Security Pensions Act 1975, a variation was introduced which gave employers the option of paying contributions into the Scheme at a lower rate (8%, instead of 10%, of the member's salary), in order to reflect the fact that the Scheme could not be contracted out of SERPS, in which case target benefits would be reduced to one seventy-fifth of final remuneration for each year of pensionable service. Over the years, some further complications were introduced, which led to a number of different target benefit structures, but the basic pattern remained the same. In practice, whether the provision of a share of surplus by the Trustee was a matter of legal entitlement or whether it was purely discretionary, and whatever the ways in which it could in theory have been calculated, the Scheme operated in essentially the same way as a final salary scheme, and for as long as the employers were able and willing to continue to fund it on that basis, no problems arose. When a member retired, he would be granted an annuity equal to his target pension. This had the result that the retiring member's Accrued Amount was topped up by the Trustee out of surplus by whatever amount was needed to provide that target pension.

One striking feature of the Scheme, which it is convenient to note at this point, is that even though members' benefits were on any view largely fixed in amount (comprising not less than the Accrued Amount before retirement, and a fixed rate of annuity after retirement), there has never been any general covenant by the employers to pay the balance of the cost of the liabilities to the extent they exceeded the value of the Scheme assets. However, until the actuarial valuation as at 31 March 2002 this did not matter, because the Scheme was always estimated to have a surplus in excess of the amounts required to fund pensions in payment and Accrued Amounts.

The 2002 actuarial valuation disclosed for the first time a comparatively modest funding deficit of £1.323 million, and various steps were taken to address this. By 2005, however, the funding deficit in relation to target benefit pensions for active and deferred members had grown to £19.894 million. This unwelcome news led the Trustee to conclude that the provision of target benefits for active members on retirement was no longer sustainable, and the decision was taken to cease to provide target benefits for those who retired after 10 July 2006. The decision was communicated to members in written announcements, which informed them that, in the light of actuarial and legal advice received, the pension payable for members retiring after that date would be based on their guaranteed Accrued Amounts, not target pension.

On 15 May 2007 Entrust was appointed as the sole corporate trustee of the Scheme. Following consultations with employers and members, a recovery plan was agreed whereby the bulk of the contributions due from the employers would be collected from them over a period of up to ten years, and good communications between members and employers were restored. As I have already noted, the Scheme has now been closed to future accruals of benefit since 1 February 2010. The amount of the funding shortfall, and thus the length of time for which the employers will be required to make payments to eliminate it, depends on the outcome of the present proceedings, and in particular on the answer to the questions whether, and if so to what extent, members are entitled to benefits in excess of those secured by their Accrued Amounts. The question arises in a particularly acute form for deferred members who left the Scheme before the 2005 Rules came into force, and whose benefits become payable on retirement after 10 July 2006. In stark, if over-simplified, terms, are they entitled to a pension which reflects a share of the surplus which was thought to exist when they left service, and in which they would have shared on actual retirement at that date, or are they confined to a pension based on their Accrued Amounts, in common with active members who retired after 10 July 2006?

One such deferred member is the second defendant, Yvonne Hunter, who joined the Scheme on 27 August 1986 and left on 5 September 1990. She has agreed to become a representative defendant. The first defendant, Prospect Hospice Limited, is a registered charity which provides hospice services in North Wiltshire and South Gloucestershire. It has been a participating employer since at least 1988, and it too has agreed to be appointed as a representative defendant. Because of the complexity and interaction of the issues, it is agreed that the necessary representation orders will be issue rather than class-based, with the first defendant arguing for the outcomes which can in general be expected to favour the employers, and the second defendant arguing for the outcomes likely to favour the members.

I have had the benefit of very full and careful written and oral arguments from counsel for both defendants, to whom I will refer for convenience as counsel for the employers and counsel for the members respectively, as well as from Mr Michael Furness QC on behalf of Entrust. I express my gratitude to them all.

The issues which I am now asked to determine are, with one possible exception, issues of pure construction of the rules of the Scheme. The extrinsic evidence which is relevant and admissible for that purpose is limited, and I have not been asked to resolve any disputed questions of fact. Depending on the answers to those issues, it may subsequently be necessary for the court to decide various questions of fact, or to give directions to Entrust about the factual assumptions it should make when administering and winding up the Scheme. The parties therefore sensibly agreed, and the court has ordered, that there should be a split trial, with the first hearing dealing only with questions of construction. A second hearing has been fixed for October 2012 to determine such consequential questions of fact as it may prove necessary to answer. Everybody agrees that the latter exercise, should it arise, may be a very difficult one, because of the incomplete...