Mr Justice Warren :
Introduction
- This case raises the question of how the new scheme specific funding regime under Part 3 Pensions Act 2004 ("Part 3" and "PA 2004") together with regulations made under it impact on the contribution rules of a defined benefit occupational pension scheme.
- This question arises in the context of two schemes known as the British Vita Pension Fund and the British Vita SE & D Pension Fund (respectively "the BVPF" and "the SE&DPF" and together "the Schemes"). The Claimant ("BV") is the principal employer under both Schemes. The first Defendant is the sole corporate trustee of the BVPF and the second Defendant is the sole corporate trustee of the SEDPF. I will refer to the trustees of each scheme as the "Trustees".
- Until 14 June 2005, BV, then known as British Vita PLC, was listed on the London Stock Exchange and was a constituent company of the FTSE 250 index. On that day BV was acquired by two subsidiaries of the Texas Pacific Group ("TPG"), a private equity firm, and was later re-registered as an unlimited company. BV itself has a number of subsidiaries which are participating employers under the Schemes although not all of them have active members in the Schemes. TPG's acquisition of the group was highly leveraged. The acquisition has been followed by a significant reorganisation of the group, one purpose of which has been to reduce the significant debt.
- At the time of the acquisition, the Schemes were well funded by reference to the middle-of-the-road actuarial assumptions which had been used in the most recent actuarial valuations for the purposes of setting the level of employer contributions to the Schemes. BV maintains – and I do not think that this is disputed – that that would continue to be so today if those or any remotely comparable assumptions continued to be applied.
- Thus the Schemes' actuarial valuations as at 31 March 2004 stated that –
a. The BVPF was 98% funded on the scheme actuary's stated long-term funding objective basis as at that date (having a deficit of only £2.3 million on assets of £122 million).
b. The SE&DPF was 107% funded on the same basis (having a surplus of £6.9 million on assets of £108.1 million).
- BV's position is that, since TPG's acquisition of the group, it and the other Participating Employers have continued to contribute to the Schemes precisely in accordance with the scheme actuary's recommendations (targeted at meeting the cost of future accrual as it arose, and in the case of the BVPF, as is usual practice, targeted at progressively repairing such small deficiency as was indicated), and the value of the assets of the Schemes have actually substantially increased. As at 26 July 2006 the asset position was as follows:
a. The BVPF: assets were £155.6 million (as against £122 million on 31 March 2004.
b. The SE&DPF: assets were £129.1 million (as against £108.1 million on 31 March 2004).
- By an undated letter sent on 28 July 2006, the first Defendant demanded payment by BV of the sum of £40.6 million and the second Defendant demanded payment by BV of the sum of £9.0 million ("the Demands"). These Demands were purportedly made pursuant to the powers vested in them under the Schemes' respective contribution rules. They are based on very different, and far more conservative, actuarial and investment assumptions than previously adopted; in particular, it is assumed that all investments are in gilts.
- The Demands reflected two decisions of the Trustees. The first decision was to make a demand at all; the second decision was to allocate the whole of the amount demanded to BV. This was against the background of the liability of each Scheme in respect of members of that Scheme employed by BV being either nil (in the case of the BVPF) or a very small proportion of the total liability of the Scheme (in the case of the SE&DPF).
- The Trustees' position is this.
a. The Demands were the culmination of a process that had commenced in about April 2005, when the board of BV (which initially opposed the TPG bid) announced that it was recommending to shareholders that TPG's offer for the company be accepted.
b. BV's proposed move from being a publicly listed company to one owned by private equity was a matter of great importance to the Trustees, as it bore on the value of BV's covenant as Principal Employer and its ability to support the Schemes.
c. The resulting process included a series of meetings between the Trustees and their advisers on the one hand and BV and its advisers on the other; meetings between advisers alone; and detailed correspondence both between the Trustees and BV direct and also between their respective advisers.
- The Trustees were met with a refusal by BV to meet the Demands. The Trustees indicated that they would bring proceedings to recover the amounts alleged to be owing. These proceedings are brought by BV as a Part 8 Claim, the Claim Form being issued on 6 November 2006. The validity of the Demands is challenged, in the events which have happened, by BV on essentially two grounds:
a. That as a result of the coming into force of the provisions of Part 3 and the Occupational Pension Schemes (Scheme Funding) Regulations 2005, S.I. 2005/3377 (the "Scheme Funding Regulations"), the Trustees were, by the time the Demands were made, no longer able to exercise the powers conferred on them by the respective contributions rules of the Schemes.
b. That on their true construction, the respective contribution rules of the Schemes did not permit the Trustees to demand the stipulated sums from BV alone in the manner in which they did.
- Both grounds are contested by the Trustees.
- BV's position is also that no reasonable trustee could have acted as the Trustees did in making the Demands. Their complaints in that regard have been aired in the correspondence. That aspect is not raised in these Part 8 proceedings; they will need to be raised in separate Part 7 proceedings, but this will be so only if BV fails in obtaining the declaratory relief which it seeks in these proceedings. I do not propose to say anything more about that aspect and the facts of relevance to it.
The rules of the Schemes
- It is necessary to look only at a very few of the Rules of the Schemes. There are no material distinctions for present purposes between the rules of the BVPF and those of the SE&DPF. I will look only at the former.
- Relevant definitions are found in Rule 2:
a. "Principal Employer" means
British Vita PLC or any other corporation, company or firm which becomes 'Principal Employer' under Rule 59 (Change of Employer)
.
b. "Participating Employer" means:
The Principal Employer or any Qualifying Employer that is participating in the Scheme under Rule 60 (Participation of Qualifying Employers) or any corresponding earlier provision of the Scheme. It means for a Member the Participating Employer in whose Service he either is or was at the relevant time.
c. "Qualifying Employer" means:
Any corporation, company or firm
(a) that is either associated in business with or directly or indirectly controlled by the Principal Employer (as decided by the Principal Employer), or
(b) that the Principal Employer has, with the consent of the Inland Revenue, decided is to be treated as a Qualifying Employer.
- Rule 12 provides as follows:
"The Participating Employers shall pay to the Scheme such contributions in each Scheme Year as may from time to time (after taking into account the assets of the Scheme and excluding those relating to Member's Voluntary Contributions) be required
(a) to enable the benefits of the Scheme to be maintained, and
(b) to meet the administrative and management expenses of the Scheme, unless the Principal Employer has determined, in accordance with Rule 58, that they shall be borne by the Participating Employers.
The amount of contributions required shall be determined by the Trustees acting on the advice of the Actuary, and shall be no less than (but may be greater than) the contributions required to be paid under Rule 13
The sums payable by the Participating Employers shall be decided from time to time by the Trustees, having regard to the Members for the time being in the service of the Participating Employer and the benefits which in the opinion of the Principal Employer are related to such service."
- Similar provisions are found in Rule 12(A) of the SE&DPF. References in this judgment to Rule 12 are to be read (unless the context requires otherwise) as references to both Rules.
- Rule 13 is the implementation within the BVPF of the then subsisting requirements (now repealed and replaced by the scheme specific funding regime) of the Pensions Act 1995 (the "PA 1995") in relation to scheme funding, known as the minimum funding requirement (the "MFR"), a topic I will need to look at in more detail in a moment. Rule 13(C) expressly provides that Rule 13 does not affect the Participating Employers' liability under Rule 12. Similar provisions are found in Rule 12(B) of the SE&DPF. References in this judgment to Rule 13 are to be read (unless the context requires otherwise) as references to both Rules.
- Part G of the Rules deals with termination of contributions and winding up of the Scheme. Rules 62A and 62B ("Termination and Wind Up") provide, in essence, that:
a. A Participating Employer's contributions may be suspended by notice in writing to the Trustees, may be resumed by agreement with the Trustees and enabling the Trustees to treat the suspension as the termination of contributions if it exceeds two years: see Rule 62A.
b. A Participating Employer can stop contributing in respect of all or some of its employees by notice in writing to the Trustees and will stop contributing (1) within 12 months of its ceasing to be a Qualifying Employer, (2) if it stops carrying on business because of liquidation or otherwise and (3) it is fails to observe and perform its obligations under the Scheme and the Trustees give written notice that its participation is to end: see Rule 62B.
Various consequences flow from such suspension or termination of contributions. There is no need for me to set out the provisions which might apply.
- Subject to any overriding effect of the MFR regime, the position under the Rules was therefore that Rule 12 gave effective control over the contribution rate to the Trustees but a Participating Employer was able to stop contributing if it wished to do so. Rules 12 and 13(C) make it clear that the Trustees' powers under Rule 12 are not limited to requiring contributions to be made which satisfy the MFR.
The MFR regime
- Although the present case is concerned with the new statutory funding regime and not the MFR regime, it is, I think, helpful to have in mind and understand the main features of the MFR regime before considering in some detail the new regime.
- The MFR was introduced by PA 1995. Section 56 provided;
a. In subsection (1) that a scheme to which the section applied was "subject to a requirement…[the MFR] that the value of the assets of the scheme is not less than the amount of the liabilities of the scheme".
b. In subsection (3) that the liabilities and assets to be taken into account and their amount or value shall be determined, calculated and verified by a prescribed person [an actuary] in the prescribed manner. The detail was to be found in regulations (the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 (the "MFR Regulations") and Guidance Note GN23 published by the Faculty and Institute of Actuaries. Broadly speaking the amount of a liability depended on the nature of the liability eg pensions in payment, deferred pensions and accrued rights of active members.
- Section 57 related to the requirements to obtain, and the timing of, valuations including the certification of assets and liabilities, the detail, again, being left to regulations.
- Section 58 required the trustees to secure that there was prepared, maintained and from time to time revised a "schedule of contributions" showing the rates of contribution payable by the employers and members and the dates by which such contributions were to be paid. Again, the detail was left to regulations. The matters to be shown in the schedule were to be either (a) matters agreed by the trustees and the employer or (b) in the absence of agreement, rates of contribution determined by the trustees being such rates as in their opinion were adequate for the purpose of securing that the MFR would continue to be met. Accordingly, the employer and the trustees could agree a funding rate which exceeded the rate appropriate for meeting the MFR which, it will be remembered, prescribed the valuation basis for assets and liabilities. In the absence of agreement, the trustees could themselves determine the contribution rate but, so far as the schedule of contributions is concerned, they could not determine a rate greater than that required to secure that the MFR was met, using the prescribed valuation bases. Quite apart from the MFR, any given scheme might, in any case, contain a contribution rule which enabled the trustees to impose on the employer a higher contribution rate that would be required by the MFR on its own. Whether such a contribution rule was overridden by PA 1995 is a question I will address in a moment.
- Before doing so, I would just mention sections 59 and 60. Section 59 sets out some provisions which were supplemental to what had gone before. The only points of detail which need to be noted are these. First, the amounts which had fallen due for payment under a schedule of contributions became statutory debts if, but only if, they did not already constitute debts. This could occur, typically, where the contribution rate was, under the rules of a scheme to be set by the employer which determined to set a rate lower even than that which was needed to meet the MFR. Secondly, a failure to make payments in accordance with the schedule of contributions resulted in the matter being reported to the regulator (then OPRA). Section 60 dealt with measures to be taken for improving funding in cases of serious under-provision.
- There was also section 117 which provided:
"(1) Where any provision mentioned in subsection (2) conflicts with the provisions of an occupational pension scheme –
(a) the provision in subsection (2), to the extent that it conflicts, overrides the provisions of the scheme, and
(b) the scheme has effect with such modifications as may be required in consequence of paragraph (a)."
- The provisions referred to in subsection (1) included, by virtue of subsection (2), the sections establishing the MFR and imposing the MFR regime. Accordingly, to the extent that the MFR regime "conflicted with" the rules of a scheme, the rules were overridden. It has never been suggested, as far as I know and is certainly not suggested in the present case, that a conventional contribution rule in an ordinary balance of cost defined benefit scheme is overridden by the MFR.
- Such a suggestion would, I think, be wrong. This is because the MFR does not purport to be a standard by which a scheme is to be regarded as fully funded. As its name suggests – a name found in section 56(1) itself and not just in the heading which would not be relevant to a question of construction – the MFR sought to identify a minimum level at which contributions were to be set. No doubt if the employer and the trustees agreed a rate of contribution which complied with a scheme rule but was more than the MFR required, a schedule of contributions providing that higher rate would have been compliant with section 58. But if the employer declined to agree that higher rate, he could not be compelled to do so, and the schedule of contributions could only have set out a rate of contributions which fell within section 58(4)(b).
- It is important to note, however that nothing in section 58 required an employer to pay anything. It was not necessary for it to do so. This was because either (i) the amount specified in the schedule of contributions was already a debt pursuant to some obligation eg typically a scheme contribution rule or (ii) the matter was dealt with by section 59(2) which, as I have mentioned, treated an amount payable under a schedule of contributions, if it was not already a debt due from the employer to the trustees, as a debt.
- I can see no reason why, if the contributions due under the scheme contribution rule were greater than the contributions arising as a result of the rate specified in the schedule of contributions, the whole debt arising should not have remained due: there was nothing in sections 58 and 59 which would lead to the conclusion that the debt due under the scheme rules should have been restricted to the amount specified in the schedule of contributions. Unless section 58, in referring at subsection (1)(a), is to be taken as referring to all of the contributions payable, there would be no reason for including amounts over and above the MFR rate of funding to be included. There was nothing in the context of the MFR regime which pointed to that result. It would, in any case, be a very surprising result in the context of statutory provision which were introduced to provide a floor below which funding should not fall and which, far from protecting members, could dramatically worsen the positions of scheme members generally with no regulatory power of intervention. In these circumstances, there was not, in my judgment, any conflict within the meaning of section 117 between (i) a scheme rule which required payment of one amount and (ii) a schedule of contributions which specified a smaller amount.
The current legislation
- The present case concerns, principally, Part 3 PA 2004 dealing with scheme funding and replacing the MFR subject to transitional provisions. The new regime for scheme funding is not the only novelty of that Act. It also introduces a new regulator – the Pensions Regulator ("tPR") – and the Pension Protection Fund (the "PPF"). Wide powers are given to tPR to require contributions to be made to schemes by employers in a variety of circumstances, powers which can be used to ensure the adequate funding of pensions; and further protection is afforded to scheme members by the safety-net of the PPF. It is within the context of PA 2004 as a whole that the new scheme funding regime falls to be considered and the relevant statutory provisions construed.
The IORP Directive
- Part 3 PA 2004 also needs to be construed against the background of Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provisions (the "IORP Directive") the provisions of which are given effect in domestic law by PA 2004. In relation to the IORP Directive, the following points are of interest:
a. Recital (4): this stresses as an urgent priority the need to draw up a directive on the prudential supervision of "institutions for occupational retirement provision", a phrase which includes UK occupational pension schemes. The key role of such institutions, as major financial players, is recognised but it is observed that they are not subject to a coherent Community legislative framework allowing them to benefit fully from the advantages of the internal market.
b. Recital (7): the prudential rules laid down in the IORP Directive are intended "both to guarantee a high degree of security for future pensioners through the imposition of stringent supervisory standards, and to clear the way for the efficient management of occupational pension schemes".
c. Recital (26): a prudent calculation of "technical provisions" (ie the amount required to make provision for a scheme's liabilities) is essential to ensure that obligations can be met. Technical provisions should be calculated on the basis of recognised actuarial methods and certified by qualified persons. The minimum amount of technical provisions should be both sufficient for benefits already in payment and to reflect commitment arising out of members' accrued pension rights.
d. Recital (27): sufficient and appropriate assets to cover the technical provisions protect the interests of members and beneficiaries in the case of employer insolvency. Cross-border activity leads to a requirement that the technical provisions be "fully funded at all times".
e. Article 15(1): this provides for each Member State to ensure that an occupational pension scheme should "establish….an adequate amount of liabilities corresponding to the financial commitments which arise out of their portfolio of existing pension contracts"; in other words, the scheme's obligations must be valued in an appropriate manner.
f. Article 15(4): this provides, at paragraph (a), that the minimum amount of the technical provisions shall be calculated by a sufficiently prudent actuarial valuation. It must be sufficient both for pensions and benefits already in payment and to reflect accrued rights.
g. Article 16: this deals with asset cover. It requires each Member State to require every institution [ie including occupational pension schemes in the UK] to have at all times sufficient and appropriate assets to cover its technical provisions.
- The thrust of the IORP Directive in the context of a UK pension scheme is, it can be seen, that the scheme should value its liabilities to pensioners and other beneficiaries adopting "a sufficiently prudent actuarial valuation", the underlying economic and actuarial assumptions for the valuation of liabilities also being chosen prudently. The scheme is then to have "sufficient and appropriate" assets to cover it liabilities as thus ascertained. It is to be noted that Article 15(4) talks of a minimum amount of the technical provisions and that Article 16(1) requires the scheme to have enough assets to cover those technical provisions. There is nothing in the IORP Directive which prevents the technical provisions being calculated on a more generous basis than by reference to a "sufficiently prudent actuarial valuation" or which precludes a scheme holding more than "sufficient and appropriate assets" to cover the technical provisions on whatever basis those are established. There is nothing, therefore, which would have prevented the UK, when implementing the IORP Directive, from providing expressly that a scheme contribution rule, which resulted in higher technical provisions or greater asset cover than the IORP Directive required, could continue to have effect.
- I need to mention, and in some instances set out, some of the provisions of Part 3 PA 204 and the Scheme Funding Regulations. I start with the Act itself. It obtained the Royal Assent on 18 November 2004. Part 3 came into force, for the purpose of making regulations, on 4 December 2005 and, for all other purposes, on 30 December 2005. The Scheme Funding Regulations also came into effect on 30 December 2005.
Part 3 PA 2004
- Part 3 is headed "Scheme Funding". The introductory section, section 221, provides that Part 3 is to apply to every occupational pension scheme other than a money purchase scheme or a prescribed scheme or a scheme of a prescribed description. Section 222 then introduces the statutory funding objective. It is to be noted that the statutory funding objective applies on a scheme specific basis, in contrast with the MFR which applied prescribed valuation criteria to all schemes to which it applied. Section 222 provides:
"(1) Every scheme is subject to a requirement ("the statutory funding objective") that it must have sufficient and appropriate assets to cover its technical provisions.
(2) A scheme's "technical provisions" means the amount required, on an actuarial calculation, to make provision for the scheme's liabilities.
For the purposes of this Part -
(a) the assets to be taken into account and their value shall be determined, calculated and verified in a prescribed manner, and
(b) the liabilities to be taken into account shall be determined in a prescribed manner and the scheme's technical provisions shall be calculated in accordance with any prescribed methods and assumptions.
………."
- Section 223(1) provides as follows:
"(1) The trustees or managers must prepare, and from time to time review and if necessary revise, a written statement of –
(a) their policy for securing that the statutory funding objective is met, and
(b) such other matters as may be prescribed.
This is referred to in this Part as a "statement of funding principles"."
- Section 224 imposes on trustees an obligation to obtain periodic actuarial valuations. For this purpose, an "actuarial valuation" means a written report, prepared and signed by the actuary, valuing the scheme's assets and calculating its technical provisions. The effective date of an actuarial valuation is the date by reference to which the assets are valued and the technical provisions calculated. By sub-section (3), it is provided that the effective date of the first actuarial valuation must be not more than one year after the establishment of the scheme: the Scheme Funding Regulations deal with schemes which already exist, an aspect I will come to later. Nothing in the section affects any power or duty of the trustees to obtain actuarial valuations at more frequent intervals or otherwise.
- Section 226 requires the trustees to prepare a recovery plan (or revise an existing plan) if, following an actuarial valuation, it appears to the trustees that the statutory funding objective was not met on the effective date of the valuation. A recovery plan must set out the steps to be taken to meet the statutory funding objective and the period within which that is to be achieved.
- Section 227 makes provision for the preparation of a schedule of contributions. Subsection (1) provides that the trustees must prepare, and from time to time revise, a "schedule of contributions". This means a statement showing the rates of contribution payable by the employers and active members and the dates by which such contributions are to be paid. Provision may be made by regulations for the time from the establishment of a scheme within which a schedule of contributions must be prepared and for requiring review and revision. The schedule must satisfy prescribed requirements. It must be certified by the actuary and (a) the duty to prepare or revise the schedule is not fulfilled and (b) the schedule does not come into force, until it is so certified: see subsection (5). The certificate must state that, in the opinion of the actuary, (a) the schedule of contributions is consistent with the statement of funding principles under section 223 and (b) (simplifying slightly) the rates shown in the schedule are such that the statutory funding objective will be met.
- Section 228 sets out the consequences of a failure to make payments. It provides, so far as material, as follows:
"(1) This section applies where an amount payable in accordance with the schedule of contributions by or on behalf of the employer or an active member of a scheme is not paid on or before the due date.
……
(3) The amount unpaid (whether payable by the employer or not), if not a debt due from the employer to the trustees or managers apart from this subsection, shall be treated as such a debt.
………."
- Section 229 provides that the trustees are required to obtain the agreement of the employer to certain matters and deals with the consequences of an absence of agreement. It provides in subsections (1), (2) and (5) as follows:
"(1) The trustees or managers must obtain the agreement of the employer to –
(a) any decision as to the methods and assumptions to be used in calculating the scheme's technical provisions (see section 222(4));
(b) any matter to be included in the statement of funding principles (see section 223);
(c) any provision of a recovery plan (see section 226);
(d) any matter to be included in the schedule of contributions (see section 227).
(2) If it appears to the trustees or managers that it is not otherwise possible to obtain the employer's agreement within the prescribed time to any such matter, they may, (if the employer agrees) by resolution modify the scheme as regards future accrual of benefits.
………….
If the trustees and managers are unable to reach agreement with the employer within the prescribed time on any such matter as is mentioned in subsection (1), they must report the failure to the Regulator within a reasonable period.
……………….."
- Under section 231, tPR is given powers to deal with any failure to comply with certain of the requirements set out in the earlier sections of Part 3. In particular, tPR is given those powers where the trustees have been unable to reach agreement with the employer within the prescribed time about any matter in relation to which such agreement is required: see subsection (1)(h). In those circumstances, tPR can give directions as to the manner in which the scheme's technical provisions are to be calculated and can impose a schedule of contributions specifying the rates of contributions payable towards to the scheme by or on behalf of the employer and the dates on or before which such contributions are to be paid. Once a schedule of contributions has been imposed, the provisions of section 228(3) will apply to treat any amount due in accordance with the schedule of contributions as a debt to the extent that it is not already a debt. However, so far as concerns section 227, it is provided in section 227(10) that the provisions of section 227(1), (3) and (5) to (9) do not apply in relation to a schedule of contributions imposed by tPR: since subsection (5) does not apply, subsection (6) has no content in such a case and can also be ignored.
- Section 232 provides that regulations may modify the provisions of Part 3 as they apply in prescribed circumstances. Section 306 contains a number of overriding requirements. It provides, materially, as follows:
"(1) Where any provision mentioned in subsection (2) conflicts with the provisions of an occupational pension scheme –
(a) the provision mentioned in subsection (2), to the extent that it conflicts, overrides the provisions of the scheme, and
(b) the scheme has effect with such modifications as may be required in consequence of paragraph (a).
(2) The provisions referred to in subsection (1) are those of
(a)…….
……….
(h) Part 3 and any subordinate legislation made under that Part."
Accordingly, in the present case, if there is a conflict between the provisions of Part 3 and the Scheme Funding Regulations on the one hand and the Schemes' contributions rules on the other, then those rules are overridden to the extent of the conflict.
- The provisions of PA 1995 relating to the MFR (section 56 to 61) are repealed by section 320 and Schedule 13 PA 2004 but there are certain transitional provisions and savings to be found in the Scheme Funding Regulations.
The Scheme Funding Regulations
- Some arguments have been addressed to me which turn on the detail of the Scheme Funding Regulations. I will refer to them now in order to complete the description of most of the statutory material.
- Regulations 3, 4 and 5 deal respectively with (a) the determination of assets and liabilities, (b) the valuation of assets and the determination of the amount of liabilities and (c) calculation of technical provisions. They are all highly prescriptive. Nothing turns on the detail.
- Regulation 5(1) provides, subject to paragraphs (2) and (3), that it is for the trustees to determine which method and assumptions are to be used in calculating the scheme's technical provisions. That, however, is subject to section 229(1) so that, if the employer does not agree with the assumptions, the trustees cannot impose them and the matter is referred to tPR. Paragraphs (2) and (3) provide that the method must be an accrued benefits funding method and lay down certain requirements which the trustees must follow. Again, nothing turns on the detail.
- Regulation 6(1) sets out a number of matters which must be included in a statement of funding principles under section 223 in addition to those specified in that section. In particular, it must include any funding objectives provided for in the rules of the scheme, or which the trustees or managers have adopted, in addition to the statutory funding objective.
- Regulation 6(2) requires the first statement of funding principles to be prepared by the trustees within 15 months after the effective date of the first actuarial valuation obtained under section 224. For existing schemes, provision is made in the transitional provisions and savings.
- Regulation 8 deals with the timing and other details of recovery plans and their revisions. A recovery plan may be reviewed and if necessary revised where the trustees consider that there are reasons that may justify a variation to it: see Regulation 8(5).
- Regulation 9 deals with schedules of contributions. For a new scheme, the first schedule must be prepared within 15 months after the effective date of the first actuarial valuation following the establishment of the scheme. The position in relation to existing schemes is dealt with later.
- Regulation 10 lays down the requirements for the contents of a schedule of contributions. Regulation 10(1) requires the rates and due dates of all contributions payable by the employer and active members to be shown (ignoring voluntary contributions) during the relevant period (as defined in paragraph (2)). Regulation 10(4) provides that, where additional contributions are required in order to give effect to a recovery plan, the rates and dates of those contributions must be shown separately from the rates and dates of contributions otherwise payable.
- Regulation 13 lays down a period for obtaining the employer's agreement where such agreement is necessary under section 229(1). The period is 15 months from the effective date of the relevant actuarial valuation.
- Regulation 21 read with Schedule 5 contains revocations (subject to the saving in Schedule 4). The whole of the MFR Regulations are revoked subject to those savings.
- Schedule 2 contains modifications of PA 2004 and the Scheme Funding Regulations themselves. There are modifications to multi-employer schemes (which the Schemes are) but no special point arises in relation to them and I do not consider that I need to set them out. Paragraph 9 featured in the arguments, but I do not need to set it out. The scope of its subject matter is captured by its heading "Schemes under which the rates of contributions are determined by the trustees or managers or by the actuary". It is to be noted that this is a general, and not simply a transitional, provision.
- Schedule 4 contains transitional provisions and savings. The transitional provisions are found in Part 1 (paragraphs 1 to 7) and the savings are found in Part 2 (paragraphs 8 to 19). These provisions (like the rest of the Scheme Funding Regulations) will override any scheme rule in case of conflict under section 306(1), (2)(h).
- Part 1 applies to a scheme which, immediately before 30 December 2005, is either (i) subject to section 56 PA 1995 (ie subject to the MFR) or (ii) exempted from that section by the MFR Regulations and becomes subject to Part 3 PA 2004 on that date. Part 2 applies to a similar, but not identical, class of scheme in that schemes within (ii) are not mentioned.
Part 1 Schedule 4 Scheme Funding Regulations
- Under paragraph 2, section 224 (actuarial valuations and reports) applies to the scheme as if:
"(a) it included a requirement for the trustees or mangers of the scheme –
(i) to obtain an actuarial valuation ("the first valuation under the 2004 Act") in accordance with the requirements specified in paragraph 3 of this Schedule, and
(ii) to ensure that the first valuation under the 2004 Act is received by them within the relevant period specified in paragraph 4 of this Schedule;….."
- A distinction appears to be drawn between obtaining a valuation and receiving it; the same distinction appears in section 224(1), (4). Mr Green suggests that "obtain" means commission, thus drawing a distinction between what they do ("obtain") and the result of what they do ("receive").
- I do not think that that is quite the right distinction. I consider that the distinction is really between a process which might, and no doubt usually would, start with commissioning of a valuation and which ends with delivery to and receipt by the trustees of it. In the course of obtaining the valuation, the trustees may need to do other things apart from commissioning it. They may, for instance, need to give further information to the actuary; in providing it, they would be doing so in the course of obtaining the valuation. But they would not actually have obtained it until they had received it. Where the trustees are under an obligation (for instance under section 224(1)) to obtain a valuation, they do not fulfil that obligation, in my judgment, until the process is complete. I can accept that it would have made perfectly good sense if the word "commission" had been used. But it was not. The word "obtain" was used and, in its ordinary meaning, obtaining is more than simply commissioning, it is also receiving. If the trustees were asked, at a time after the actuary had been instructed but before he had prepared even a draft, whether they had obtained a valuation, the answer would surely be that they had not; they would say that they were in the process of obtaining one but had not yet done so. I see no reason to depart from the ordinary meaning of the word.
- This distinction is, I hope helpfully illustrated, if one looks at the producer of the valuation, the actuary. Having been instructed to effect a valuation in accordance with the time limits imposed on the trustees, his obligation is then to produce the valuation and to deliver it within the relevant period. The production is a process reflecting the trustees' obligation to obtain the valuation; the delivery is the end result reflecting the trustees' duty to ensure that the valuation is received by them within the specified time limit.
- Why, it might be asked, does the draftsman use different words in different places? There are two parts to the answer to that. The first is that it would not be appropriate to use the word "receive" where one is focusing on a process which only ends with receipt; to substitute "receive" for "obtain" would be at least inelegant and probably incorrect. The second part of the answer is that the draftsman is drawing a distinction between the end result which has to occur within a certain period and the longer process which is encompassed by an obligation to "obtain". He is focusing on the important part of obtaining the valuation, namely its receipt.
- This approach sits comfortably, in my view with the use of the word "obtain" in subparagraphs (3), (5) and (7) of paragraph 3. Take paragraph 3(3) for example. That paragraph does not itself require the valuation to be obtained or received within any particular time period. It simply sets certain criteria by reference to which the valuation must be produced. Looking at the matter from the perspective of the actuary again, he must produce the valuation by reference to an effective date ascertained in accordance with paragraph 3(3); he does not produce it by being instructed, he produces it by working on it and then delivering it. Similarly, the whole process of obtaining the valuation is carried out by reference to the effective date as laid down in paragraph 3(3): it is not simply that the trustees have instructed, or commissioned, the actuary to prepare it on that basis.
- Of course, there are practical constraints imposed by paragraph 3(3) (and the same goes for paragraph 3(5) and 3(7)). It is impossible on any footing to comply with paragraph 3(3) if more than 3 years have passed since the effective date of the last valuation under PA 1995; and it would be practically impossible to do so if the trustees left instructing the actuary until 2 years 364 days after the effective date of the last valuation.
- Paragraph 3 as a whole does not deal with the date by which an actuarial valuation must be obtained: it is concerned with the effective date by reference to which it has to be obtained. Thus:
a. Where paragraph 3(1) applies (which it will do in cases where none of subparagraphs (3), (5) or (7) apply), the trustees must obtain a valuation by reference to an effective date no later than 30 December 2006.
b. Subparagraph (3) applies (see subparagraph (2); but see also subparagraph (2)(b) for exceptions) where the trustees received, prior to 30 December 2005, in accordance with section 57 PA 1995 and the MFR Regulations an actuarial valuation by reference to an effective date on or after 21 September 2002. It also applies where a valuation is received, on or after 30 December 2005 and within one year of its effective date, in accordance with any such statutory provision which continues in force under Part 2 of Schedule 4 of these Scheme Funding Regulations. Where subparagraph (3) applies, the valuation must be obtained by reference to an effective date which is (a) not earlier than 22 September 2005 (a date, it is to be noted, 3 years after the date previously referred to, 3 years being the maximum interval between actuarial valuations) and (b) not more than 3 years after the effective date of the last valuation received under PA 1995.
I will need to return to the actual dates on the facts of the present case later.
- The timing of the actual receipt of the valuation is dealt with in paragraph 4. Generally speaking, it must be received within either 15 months or 18 months of its effective date, depending on the circumstances.
- Paragraph 5 provides that where Part 1 of Schedule 4 applies, section 227 (schedule of contributions) applies as if it included a requirement for the trustees to prepare a schedule with the same period as that within which they are required by paragraph 4 to ensure that they receive the first actuarial valuation under PA 2004. And paragraphs 6 and 7 provide that references in sections 224 to 231 to actuarial valuations or schedules of contributions shall be taken to exclude any such valuation or schedule under PA 1995 as in force before 30 December 2005 or as continued by paragraphs 9 to 16.
Part 2 Schedule 4 Scheme Funding Regulations
- Paragraph 9 provides that section 56 and 58 to 60 (but not 57), regulations 15 to 17 and 19 to 27 (but not 18) of the MFR Regulations and Schedules 2 and 4 to those Regulations continue to apply to the scheme from 30 December 2005 until the date on which the first schedule of contributions under PA 2004 comes into force. As to the excluded provisions, section 57 relates to valuation and certification of assets and liabilities and regulation 18 (and Schedules 2 and 4) relate to content and certification of schedules of contributions. This provision needs to be read in conjunction with paragraphs 5 and 7.
- Paragraph 10 featured in the argument and provides as follows:
"Where –
(a) immediately before the commencement date [30 December 2005], the trustees or managers of the scheme were required under section 57(1)(a) of the 1995 Act and regulation 10 of the 1996 Regulations (time limits for minimum funding valuations) to obtain an actuarial valuation within a period ending on or after the commencement date, and
(b) they have determined before that date, or determine subsequently, that the valuation should be obtained by reference to an effective date before 22nd September 2005,
those provisions apply to the scheme on and after the commencement date in respect of that valuation."
- There is one short textual point which I would like to deal with immediately in relation to paragraph 10. According to Mr Green, the reference to "those provisions" in the closing lines is a reference back to the provisions referred to in paragraph 9. I do not accept that. I can see no reason for thinking that the reference is other than to the provisions referred to earlier in paragraph 10 itself, that is to say section 57(1)(a) PA 1995 and regulation 10 of the MFR Regulations. See also paragraph 168 below.
Are the Schemes' contribution rules overridden by provisions of Part 3 PA 2005?
- Mr Green and Mr Newman say in their skeleton argument that BV would be very surprised to discover that the Trustees sought to contend that the general effect of PA 2004 on schemes such as the Schemes was that Rule 12 was not overridden by Part 3 as of 30 December 2004 (the commencement date of the PA 2004). It is not for me to say whether BV was, or was entitled, to be surprised. The fact is that that is precisely what the Trustees do contend. Mr Green submits, however, that the scheme of Part 3 is to provide an exclusive code for the level of contributions to an ordinary defined benefit scheme with a conventional employer contribution rule. It is no longer open to trustees to invoke such a rule, certainly in a case such as the present where the scheme does not fall within paragraph 9(1) Schedule 2 Scheme Funding Rules, so as to impose a greater burden on the employer than would arise under a schedule of contributions (whether agreed between the trustees and the employer or imposed by tPR). He says that that would be the position even absent the provisions of section 306 resolving any conflict between the legislation and the rules in favour of the legislation. But once account is taken of that provision, there can be only one answer since, according to Mr Green, there is an obvious conflict between Rule 12 and the Part 3 regime, in particular the requirement for employer agreement to the schedule of contributions. According to his argument, the relevant inconsistency or conflict arose as soon as Part 3 came into force on 30 December 2005; it is not simply that a conflict arises once a schedule of contributions has come into force. Rather, the schedule is the sole reference point for ascertaining the contributions which have to be paid.
- In other words, it is said that the trustees of a scheme can recover only the amounts which are shown in a schedule of contributions (subject, of course, to any transitional provisions in the case of an existing scheme). In the absence of agreement between the employer and the trustees about the contents of that schedule, tPR can impose rates of contribution under section 231(2)(c). If tPR imposes a rate which is less than that which would apply under the scheme contribution rule, only the lesser amount can be recovered. Mr Green does not, of course, suggest that an accrued, crystallised, liability ceases to be enforceable.
- Mr Green suggests that Part 3 should be construed in the light of the Scheme Funding Regulations. Some caution must be applied in relation to that, a suggestion based on the proposition that the Act and the Regulations are all part and parcel of one exercise. There was a significant period between the Royal Assent (18 November 2004) and the laying before Parliament of the Scheme Funding Regulations on 9 December 2005. It would be entirely unsafe to assume that the provisions actually found in the Scheme Funding Regulations were in contemplation in November 2004 in anything like the form which they eventually took. Having said that, the Scheme Funding Regulations are made under a number of provisions, including section 232 which permits modification of Part 3; and the question of conflict for the purposes of section 306 must be addressed by reference to Part 3 and the Scheme Funding Regulations read together, as a result of section 306(2)(h). I therefore propose to look at Part 3 and the Scheme Funding Regulations together, but bearing in mind that the note of caution which I have sounded.
- In construing Part 3 and the Scheme Funding Regulations, account must be taken of the IORP Directive which is intended to be implemented by them. But I have already concluded that there is nothing in it which would have prevented the UK from providing expressly, when implementing it, that a scheme contribution rule, which resulted in higher technical provisions or greater asset cover than the IORP Directive required, could continue to have effect. The IORP Directive is essentially neutral on the point at issue in the present case.
- In this context, as well as in relation to the transitional provisions, I was taken to explanatory memorandum dated 5 December 2005 ("the Memorandum"), produced by the Department of Work and Pensions, which, together with the Scheme Funding Regulations, was laid before Parliament on 9 December 2005. Ultimately, the explanatory memorandum does not really take one any further on the issue. But there are some interesting points which come out of it which are worth making.
- First, the Memorandum points out that the IORP Directive required Member States to implement its requirements before 23 September 2005. The UK government was running slightly behind schedule, given the need to take full account of responses to the extensive consultations which had been undertaken, so that it was not possible to bring the Scheme Funding Regulations into force by that date. However, there had been widespread expectation within the pensions industry that the new requirements would apply to valuations as at a date after 21 September 2005 and schemes had begun to prepare their valuations on that basis. As the Memorandum puts it, "Key stakeholders agreed that it would be less disruptive for such schemes for the Regulations to apply to valuations from 22 September onwards rather than from the coming into force date of 30 December". There are, accordingly, transitional provisions and savings to reflect this.
- The Memorandum acknowledges the work involved in preparing valuations and says that the Regulations will normally allow up to 15 months for completion. Valuations are usually triennial and based on an "effective date"; the effective dates of most schemes are clustered around the ends of the calendar year and the tax year. It would be exceptional to complete a valuation in less than 6 months from the early stages of data collection and validation, including the obtaining of audited accounts. It was therefore thought that the timing of the Regulations "would have a minimal practical effect on the small number of schemes required to commence a valuation between 22 September and 30 December and which would otherwise be required to carry out an unexpected further valuation on the basis of the current minimum funding requirement (MFR). Moreover, the Regulations allow such schemes to have longer to complete their first valuation under the new provisions – eighteen months rather than the fifteen usually allowed".
- Under the heading "Policy background" it is said that Part 3 and the Regulations replace the MFR with more flexible, scheme-specific funding requirements. Key differences are identified which include (a) greater focus on partnership, with trustees working with the sponsoring employer to develop and agree an appropriate funding strategy for their scheme, having taken actuarial advice and (b) new powers for tPR to help resolve disputes about funding issues between the trustees and the sponsoring employer.
- The key component is identified at paragraph 7.4 of the Memorandum as being "that pension schemes will be required to fund on a scheme-specific basis rather than according to a "one size fits all" prescribed basis as with the MFR…". And in paragraph 7.5 it is said that the "aim is to allow schemes the flexibility to take account of circumstances specific to their scheme….when determining their detailed funding strategy…..Together with Part 3 of the 2004 Act, the Regulations require trustees, having taken actuarial advice, to agree a prudent funding strategy with the sponsoring employer to provide for benefits to be paid when they fall due".
- I do not think that those passages – and there is no other relevant passage – point to the conclusion which Mr Green argues for. It seems to me that those passages are really drawing attention to the major departures from the MFR: in particular, the new requirement to agree a funding strategy with the employer (with the matter passing to tPR in the event of disagreement) takes the place of the unilateral decision of the trustees under the MFR regime.
- Not much can, I think, be derived even from that. Where agreement could not be reached between the trustees and the employer, the trustees, under the old regime, could only impose a contribution rate sufficient to meet the MFR: see section 58(4)(b) PA 1995; but that did not detract from their power to demand a higher rate of contribution if the rules permitted them to do so, as I have explained above in considering the MFR provisions. Although the Memorandum refers to pensions being "required to fund on a scheme-specific basis" that statement was made in a context which also regarded a scheme as being required, under the MFR regime, to fund on the MFR basis. The Memorandum does not lend support to Mr Green's argument: from his point of view, it is as best neutral. I say "at best" because it seems to me that the indications are, if anything, in the other direction. I would have thought that a complete statutory override of a scheme's contribution rules would have been a matter of such significance that it would have been referred to expressly – and certainly the language of the Memorandum in highlighting the distinctions between the MFR regime and the new regime would have been different.
- As I have mentioned, Mr Green says that the scheme of the legislation is to provide an exclusive code for the level of contributions to an ordinary defined benefit scheme with a conventional employer contribution rule. I am not sure if he says that it is part of that scheme that the target for funding must always be the statutory funding objective so that tPR could not impose a rate of contributions targeted at a better funding level or one which would reflect the scheme's own contribution rule. But whatever the general scheme of the legislation, it seems to me that the real question is whether there is a conflict, within the meaning of section 306, between the provisions of Part 3 and the Scheme Funding Regulations on the one hand and the Rules of the Schemes on the other.
- If there is such a conflict, the Rules are overridden to the extent of the conflict. But if there is no conflict, then I do not consider that the appeal which Mr Green makes to the overall scheme of Part 3 as providing a complete code has any force. I would take that view even in the absence of section 306. If a person's contractual or other rights are to be overridden or somehow qualified by legislation, that requires the use of clear words which, either expressly or by necessary implication, produce that result. Part 3 and the Regulations, in the absence of any conflict within section 306, do not, I consider, use such clear language. An examination of section 306 itself reinforces that conclusion. The section provides expressly that, in a case of conflict, the scheme rule is overridden: this suggests strongly to me that, in the absence of conflict, the scheme rule should continue to apply. For these reasons I reject any broad submission based on the proposition that Part 3 and the Scheme Funding Regulations provide a complete code for the making of contributions to a scheme. The search must be for a conflict if Mr Green's approach is to be upheld.
- In my view, it is necessary to consider the potential for conflict at two stages. The first stage is during the period after the commencement of Part 3 on 30 December 2005 and the date of the coming into effect of the first schedule of contributions under Part 3. The second stage is once such a schedule has come into effect. I propose to consider those stages separately; in considering the first stage, I assume that the trustees and the employer have complied with their obligations under PA 2004 and the Scheme Funding Regulations, particularly with regard to the time limits within which matters must either be agreed or referred to tPR. What provisions of the legislation could give rise to this conflict?
- Such a conflict is not to be found in the statutory funding objective itself. That objective (see section 222(1)) is that a scheme must have sufficient and appropriate assets to cover its technical provisions. There is nothing in that requirement preventing a scheme having more than sufficient assets to cover its technical requirements. Nor is there anything in the remainder of section 222 which has that result. Subsection (2) to (4) envisage regulations being made which will prescribe what assets and liabilities are to be taken into account; how assets are to be valued; and how the technical provisions are to be calculated. But that does not alter the fact that the statutory funding objective (as defined) is that the scheme has sufficient assets to cover its technical provisions. That reflects the requirement of the IORP Directive. The Directive too, as already explained, requires the technical provisions to be covered by the scheme's assets; but it does not prohibit cover in excess of that. Accordingly, there is no need to strain the language of section 222(1) to give effect to some other and different requirement of the Directive.
- It follows that there is no conflict between section 222 and the Rules of the Schemes in the present case. Because there is no obligation under section 222 to fund only in accordance with the statutory funding obligation, there is no conflict in funding on a basis requiring a larger rate of contribution.
- There is clearly nothing in sections 224 or 225 which might curtail the trustees' powers to demand contributions and no conflict between those provisions and the Rules of the Schemes.
- Section 226 concerns recovery plans. It applies where it is appears from an actuarial valuation that the statutory funding objective is not met. A plan must then be implemented for ensuring that that objective will be met within a period, with regulations laying down detailed requirements of any plan. It is to be noted that a plan relates to the statutory funding objective only. A scheme might have (assuming that it can validly have) a funding objective set at a higher level than the statutory funding objective; but section 226 is not concerned with securing funding at that higher level. Further, such procedures as exist for ensuring compliance with a recovery plan (eg by agreement between trustees and employer or by directions from tPR under section 231(2)(b)) relate only to the statutory funding objective. The fact that a recovery plan must be agreed, or if not agreed, that appropriate directions may be made by tPR, does not derogate from such other remedies as the trustees may have to ensure that either the statutory funding objective or any other funding objective is met. There is nothing in section 226 which expressly or by necessary implication provides that a recovery plan is to be the exclusive method of meeting the statutory funding objective. In some schemes, one of the powers which the trustees may have is to demand increased contributions from the employer and they may decide to use that power to meet the statutory funding objective. I perceive no conflict between section 226 and the continued existence of such a power.
- Section 223, 227 and 228 need to be taken together. As to section 223 the statement of funding principles is something which requires the agreement of the employer. However, where the trustees and the employer cannot agree a statement of funding principles, tPR does not impose one: his relevant powers are, instead, to give directions about calculation of technical provisions and to impose a schedule of contributions.
- Section 228 deals with a failure to make payments in accordance with the schedule of contributions. In some circumstances, the trustees must report the matter to tPR and to the members. Subsection (3) (which I have already set out) provides for any amount due and unpaid to be treated as a debt due from the employer if it is not a debt due to the trustees apart from the subsection. But there is nothing in section 228 which conflicts with an obligation to pay contributions in excess of those shown in the schedule of contributions.
- The conflict, if it exists, is therefore, I consider, to be found, if it is to be found at all, in section 227 read with the relevant provisions of the Scheme Funding Regulations, that is to say Regulations 9 and 10.
- Returning to the first stage (the period before a schedule of contributions is in place), there is, in my judgment no conflict. The only reason why the statutory provisions just referred to might arguably give rise to a conflict is that the schedule of contributions provides a rate of contribution which is different from the rate which the trustees could enforce under the scheme contribution rule. Until the schedule is in place, it has nothing to say about the contributions actually payable. It neither tells one what is payable or, more importantly, what is not payable. The legislation does not provide that only contributions shown in a schedule of contributions may be recovered. What is does provide is that a schedule of contributions must be prepared; and once it is prepared – this is the second stage – it may be arguable that the difference between the rate shown in the schedule and the rate recoverable under the rules is an inconsistency or gives rise to a conflict. But until the second stage, there is no conflict.
- Moreover, a schedule of contributions does not have retrospective effect. In this context, it should be noted that Regulation 10(1) provides for the contribution rates to be shown for the "relevant period" that is to say 5 years from the date on which the schedule is certified. There can, I consider, be no conflict between, on the one hand, payment of contributions in accordance with the scheme contribution rule during the period before the schedule of contributions comes into effect and, on the other hand, payment of contributions in accordance with that schedule after that time. The two payment obligations relate to different periods and there is no inconsistency or conflict between them.
- The contrary view would have surprising consequences. If it were correct that the scheme rule is overridden by Part 3, then it would follow that, until the first schedule becomes operative, no contributions would be recoverable by the trustees in relation to a scheme established after 30 December 2005 to which Schedule 4 of the Scheme Funding Regulations does not apply.
- In relation to such a scheme, the first actuarial valuation must have an effective date within 1 year of the establishment of the scheme and must generally be received within 15 months of its effective date (see Regulation 7). It could therefore be as much as 27 months from the establishment of the scheme before the first actuarial valuation is received by the trustees. By that time, the first statement of funding principles must also be prepared under Regulation 6(2).
- It is not until that same date (15 months of the effective date of the first actuarial valuation) that a schedule of contributions must be prepared pursuant to Regulation 9(1). For a new scheme, therefore, there can be a period of up to 27 months during which there is no schedule of contributions on foot. The period may be longer: agreement to the schedule of contributions must be obtained under Regulation 13 within the same time-scale. If the matter is referred to tPR at the very end of the permitted period, a further period will inevitably pass before tPR imposes a schedule. It is true that the trustees could bring forward the date of the first actuarial valuation, but there would nonetheless be bound to be a period, possibly a significant period, before the actuary was able to complete it.
- It would extremely surprising if it were the case that, until the first schedule of contributions becomes operative, the trustees have no right to demand contributions from the employer if the scheme rules allow them to do so. But that would be the effect of the legislation if it is correct that Part 3 overrides any scheme contribution rule. Moreover, even if the employer agrees, at the time when the scheme is established, to pay contributions at a certain rate until the first schedule of contributions is produced, that agreement could not be enforced, on this construction of the legislation.
- In relation to an existing scheme, the position is, in principle, the same although the detail is different. A schedule of contributions prepared for the purposes of section 58 PA 1995 may or may not show the totality of an employer's contribution obligations. While the MFR regime was in force, there was nothing to prevent trustees from demanding additional contributions from the employer if the scheme contribution rule permitted it. The timing of the first valuation under the 2004 depends on which subparagraph of paragraph 3 Schedule 4 Scheme Funding Regulations applies. Thus, where paragraph 3(1) applies, the first actuarial valuation must have an effective date not later than 30 December 2006 with a further 15 months allowed for the preparation of the first schedule of contributions under section 227; and where paragraph 3(3) applies, the earliest effective date is 22 September 2005 leaving, a further 18 months (to 22 March 2007) for preparation of the first schedule of contributions: see Regulation 5 read with Regulation 4(b).
- Consider, for example, an existing scheme where the MFR schedule of contributions is set under section 58(4)(b) and shows a lower rate of contribution than the trustees are entitled to recover under the scheme contribution rule. Paragraph 9 Schedule 4 Scheme Funding Regulations then applies and results in the amounts shown in an MFR schedule of contributions remaining payable until the date of the first schedule of contributions under Part 3 comes into force. But paragraph 9 would not (for reasons which I will explain in more detail when considering the transitional provisions and savings) preserve the right of the trustees to obtain payment of the excess if, apart from paragraph 9, that excess would not be recoverable. The result would be that, during the period until a schedule of contributions under Part 3 is in place, the trustees would be able to recover contributions only at the MFR rate, notwithstanding that, before 30 December 2005, they could recover at a higher rate under the scheme contribution rule and notwithstanding that the first schedule of contributions under Part 3 will, when it comes into force almost certainly provide a higher rate. In other words, the construction for which Mr Green argues results in the contribution rate, for the period from 30 December 2005 to the date when the first schedule of contributions come into force, being less than it was under PA 1995 and less than it ought to be under Part 3 in order to meet the statutory funding objective. That again would be an extremely surprising position.
- These surprising results do not come about on the view which I take of the legislation. In my judgment, until the first schedule of contributions is in place, there is no conflict between the legislation and scheme contribution rule. During that period the trustees, in the case of an existing scheme, may continue to operate the scheme contribution rule and are not restricted to recovery of the amounts shown in the MFR schedule of contributions; and in the case of a newly established scheme they are not prevented from recovering any contribution at all.
- Later in this judgment, I will consider the transitional provisions and savings in more detail, as well as the facts in the present case relevant to those provisions. Jumping ahead, one of my conclusions is that there has been no valuation complying with the provisions of section 224 with an effective dated after 22 September 2005 and accordingly no first valuation under Part 3. It is clear that there was, on any footing, no obligation to obtain or receive such a valuation before the end of July 2006, by which time the Demands had been made or before the end of September 2006 by which time the Demands were due for payment. Even if contrary to that conclusion the valuation for each Scheme with an effective date of 31 August 2005 constitutes, as Mr Green submits, a valuation for the purposes of Part 3, a schedule of contributions based on it would not be due for another 15 months. Accordingly, the Demands were made, and the amounts demanded became due, whichever view is taken of the valuation, before a schedule of contributions needed to be prepared (and, of course, before one was actually prepared).
- It follows, in my view, that there is nothing in Part 3 and the Scheme Funding Regulations which renders the Demands invalid if they were otherwise valid.
- That is enough to dispose of the point under Part 3 on the facts of the present case. But since the matter was addressed by the parties on a wider basis, I ought to consider the position at what I have described as the second stage, that is to say once a schedule of contributions is in place. Although the issue will arise most starkly where the trustees wish to impose a higher contribution rate than the employer is prepared to agree, in which case tPR may impose a schedule of contributions, it could also arise where there is a subsisting agreed schedule and the trustees wish, in the light of a change of circumstances, to make a one-off contribution demand.
- I have already explained that a conflict, if it is to be found at all, is to be found in section 227 and Regulations 9 and 10. I need to say something more about section 227 and 228.
- Starting with section 228, subsection (3) (which I have already set out) provides for any amount due and unpaid to be treated as a debt due from the employer if it is not a debt due to the trustees apart from the subsection. That provision should be explained.
- It is quite possible, in many types of case, that the amount of contributions payable under the scheme rules by the employer will be less than the amount payable under a schedule of contributions (whether an agreed schedule or one imposed by tPR). There is nothing in sections 222 to 227 which makes the amounts shown in the schedule of contributions actually payable; the obligation to pay must be found elsewhere. Section 228(3) provides that an amount due under a schedule of contributions, if not already a debt, becomes a statutory debt. It is implicit in this that an amount which is due (typically under the rules of the scheme) and which is shown in the schedule of contributions remains recoverable in the ordinary way – there is no need for the section to make it recoverable. It is also to be noted that the fact that a contribution rate has been agreed between the employer and the trustees does not of itself give rise to a contractually enforceable agreement that the employer should pay the contributions shown as due from it. Rather, the source of the liability to pay contributions shown in a schedule of contributions remains, to the extent available, the scheme contribution rule with only the excess (if any) being a statutory debt.
- This last point is significant because it demonstrates quite clearly that the statutory scheme does not replace altogether the rules of a scheme. Rather the legislation supplements the scheme contribution rule (by creating a statutory obligation to pay any excess contribution where the scheme contribution rule is inadequate to meet the statutory funding objective) whilst, if Mr Green is correct, at the same time qualifying the scheme contribution rule by making it unenforceable to the extent of what would otherwise be the excess contribution.
- The general scheme of these provisions therefore appears to be that there should be a statement of funding principles and a schedule of contributions aimed at meeting the statutory funding objective in the light of actuarial assumptions appropriate to the pension scheme in question. If that objective is not met (as revealed by an actuarial valuation) a recovery plan must be put in place. In the event of disagreement or the absence of actuarial certification, tPR is given powers to make directions or impose contribution rates with a view to ensuring that the statutory funding objective is met. These provisions appear to be directed at ensuring that the scheme meets the statutory funding objective: sections 223 to 231 can be seen as having that primary purpose in mind. It is no part of that purpose to prevent funding at a higher level. Nor is there is any reason to think that Parliament considered that these particular regulatory functions should have any relevance to funding requirements going beyond the statutory funding objective.
- To put this another way: The starting point is the statutory funding objective which is a requirement about sufficiency of assets; it does not preclude a different objective, namely to achieve better cover. The principal focus of Part 3 as a whole is on ensuring compliance with the statutory funding objective.
- However, that is not to say that, as actually drafted, the legislation does conflict with a scheme rule. But in approaching that question, essentially one of construction, it is not appropriate to start with a preconception that the policy behind the legislation is that it should be the beginning and end of an employer's contribution obligations.
- Section 227(2) now requires more consideration. Under that subsection, a "schedule of contributions" means a statement showing the rates of contributions payable towards the scheme. The subsection is concerned with identifying the meaning of "schedule of contributions" rather than with precisely what that schedule must show. The schedule must, under subsection (4) satisfy prescribed requirements and, if it does so, it will be a "schedule of contributions" provided that it can properly be described as a statement showing "the rates of contributions payable….".
- In this context, Regulation 10(1) Scheme Funding Regulations is significant. It provides that a schedule of contributions "must show the rates and due dates of all contributions (other than voluntary contributions) payable towards the scheme by or on behalf of the employer and the active members….". It makes sense to exclude voluntary contributions since these will often match precisely the increased liabilities of the scheme as a result of their payment and, because being voluntary, their amounts and dates of payment may be unpredictable and, by definition, they are not enforceable obligations. It appears to me that this regulation was made in the purported exercise of the powers conferred by section 227(4) rather than as a modification under section 232 (such modifications being dealt with in Regulation 19). I do not doubt that the Regulation 10(1) was valid: it seems to me that a schedule showing contributions other than voluntary contributions is nonetheless properly described as "a statement showing the rates of contributions payable……".
- Nor do I doubt that if the employer and the Trustees agree contributions rates in excess of those necessary to meet the statutory funding objective (eg to produce extra cover for certain of the scheme benefits), a statement recording those rates of contribution would be a "schedule of contributions"; a failure to pay contributions at those rates would carry all the regulatory and other consequences which flow from a failure to pay contributions in accordance with such a schedule. Section 228(3) would also apply to treat the excess contribution as a statutory debt if and to the extent it is not already a debt under the scheme contribution rule.
- Equally, it seems to me that a statement which showed the contributions required to meet the statutory funding objective would be a "schedule of contributions". There is nothing in section 227 taken by itself which would require any excess contributions payable under the scheme contribution rule to be shown in a statement before it could be said to be a "schedule of contributions". Indeed, it would be a perfectly rational approach for regulations to provide expressly that the statement (the "schedule of contributions") should show a rate of contributions sufficient, and no more than sufficient, to meet the statutory funding objective. It would not conflict with such a regulation for a scheme contribution rule to continue to apply. The employer and the trustees might well be willing to agree a schedule on that basis, with the regulatory protection applying to contributions at that level. But that should not prevent the trustees recovering any excess under the scheme contribution rule: there would be no conflict between the schedule and the rule. I should add that such a regulation would, it seems to me, be permissible pursuant to section 227(4): section 227(2) does not require that all of the contributions must be shown in the schedule of contribution, something which is recognised in Regulation 10(1) which excludes voluntary contributions as already mentioned.
- The conclusion, therefore, is that Part 3 taken by itself does not prevent a scheme contribution rule continuing as a source of liability to pay contributions notwithstanding that the higher rate of contribution does not appear in a schedule of contributions. That, however, is not an end of the matter in the light of Regulation 10(1).
- Regulation 10(1) requires all contributions other than voluntary contributions to be shown in the schedule of contributions. That Regulation clearly applies to a schedule of contributions agreed between the employer and the trustees. If Mr Rowley is correct in his submissions that the scheme contribution rule continues to apply and is not constrained by the legislation, the trustees could not agree a schedule of contributions which did not show the full rate of contribution under the scheme contribution rules; if it did not do so, it would not comply with the requirement of Regulation 10(1) to show all of the contributions. Accordingly, the matter would pass to tPR who could then impose a schedule of contributions.
- A number of questions then arise.
a. First, does a schedule of contributions imposed by tPR have to specify all of the contributions other than voluntary contributions as a result of Regulation 10(1)?
b. Secondly, if tPR does not have to do so, does tPR have power to override the scheme contribution rule or does the rule remain fully operative so that tPR, in complying with Regulation 10(1), has to specify the higher rate in the schedule of contributions?
c. Thirdly, if it is not obliged to specify the higher rate, so that it may specify a lower rate sufficient to meet the statutory funding objective, can the trustees nonetheless recover contributions at the higher rate?
- None of those questions admits of straightforward answers. None of them has been argued before me. I do not propose to answer them without such argument although I make the following observations.
- As to the first question, although section 227(4) is not excluded by section 227(1) in relation to schedules imposed by tPR, requirements prescribed under section 227(4) can apply to tPR only to the extent that they are capable of applying. Accordingly, Regulations 10(5) and (6) clearly do not apply. Regulation 10(1) requires the schedule to show contributions payable "during the relevant period". That period is defined by reference to the date of certification of the schedule or by reference to a recovery period under a recovery plan. Where tPR imposes a schedule, there will be no certification and there may be no recovery plan. It is not, therefore, clear that an imposed schedule has to show all contributions payable.
- As to the second question, it is arguable that what tPR imposes overrides the scheme contribution rule; however, it is also arguable that, if tPR is bound by Regulation 10(1), so that the imposed schedule of contributions must reflect the scheme contribution rule which has not been expressly abrogated. This is something of a chicken-and-egg situation: the conclusion you arrive at depends on where you start.
- As to the third question, it can be argued that tPR's role is simply to ensure that the statutory funding objective is met; there is no interest in, and no function in relation to, funding over and above that level. If tPR sets a (lesser) rate sufficient to meet the statutory funding objective, it is arguable that there is no conflict between what is specified and the scheme contributions rule.
- It seems to me, after this analysis, that the question whether the trustees can recover contributions under the scheme contribution rules in excess of those showed in an actual schedule of contributions will depend on the answer to the questions I have set out above. They are not questions on which I have heard argument and they are questions on which tPR may wish to express views. In the light of my conclusions in relation to the first stage, it is not necessary to resolve these other aspects in this case. I have not therefore sought further argument from counsel or considered it appropriate to invite tPR to join in these proceedings, I do not consider that it is sensible, in these circumstances, for me to attempt to give answers. Accordingly, I do not answer the question whether Part 3 and the Schedule Funding Regulations override a scheme contribution rule once a schedule of contributions is actually in place.
- Before leaving this aspect of the case, I should deal with some extracts from Hansard which I have been shown. These relate to part of the debate in the House of Lords on what is now Part 3. I doubt that these extracts are admissible applying the criteria of Pepper v Hart [1993] AC 593. Although the interlinking provisions of Part 3 and the Scheme Funding Regulations are quite complex, I have been able to resolve the point of construction, so far as concerns the first stage which I have identified, applying ordinary canons of construction. I do not find there to be an ambiguity, rather than a difficulty, which justifies reference to Hansard to resolve it. On the contrary, I think this is a case where the effect of reading Hansard is to create an ambiguity when none was otherwise present. Nonetheless, I propose to look at what Baroness Hollis of Heigham said on behalf of the Government.
- First she said this in relation to what is now section 229.
"We are aware that a requirement to seek the agreement of the sponsoring employer raises particular issues for schemes in which the rules of the scheme give the trustees or scheme actuary the responsibility for determining the level of contributions payable to the scheme. Such a requirement would override existing rules in a way that could have an adverse impact on the security of members' benefits. [my emphasis] We have concluded that it would not be appropriate to override existing rules of schemes in that situation. We therefore propose to modify the new provision under the powers in Clause 222 [that is now section 231] to provide that when rules of the scheme provide for the trustees or scheme actuary to set the contribution rate, that arrangement may continue."
- Later in the debate, Baroness Hollis made it absolutely clear that where trustees already have the power to set contributions it would not be diluted, adding that it would be under regulations pursuant to what is now section 231 that the existing power of trustees would be preserved. Accordingly, so far as any interested reader of the debate was concerned, he or she would be left with the clear impression that the new legislation would not override the trustees' powers to set contribution rates in schemes containing such a power. That may account for the marked absence of comment – at least, none has been put before me – within the pensions industry about the radical change which, if Mr Green's submissions are correct, has now taken place.
- Unfortunately, Baroness Hollis does not explain why she considers that the new provisions would override existing rules or why there would be a conflict or the extent of it. I have decided, in relation to the statute as enacted, that there is in fact no such conflict, at least in the period before a schedule of contributions is in place. It does not appear that Baroness Hollis had in mind a possible distinction between the position obtaining before and after the coming into operation of a schedule of contributions. Her statement is not, in any case, the sort of unequivocal statement which I would expect to see if reliance is to be placed on it at the second stage in accordance with Pepper v Hart. Baroness Hollis is not to be read as saying that the positive intention of the clauses was to override scheme rules; rather, I read her as saying that her view (no doubt on the advice of her departmental officials) was that the legislation as then drafted would have the effect of overriding scheme rules. That, however, was clearly not a policy decision since what she does say, unequivocally, is that a unilateral power for trustees to set contributions would not be diluted.
- That unequivocal statement was, in fact, reflected in the first draft of the Scheme Funding Regulations which went out from the Department for Work and Pensions in March 2005. What is now paragraph 9(1) Schedule 2 of the Regulations applied in the case of any scheme under which there is a discretion to fix contribution rates without the agreement of the employer: there was nothing which reflected what eventually appeared as paragraph 9(1)(b). It is some comfort to know that my conclusion, so far as it goes, reflects what she informed the House of Lords would eventually be implemented.
Validity of the Demands
- I have set out the relevant parts of Rule 12 at paragraph 15 above. Following the discussion of the MFR above, it is now easy to see that Rule 13 is an attempt to reflect the provisions of the MFR. Rule 12 states in its opening paragraph that the Participating Employers "shall pay to the Scheme such contributions…as may….be required…to enable the benefits of the Scheme to be maintained". The full paragraph after paragraph (b) provides that the amount of the "contributions required" shall be determined by the Trustees acting on the advice of the Actuary and "shall be no less than (but may be greater than) the contributions required to be paid under Rules 13".
- Rule 13 then provides for the keeping of a schedule of contributions. As required by Regulation 10(1), Rule 13(A)(1) requires the schedule to show "the rates of contribution payable by each Participating Employer" under Rule 12. I can detect no difference between "contributions required" which the Participating Employers have to pay and "contributions required to be paid".
- However, it is not necessarily the case that all contributions which could be required under Rule 12 would feature in an MFR schedule of contributions. The Rule might be invoked by the Trustees to demand an additional immediate contribution (which is what has happened in the present case) to meet an imbalance in funding which has arisen since the schedule of contributions was last set. If such a demand were made and met, it would never feature in a schedule of contributions and the imbalance would not give rise to the need for a recovery plan.
- Further, where agreement cannot be reached between the Participating Employers and the Trustees about the contents of the schedule of contributions, the trustees are to show in that schedule the rates of contribution which the Trustees decide are required to meet the MFR.
- In the light of the preceding two paragraphs, it can be seen that the provision in Rule 12, recognising that the contributions under that Rule may be greater than those ascertained in accordance with Rule 13, is not without content. Similar considerations apply to Rule 13(C) providing that Rule 13 does not affect liability under Rule 12.
- Rule 12 commences with the requirement that "The Participating Employers shall pay…". The amount of contributions required is to be determined by the Trustees. The reference to the amount of the contributions required may, as Mr Green submits, be to the aggregate amount of the Participating Employers' contributions. There can, however, be no doubt that it is part of the Trustees' function to decide how the aggregate contribution is to be apportioned among the Participating Employers, as is made clear by the final paragraph of Rule 12. That paragraph (to repeat) reads as follows:
"The sums payable by the Participating Employers shall be decided from time to time by the Trustees, having regard to the Members for the time being in the service of the Participating Employer and the benefits which in the opinion of the Principal Employer are related to such service."
- What happened in the present case was this. The Trustees determined that the large extra contributions already mentioned should be demanded. Having communicated that requirement to BV, the Trustees then purported to apportion the entirety of the amount required to BV in circumstances where, as set out above, a pro rata apportionment according to liability would have resulted in a nil (in the case of the BVPF) and a comparatively small (in the case of the SE&DPF) apportionment to BV.
- There is a point of construction which I should mention at this stage. The paragraph of Rule 12 which I have just set out refers, at the end, to "such service". The question arises whether that is a reference to "service with the Participating Employer" thus including benefits of deferred members and pensioners attributable to service with that Participating Employer; or whether it is a reference only to service of the Members actually still in service with that employer. In other words, the question is whether these words are focusing on the nature of the service (ie with the relevant employer) or are focusing on the benefits of the Members in active service (sub silentio with that employer). This is not an easy question to answer. My own view is that the focus is on service with the employer and that the purpose is to ensure that the Trustees have regard to the scheme liabilities which are attributable to service with a particular employer in deciding how to allocate contributions some of which may be required to meet a past service deficit.
- Returning to the Trustees actual apportionment, Mr Green submits that, in acting in this way, the Trustees have failed to observe the requirements of the paragraph of Rule 12 which I have just quoted. He would have me read it as if the word "only" appeared after "having regard". In other words, the paragraph is a mandatory provision requiring the Trustees to apportion on a pro rata basis according to the benefits which in the opinion of BV are related to service with the relevant Participating Employer (but query whether or not that is restricted to service by current active members). I am not at all sure what that would actually entail. It is not clear what benefits are being referred to. Is it restricted to past service benefits or does it include also, for the purposes of apportionment, an assumed future benefit accrual (and if so over what period) or perhaps a total projected benefit? It is not, in any case, possible to apportion pro rata according to benefits although it would be possible to place present values on the benefits once they had been identified and apportioned according to those values.
- I reject Mr Green's submission. In my judgment, the requirement to have regard to active members and to benefits (on whatever basis those benefits are to be ascertained) does not mean that other factors are to be ignored, or that any sort of pro rata apportionment is mandatory.
- This, I consider, is clearly so if, contrary to the view I have expressed, "such service" at the end of Rule 12 is a reference to service by current active members. Consider the following example assuming (contrary to my view) that such approach is correct. Suppose that the BVPF had two Participating Employers, A and B. Suppose that 99% of the past service liability is attributable to service with A which, in the past, had a large workforce; but suppose that, at the present time, A now has only one active employee and that B has one thousand. Future service liabilities will, it can be seen, arise almost exclusively as a result of service with B. But suppose that there is a large past service deficit (attributable to service with A) which the Trustees propose to amortise over the next 15 years. I do not consider that the Trustees would be compelled to apportion the entire ongoing contribution between A and B according to the benefits of the one member employed by A and the one thousand members employed by B. The Trustees must, in this example (and on the hypothesis under consideration namely that "such service" relates only to current active members), certainly take the active members and their benefits into account but they may think it appropriate that a significant part of the deficit funding should be borne by A as the employer of the now non-active members of the scheme to whom the deficit is largely attributable. In my judgment, all that the paragraph requires is for the Trustees to have regard to the Members in service with a Participating Employer and to the benefits which in the opinion of the BV are related to such service. It is up to the Trustees to determine what, if any weight, they attach to those matters. They are not precluded from having regard to other matters as well.
- Further, I do not consider that the final paragraph of Rule 12 compels a pro rata apportionment according to liabilities if the view I have expressed about the focus of "such service" is correct. Consider another example assuming my approach to be correct. Assume again that the scheme has two employers, A and B, but that each of them has an active workforce of say 500 people and that the contributions needed to fund future benefits are roughly the same for each employer. Suppose also that the scheme has a past service deficit attributable almost exclusively to benefits in respect of service with A by individuals no longer employed by A (or by B) (eg where there has been a large reduction in the workforce because of forced redundancy). Suppose that the Trustees wish to impose an overall funding rate to meet (i) future service liabilities and (ii) to eliminate the past service liabilities. If Rule 12 imposes a mandatory apportionment pro rata to total liabilities, the result will be that A will have to pay more than its 50% share – possibly much more – of the contributions in respect of future service liabilities. That cannot be right. And the reason why it is not right is that Rule 12 does not (on the hypothesis under consideration that "such service" refers to service by all members, not just active members) impose a rigid pro rata apportionment, but simply requires the Trustees to have regard to how the liabilities which are being funded arose or will arise.
- Accordingly, whichever approach to the meaning of "such service" in Rule 12 is correct, Rule 12 does not, in my judgment, impose an apportionment of contributions between the Participating Employers on a pro rata basis, whether pro rata to the benefits of active members or to the benefits of active members together with deferred members and pensioners.
- It is then submitted by Mr Green that the Trustees did not, in fact, have regard to the active members and their benefits at all. One reason that they did not do so is because they did not obtain the opinion of BV concerning the benefits related to service with each Participating Employer and could not, therefore, have regard to benefits in accordance with the final paragraph of Rule 12.
- It is necessary to examine the evidence to see whether there is anything in Mr Green's points. In doing so, I do not propose to consider at all the thinking which led the Trustees to making the Demands in the first place. That is not relevant to the issues before me although it may be highly relevant to the issue whether the Trustees acted in a way in which no reasonable trustee could have acted. That is for another day and the issue will, if it is necessary to resolve it, be raised in separate Part 7 proceedings.
- From the witness statement of Mr Macwhinnie (a director of The Law Debenture Pension Trust Corporation plc which is itself a director of the Trustees of each Scheme) and the documentation exhibited, the following appears.
- One can start with a letter from Eversheds (acting for the Trustees) dated 23 November 2005 to Freshfields Bruckhaus Deringer (acting for BV). By this letter, the Trustees informed BV that they were considering making lump sum demands under the contribution rules. It was emphasised that no decision had been made but that BV's opinion was being sought. That the Trustees were considering this course of action was repeated at a meeting between the Trustees, BV and their respective advisers on 14 December 2005.
- Having considered, with the benefit of detailed professional advice, the financial information provided to them about BV, on 31 May 2006 the Trustees (i) decided that the appropriate funding basis for the Schemes was 100% gilts (ii) adopted a gilt-based investment strategy (set out in a new Statement of Investment Principles) and (iii) determined to require the payment of lump sums to the Schemes under the relevant contribution rules. BV were informed of this in a letter dated 31 May 2006 from Mr Boyes (the then chairman of each of the Trustees) to Mr Cox (a director of BV) which enclosed a copy of the Statement of Investment Principles.
- The 31 May 2006 letter explained that in order to determine the liability of the two Schemes "on a funding basis using sovereign debt" the Trustees of each Scheme had instructed Mercers to carry out an actuarial valuation as at 31 August 2005. The results of those valuations were attached to the letter: they showed deficits of about £48 million for BVPF and £16 million of SE&DPF, a total of about £64 million. Mindful of changed investment conditions since August 2005, the Trustees had instructed Mercers to carry out an update, the position as of 25 May 2006 being shown in a further attachment to the letter. The deficits had reduced to about £42,588,000 and £8,737,000. BV was informed in the letter that the sums specified in the letter, namely £42.6 million for the BVPF and £8.7 million for the SE&DPF, had been determined by the Trustees, pursuant to the powers under the relevant contribution rules (ie Rule 12), as required in order to enable the benefits of the relevant Scheme to be maintained. In other words the Trustees had made determinations within the first full paragraph of Rule 12 after paragraph (b).
- In making those determinations, there is no doubt that the Trustees had taken into account the advice of the actuary as required by Rule 12 and that they had taken into account the assets of the Schemes. I say that there is no doubt that they had done so because they had the valuation and updates from Mr Brougham which are referred to in the letter. Whether or not the valuation and the updates fulfilled the requirements of any relevant statutory provisions or whether they were procured partly to enable the transitional provisions in the Scheme Funding Regulations to be invoked (something which gives rise, according to Mr Green, to a fraud on the power) is neither here nor there, in my view. The valuations were clearly made and they clearly constitute actuarial advice: the Trustees therefore clearly complied with the requirement in Rule 12 to take actuarial advice.
- Although it may be BV's case that no reasonable trustee could have adopted that Statement of Investment Principles, I do not understand it to be suggested that the Trustees had failed to comply with their statutory duty to consult BV, under section 35 PA 1995 (as amended by section 244 PA 2004) and the relevant regulations made under that section. It is certainly the Trustees' position that they did comply with that obligation.
- The Trustees did not in the letter dated 31 May 2006 demand payment of the required sums from any (or indeed all) of the Participating Employers. Rather, having determined the sums required by their respective Schemes, the Trustees invited BV as the Principal Employer to communicate its opinion in relation to the matters referred to in the final paragraph of the contribution rules, the text of which I have set out already. BV failed or refused so to do: I do not think that that is disputed either although BV considered that it did not need to express an opinion because it considered that any contribution demand would be invalid. I should, nonetheless, rehearse the history.
a. The Trustees expressly recognised in Eversheds' letter dated 23 November 2005 their obligation to have regard to the opinion of BV as Principal Employer on the matter specified in the final paragraph of the contribution rules, namely the benefits which in the opinion of BV are related to the service of members in service with each Participating Employer.
b. The final paragraph of Mr Boyes' letter dated 31 May 2006 specifically sought the opinion of BV pursuant to the contribution rules on the manner in which the liability should be apportioned.
c. On 15 June 2006, Pinsent Masons (who by then had commenced acting for the Trustees in place of Eversheds following a move of personnel between firms) wrote to Freshfields Bruckhaus Deringer again inviting BV to express an opinion, stating that, in the absence of any opinion, the Trustees would have regard to the employers and liabilities detailed in a schedule enclosed with the letter. The schedule contained a list of employers against which were shown liabilities, in separate columns, in respect of active members, deferred members and pensioners, with a total in a final column. For the BVPF, BV's own liability was shown as nil in all columns out of a total liability of some £245,943,000. For the SE&DPF, BV's liability was a total of £34,834,000 of which £1,563,000 was attributable to active members, out of a total liability of £165,906,000, of which active members accounted for £52,461,000.
d. The response to that letter, dated 16 June 2006, indicated that it was intended to provide a response to Mr Boyes' letter dated 31 May 2006 by the end of June. The letter ended by saying: "Accordingly the Trustees should not proceed on any contribution apportionment analysis contained in your letter".
e. At their meeting on 19 June 2006, the Trustees did not carry out an apportionment analysis. On 26 June 2006 Pinsent Masons wrote to Freshfields Bruckhaus Deringer informing them of that fact and requesting BV to confirm that it was not aware of any material inaccuracies in the data relating to the Participating Employers and the solvency liability split set out in the 15 June 2006 letter. It was requested that such confirmation be given as soon as possible and in any event by 30 June 2006 in the response to Mr Boyes' letter dated 31 May 2006 (which Freshfields Bruckhaus Deringer had stated it was intended to provide by that date).
f. BV failed to confirm that data by the end of the month. On 13 July 2006, Pinsent Masons wrote again to Freshfields Bruckhaus Deringer pointing out, again, the opportunities which had been afforded to express the opinion envisaged by the final paragraph of Rule 12 and informing them that the Trustees would make a decision on apportionment at their meeting on 27 July 2006. A request was made for any information or opinion on which BV wished to rely to be provided by 19 July 2006 indicating that the Trustees were not prepared to extend the deadline.
g. On 18 July 2006, Mr Cox wrote a long reply to Mr Boyes' letter dated 31 May 2006. Much of that letter is not material to the issues before me but is material, rather, to the issue whether the Trustees could properly be acting as they were. There is a short section on page 5 of the letter dealing with the validity of the lump sum demands. In that section, Mr Cox says that BV had no recollection or record of any valuation with an effective date of 31 August 2005 and asked to be informed how such valuation came about. Mr Cox stated that BV did not accept the two page summary (ie the schedule sent by Pinsent Masons on 15 June 2006) as a valid actuarial valuation. He said that in the absence of any evidence that the Trustees carried out formal valuation as at 31 August 2005, BV could only conclude that the valuation in the form provided constituted a valuation as at 25 May 2006. This point did not answer why the opinion envisaged by Rule 12 had not been provided, but is directed at BV's case that a contribution cannot be set without BV's consent. On the next page, BV's position was, however, made clear where Mr Cox sated that the validity of the Demands was not accepted and that BV "does not agree that it is appropriate now to be undertaking an apportionment exercise as requested by Pinsent Masons for the purposes of apportioning the Trustees lump sum demands".
- It is, in the light of that correspondence, impossible to conclude other than that BV failed to express an opinion for the purposes of the final paragraph of Rule 12 having been given adequate opportunities to do so, as well as to make observations on the schedule on which it knew that the Trustees were proposing to proceed. Given BV's attitude to the power of the Trustees to make any demand, it is not entirely surprising that it took this course; indeed, Mr Green says that it did not express an opinion because it had at all time contested, and continues to contest, the right of the Trustees after PA 2004 to apply Rule 12 in relation to it, but I have rejected that as a valid reason. Had BV been correct in its view that the demand could not be made in the first place, the failure to express an opinion would have no consequence. However, in taking the course it did, BV took the risk that it might be wrong in its approach and, having failed to express an opinion, can hardly complain that the Trustees then proceeded without one on the basis of the data which they had. In the absence of such an opinion, after proper opportunity to express it had been given, the Trustees were, in my judgment, entitled to proceed on the basis of their own assessment of the benefits and their value, a matter on which they had detailed information and in relation to which the actuary had carried out detailed calculations. I do not consider that the Trustees were under any duty to take steps to compel BV to express an opinion, although I do accept Mr Green's submission that the failure to express an opinion cannot change the nature of the power. Had I accepted Mr Green's submissions on the construction of the power – so that there would then be a mandatory pro rata apportionment – I would also accept his submission that such a power cannot be turned into a power to throw the entire deficit funding onto BV when the Trustees knew that a liability-based apportionment would throw nothing or a comparatively small proportion of the deficit funding onto BV. But that is not the case for I do not accept his submissions on construction.
- It was against that background that the Trustees proceeded to allocate the liability at their meeting held on 27 July 2006. Those present at the meeting included Mr Brougham, the actuary to the Schemes, and Mr Dewar of Ernst & Young. Mr Brougham explained that what he called the insolvency liability split had been provided to BV. This was a reference to the schedule sent with the letter dated 15 June 2006 from Pinsent Masons and which ascertained liabilities on a buy-out basis. He explained that Mercers had also carried out a similar exercise on a gilts liability basis. Mr Brougham identified some uncertainties arising from a lack of information about which group company had employed which members and when, observing that it was difficult to be more accurate without more information from BV. The figures were based on data and financial conditions at 30 September 2005. Although there could have been some movement on the gilts liability split, Mr Brougham confirmed that these figures could be used for apportionment purposes because of the significant time and costs involved in making the figures more accurate, something involving as much work as a valuation and taking several months.
- Ernst & Young had prepared a briefing paper for the consideration of the Trustees. It contains a table showing the split of the gilt based liabilities as at 30 September 2005 for each Scheme. It shows total liability figures for the BVPF of £192,310,000 with the amount and percentage shown against BV being nil. For the SE&DPF, the total is shown as £328,710,000 with the amount and percentage shown against BV being £28,750,000 and 21%. The percentage liability of BV across both Schemes was 9%.
- Mr Dewar took the meeting through the briefing paper. He said that Ernst & Young were conscious that there were a number of dormant companies within the BV group without the ability to pay any demand apportioned to them. An apportionment had been prepared leaving those companies out of account, with the total liabilities being distributed among the other participating companies. The contribution demand was then spread on the percentage liability split per company. He then looked at the financial position of the companies and their ability to make good the payment of the apportioned liability. The Trustees noted that the allocation would require the majority of the companies to divert a substantial element of the earnings to make good the apportioned liability as well as turning many of the companies' balance sheet positions from a net asset into a net liability position. Mr Dewar stated that if the Trustees wished to allocate the entire contribution to BV, it would have a substantial effect on its earnings and balance sheet, but that would be of a lesser effect than on the other companies detailed in his table. After further discussion, the directors of the Trustees determined that the whole demand should be apportioned to BV.
- Mr Brougham took the Trustees through a valuation update which he had prepared. Across the two Schemes, this indicated that on a gilt-matched basis there was a deficit of £64 million as at 31 August 2005 (the effective date of the valuation), £51.3 million as at 25 May 2006 and £44.5 million as at 30 June 2006. His best estimate of the current deficit for the two Schemes combined was in the region of £47 million; the Trustees agreed to obtain a new and completely up-to-date figure and to inform BV of that figure and the fact that they had apportioned the entire demand to BV.
- It can be seen, therefore, that in making their decisions on allocation, the Trustees took into account the actuarial advice received from Mr Brougham and financial advice received from Ernst & Young. There is no requirement under Rule 12 for such advice to be taken in effecting the apportionment, in contrast with the advice which needs to be obtained before requiring contributions to be made. But clearly it was sensible for the Trustees to take such advice and they did so.
- That advice included the schedule sent by Pinsent Masons on 15 June 2006. That schedule showed the split for active members, deferred pensioners and pensioners against each Participating Company. The advice also included the detailed advice about total liability split. Is clear that the Trustees had regard to that advice when making the allocation decision. In my judgment, they complied with Rule 12.
The transitional provisions and savings
- Mr Rowley has an alternative route to the validity of the Demands if, contrary to my view, Part 3 and the Scheme Funding Rules are in conflict with Rule 12 at the first stage (although, even under this alternative route, he still needs to rely on the Demands as having been validly made in accordance with Rule 12). He relies on the actuarial valuation for each scheme (the "2005 Valuation" for the relevant Scheme), with an effective date of 31 August 2005, obtained by the Trustees, on the basis of which he submits that the case falls within the transitional provisions and savings found in Schedule 4 Scheme Funding Rules. The result, according to him, is to avoid the conflict which would otherwise arise.
- Put shortly, Mr Rowley's case is this:
a. Both Parts 1 and 2 of Schedule 4 apply to the Schemes, since both were subject to section 56 of PA 1995 (ie to the MFR)) immediately before the commencement date and became subject to Part 3 of the 2004 Act on that date: see paragraphs 1 and 8 Schedule 4.
b. The Trustees of each Scheme received, after 30 December 2005, the 2005 Valuation for that Scheme. These were received within one year of their effective dates, 31 August 2005, being a date on or after 21 September 2002 in accordance with the provisions of section 57 of the 1995 Act, thus bringing the case within paragraph 3 (2) Schedule 4.
c. In consequence, the Trustees are required, in accordance with paragraph 3(3) Schedule 4, to obtain the first actuarial valuation for each Scheme under the 2004 Act by reference to an effective valuation date no earlier than 22 September 2005 and not more than three years after the effective date of the last valuation received by them under the 1995 Act. But see below concerning savings.
d. The first valuations under the 2004 Act must be received by the Trustees within either 15 or 18 months after their effective dates, depending upon whether those dates are after 29 December 2005 or fall between 22 September and 29 December 2005: see paragraphs 4(a) and (b) Schedule 4.
e. The Trustees of each Scheme will in due course be required to prepare a schedule of contributions under section 227 within whichever period is applicable under paragraph 4: see paragraph 5 Schedule 4.
f. Sections 56 and 58 to 60 of the 1995 Act continue to apply to the Schemes from 3 December 2005 until the date on which the first schedule of contributions under the 2004 Act comes into force: see paragraphs 9 and 10 Schedule 4
g. So long as those provisions continue to apply, the contribution regime of Part 3 does not apply and the conflict which would otherwise exist on the hypothesis under consideration, it postponed.
- One point which is made by Mr Green against Mr Rowley's argument is that there has in fact been a valuation for each Scheme since 30 December 2005 so that there has been the first actuarial valuation for the purposes of PA 2004. It is said that each of the 2005 Valuations, although purporting to have a valuation date of 31 August 2005, is really a valuation with an effective date in May or July 2006. This is on the basis that the actuary has in fact carried out adjustments to the results for 31 August 2005 on the basis of data since that date in order to bring the each 2005 Valuation up to date as of May or July.
- I reject Mr Green's point for the following reasons.
- The 2005 Valuations have effective valuation dates of 31 August 2005 and were signed off by the actuary, Mr. Brougham, on 18 August 2006. The interval between the valuation date and the date on which the 2005 Valuations were signed off is not unusual.
- The 2005 Valuations provide results for 31 August 2005. They also contain updates for each Scheme as at 25 May 2006 and 26 July 2006. The basis for those updates is explicitly stated in the text: they show "approximate updates based on general market movements and a summary of member movements as at 25 May 2006" and "an approximate position as at 26 July 2006". They do not purport to be actuarial valuations at either date and, in my judgment, are not actuarial valuations as at either date: the updates are not valuations of the Schemes' assets or calculations of their technical provisions and not therefore within the definition of "actuarial valuation" in section 224(2)(a).
- In any event, the 2005 Valuations did not include the actuary's certification in the form set out in Schedule 1 to the Scheme Funding Regulations and as required by Regulation 7(4)(a). Nor was an estimate of solvency included as required by Regulation 7(4)(b). All of this goes to emphasise that the updates were not actuarial valuations. This justifies the conclusion which I have reached in paragraph 100 above.
- Returning to Mr Rowley's argument, Mr Green submits that the transitional provisions and savings do not disapply Part 3 together with the other provisions of the Scheme Funding Regulations if they would otherwise apply.
- The transitional provisions of Part 1 apply so as to alter the time limits for obtaining and receiving the first actuarial valuation, and for preparing the first statement of funding principles and the first schedule of contributions. If, contrary to the conclusions which I have already reached, Part 3 overrides Rule 12 from 30 December 2005, there is nothing in these transitional provisions that would disapply that override. Mr Rowley needs, therefore, to rely on the savings found in Part 2 Schedule 4. The relevant provisions are paragraphs 9 and 10.
- Regulation 9 provides that sections 56 and 58 to 60 (but not section 57) PA 2005 and regulations 15 to 17 and 19 to 27 (but not regulation 18) MFR Regulations continue to apply until the date on which the first schedule of contributions under Part 3 come into force. It cannot be said that Regulation 9 overrides Part 3 altogether since it is clear that the obligations to obtain and receive the first actuarial valuation, and to prepare the first statement of funding principles and the first schedule of contributions arise as soon as Part 3 came into force, albeit in accordance with the time-limits set out in the transitional provisions. Moreover, just as the MFR does not prevent recovery of contributions at a higher rate than is necessary to meet the MFR (which rate is the default rate shown in a schedule of contributions under section 58(4)(b) PA 1995), nor does it empower trustees to recover any higher rate of contributions. The fact that the provisions referred to in paragraph 9 continue does not mean that Part 3 is disapplied so as to prevent it overriding the scheme contribution rule if that would otherwise be its effect.
- In my view, paragraph 9 does no more than to allow trustees to continue to obtain contributions in accordance with an MFR schedule of contributions until the first schedule of contributions under Part 3 is in force. It does not, by implication, disapply the override by Part 3 of the scheme contribution rule if there would otherwise be an override.
- As to paragraph 10, there are a number of requirements if it is to apply. It applies where:
a. immediately before 30 December 2005
b. the trustees were required
c. under section 57(1)(a) A 1995 and regulation 10 MFR Regulations
d. to obtain an MFR valuation within a period ending on or after 30 December 2005
e. and the trustees have determined before 30 December 2005 or determine after 30 December 2005 that the valuation (ie that referred to in d. above)
f. should be obtained by reference to an effective date before 22 September 2005.
- Where paragraph 10 applies "those provisions" apply to the scheme on and after the 30 December 2005 in respect of "that valuation" ie the valuation referred to in d. above. As already explained, the reference to "those provisions" is, in my view, a reference to section 57(1)(a) and regulation 10. Regulation 10 is limited in its scope: it provides for certain provisions of the scheme to apply in respect of that valuation. One would therefore expect the provisions concerned to be ones which relate to valuations which is precisely what section 57(1)(a) and regulation 10 are, preserving the time limits for obtaining the MFR valuation notwithstanding the repeal of the relevant parts of PA 1995 and the MFR Regulations. In my judgment, that has no impact at all on whether a scheme contribution rule is overridden by Part 3.
- Accordingly, I do not consider that the transitional provisions and savings in Schedule 4 Scheme Funding Regulations have the effect of disapplying any override, by Part 3 and those Regulations, of a scheme contribution rule. Mr Rowley's alternative route to establishing the continued operation of such a rule does not, therefore, succeed.
- This makes it unnecessary to consider the submission by Mr Green that these savings do not apply, in any case, because the Trustees were not "required" immediately before 30 December 2005 to obtain an MFR valuation. That submission involved detailed consideration of a number of the provisions of PA 1995 and the MFR Regulations and certain other Disclosure Regulations made under Social Security Act 1975, Social Security Pensions Act 1975 and PA 1995. I do not propose to consider that submission further except to say that, if correct, it would make paragraphs 3(2), (3) Schedule 4 Scheme Funding Regulations inapplicable on the facts of the case.
- It is also unnecessary to consider Mr Green's submission that the effective dates of the 2005 Valuations were chosen for an improper or collateral purpose (namely to avoid the consequences of the commencement of Part 3). Even if the point had remained material, I would have declined to decide it in these proceedings. It seems to me that it is something which should be decided only after an opportunity to give full evidence has been given to the Trustees, and possibly only after cross-examination. Mr Green submits that the reasons for the choice of date are so clear that it is possible to say without more that that choice was improper, but I do not agree with that approach. In any event, as I have already said, the 2005 Valuations are sufficient to satisfy the requirement of Rule 12 to take actuarial advice even if they cannot stand as formal valuations for the purposes of PA 1995 and the MFR.
Conclusions
- My conclusions are as follows:
a. The Demands, if otherwise valid, are not invalidated by Part 3 and Scheme Funding Regulations having been made, and requiring payment, before any schedule of contributions was in place or required to have been put in place. I make no decision on the question whether, had a schedule of contributions been in place when the Demands were made or when they were to be met, Part 3 and the Regulations would have rendered the Demands invalid if they were otherwise valid.
b. The Demands were within the scope of Rule 12 the BVPA and Rule 12(A) of the SE&DPF; those Rules do not impose a mandatory pro rata apportionment of liabilities among the Participating Employers whether by reference to the liabilities of active members or otherwise. It is a matter to be decided in other proceedings whether the Trustees could, acting properly, in fact have adopted the apportionment which they purported to adopt.
- I therefore refuse to grant the declaratory relief which is sought by BV
