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 Against (first) Eric Edwards And (second) Scottish Widows Plc
| Jurisdiction | Scotland |
| Judge | Lord Doherty |
| Neutral Citation | [2015] CSOH 83 |
| Court | Court of Session |
| Published date | 24 June 2015 |
| Year | 2015 |
| Docket Number | CA116/13 |
| Date | 24 June 2015 |
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...
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