B e f o r e :
MRS JUSTICE ASPLIN DBE
Between:
MERCHANT NAVY RATINGS PENSION
- and -
(1) STENA LINE LIMITED
____________________
Michael Tennet QC, Edward Sawyer and James Walmsley (instructed by
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mrs Justice Asplin :
Introduction
This is a Part 8 claim concerning the Merchant Navy Ratings Pension Fund ("the Scheme") established with effect from 6th April 1978. The Scheme is a non-sectionalised industry-wide defined benefit occupational pension scheme, established for the benefit of British Merchant Navy ratings and their dependants. Merchant Navy Ratings Pension Fund Trustees Limited, ("the Trustee") is the sole trustee of the Scheme and seeks the Court's approval to proceed with a proposed amendment to the Rules of the Scheme in order to introduce a complex new contribution regime (the "New Regime") under which all Employers which have adhered to the Scheme (the "Participating Employers") may be made liable to make contributions to repair the current deficit. The proposed amendments give rise to issues as to whether their introduction would be a proper exercise of the Trustee's powers and whether in fact, they are within the scope of those powers. These have come to be known as the "Propriety Issues."
In addition, the Court is asked to determine a number of questions which arise as to the status of the Scheme principally under section 75 Pensions Act 1995 and the Regulations made under that Act. The provisions in question govern the statutory liability of Employers to make deficit contributions in particular circumstances. The issues affect the terms upon which certain Employers allege that they are entitled to cease to participate in the Scheme, leaving the liabilities attributable to their former employees behind. These have come to be known as the "Open /Frozen Issues".
Parties
The Trustee acts by a Board of up to twelve directors of whom half are appointed by the Chamber of Shipping (the trade association for the British shipping industry) and half are appointed by the National Union of Rail Maritime and Transport Workers. In addition there is one non-voting independent trustee director. The two groups of directors are referred to respectively as "Participating Employers' representatives" and ~Members' representatives" in the Trust Deed and Rules. The Trustee Board is subject to a "dual majority principle" as a result of which all resolutions must be passed by majorities of both groups of directors, and any exercise of the Scheme's power of amendment must be approved by majorities of both groups.
The First Defendant, Stena Line Limited ("Stena Line") is a Current Employer as defined in Rule 3 of the Trust Deed and Rules of the Scheme dated 1 August 2007 ("the Current Trust Deed and Rules"). The Stena Line group bears the largest funding burden amongst the Current Employers under the 2001 Regime to which I shall refer. Under that regime, it is liable to meet 60% of the deficit repair contributions in relation to the entire deficit.
P&O Ferries Limited, the Second Defendant ("P&O Ferries") is a Voluntary Employer, that is to say that it is a "Historic Employer" by which or on behalf of which ex gratia contributions were paid to the Scheme in respect of the deficit following the introduction of the 2001 Regime. The term "Historic Employer" has been adopted as shorthand for an Employer which became an "Employer" or "Participating Employer" within the definition of that expression in the then current Rules of the Scheme but which is not and has never been a Current Employer. A significant proportion of the voluntary contributions were paid on behalf of the P&O group of companies. However, as with most of the other Voluntary Employers, P&O Ferries ceased to pay voluntary contributions in 2006 and has not contributed to the deficit in the Scheme since that time.
The Third Defendant, Sealion Shipping Limited, ("Sealion") is also a Historic Employer but not a Voluntary Employer. It ceased to have active members in the Scheme in 1994 and paid no deficit contributions under the 2001 Regime whether voluntarily or otherwise.
International Marine Transportation Limited, ("International Marine") the Fourth Defendant, (formerly Mobil Shipping Company Limited) is a Current Employer from the ExxonMobil group of companies. It is part of a large and financially strong corporate group. As a result it is in a position to present the views of Participating Employers with stronger covenants in relation to the Propriety Issues. International Marine is also what has come to be termed a "C2 Employer." That is an Employer which is a Current Employer as defined under the Current Trust Deed and Rules but which on or after 31 May 2001 ceased to employ anyone who was or who was eligible to be an "Active Member" or "Employee Member" of the Scheme as defined in Rule 4 of the 2001 Rules and Rule 4 of the Current Trust Deed and Rules.
The Fifth Defendant, Mr Terence Brown, ("Mr Brown") is a Member of the Scheme. He was an active Member from 1978 1996 and has recently become a pensioner.
Representation Orders
It is proposed that issue based representation orders are made in order to deal efficiently and proportionately with the questions before the Court. I am happy to make such orders. In relation to the Propriety Issues in general terms, it is intended that the Trustee be appointed to advance arguments in favour of the propriety of the New Regime. In particular, it is proposed that the Trustee be appointed to represent all Employers interested in contending for an affirmative answer to Issues 1, 2 and 4 and that P&O be appointed to represent all those Employers interested in arguing for a negative answer to the questions posed under those issues. Issue 1 is whether it would be proper for the Trustee to amend the Scheme to enable contributions to be demanded from all Participating Employers whether Current, Historic or Voluntary, ("Full Augmentation"). If the answer to Issue 1 is "yes", Issue 2 arises. It is whether it would be proper for each Participating Employer's liability to be calculated by reference to the percentage of the liabilities of the Scheme that is attributable to the pensionable service of Members whilst employed by that Participating Employer. Issue 4 is whether it would be proper for the New Regime to give credit for deficit contributions paid by Current Employers under the 2001 Regime and ex gratia contributions made by Voluntary Employers and for payment of section 75 debts ("Re-Apportionment").
In the same way it is intended that the Trustee represent those Employers interested in arguing for an affirmative answer to Issues 3 and 5 and that Sealion be appointed to represent those interested in a negative answer. Those issues are whether it would be proper to calculate each Participating Employer's Percentage as at 31 March 2011 using what became known as Method C and if the answer to Issue 4 is "yes" whether it would be proper for credit to be given under the New Regime for all such deficit contributions paid from 31 May 2001 onwards (and in the case of section 75 payments, paid at any time).
In addition, it is intended that the Trustee be appointed to represent those Employers interested in an affirmative answer in relation to Issues 6-12 and that P&O Ferries represent those interested in a negative answer in each case. Issues 6-12 are concerned with ancillary matters to which I shall refer below.
Each of the proposed representation orders is subject to the fact that if and to the extent that an issue gives rise to the question of whether the Trustee should amend the Scheme or administer it in a way which would impose more onerous obligations on Employers with stronger covenants relative to that of other Employers, International Marine be appointed to represent all Employers which would or might be adversely affected by such a step.
Subject to the particular issues to which I have already referred, it is intended that Stena Line represent the Current Employers and all persons with the same interest as the Current Employers and P&O Ferries represent the Voluntary Employers and all persons with the same interest including so far as their interests coincide, other Historic Employers. To the extent that their interests diverge from the Voluntary Employers, Sealion is intended to represent the Historic Employers. Mr Brown is intended to represent all Members of the Scheme and those claiming through them.
I will set out the representation regime in relation to the Open/Frozen issues when I come to deal with them below.
A. PROPRIETY ISSUES
Approval by the Court
Although the Trustee seeks the Court's approval before amending the Current Trust Deed and Rules to reflect its decision to put the New Regime into effect, it must be borne in mind that Court approval is not required in the sense of being essential for an effective amendment and in making this application the Trustee has not surrendered any discretion to the Court. Rather it is seeking the Court's blessing for a course of action which it has resolved to take and it says is within its powers because the decision is far reaching and has serious consequences.
The circumstances in which the Court has to adjudicate upon a course of action taken or proposed by trustees was considered in Public Trustee v Cooper [2001] WTLR 901 in which Hart J set out a passage from a judgment of Robert Walker J given in chambers in 1995. The passage was set out at paragraph 5 of the decision of Blackburne J in relation to the Scheme in Merchant Navy Ratings Pension Fund Trustees Ltd v Chambers & Ors [2001] PLR 137 ("the 2001 case") in the following form:
"[5] . . .
At the risk of covering a lot of familiar ground and stating the obvious, it seems to me that, when the court has to adjudicate on a course of action proposed or actually taken by trustees, there are at least four distinct situations (and there are no doubt numerous variations of those as well).
(1) The first category is where the issue is whether some proposed action is within the trustees' powers. That is ultimately a question of construction of the trust instrument or a statute or both. The practice of the Chancery Division is that a question of that sort must be decided in open court and only after hearing argument from both sides. It is not always easy to distinguish that situation from the second situation that I am coming to
(2) The second category is where the issue is whether the proposed course of action is a proper exercise of the trustees' powers where there is no real doubt as to the nature of the trustees' powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers. Obvious examples of that, which are very familiar in the Chancery Division, are a decision by trustees to sell a family estate or to sell a controlling holding in a family company. In such circumstances there is no doubt at all as to the extent of the trustees' powers nor is there any doubt as to what the trustees want to do but they think it prudent, and the court will give them their costs of doing so, to obtain the court's blessing on a momentous decision. In a case like that, there is no question of surrender of discretion and indeed it is most unlikely that the court will be persuaded in the absence of special circumstances to accept the surrender of discretion on a question of that sort, where the trustees are prima facie in a much better position than the court to know what is in the best interests of the beneficiaries."
In relation to the test to be applied when determining whether approval should be granted under category (2), Blackburne J went on at [7]:
"[7] There is one other matter which I should refer to at this stage. That is the threshold test for the provision of the court's blessing under category (2). The test is whether it can be said that in reaching its decision to implement the proposal, the trustee has taken into account irrelevant, improper or irrational factors, or whether it has reached a decision that no reasonable body of trustees properly directing themselves could have reached. See Sir Richard Scott V-C in Edge v Pensions Ombudsman [1998] Ch 512 [2000] 3 WLR 79
In the recent case of Cotton & Moore v Brudenell-Bruce, Earl of Cardigan & Ors [2014] EWCA Civ 1312 ("the Earl of Cardigan case") Vos LJ with whom Black and Moore-Bick LJJ agreed, had cause to consider the proper approach of the Court to applications to approve a momentous decision made by trustees. In that case, the Court was asked to approve the sale of the principal asset of an estate to an existing buyer. There was no dispute as to the decision of the trustees to sell. What was in dispute was the process by which the sale should be achieved. Vos LJ set out the relevant authorities in the following way:
"The legal background
12 In Public Trustee v. Cooper [2001] WTLR 901
i) That the trustees had in fact formed the opinion that they should act in the particular way relevant to that case; ii) That the opinion of the trustees was one which a reasonable body of trustees properly instructed as to the meaning of the relevant clause could properly have arrived at; iii) That the opinion was not vitiated by any conflict of interest under which any of the trustees was labouring. 13. In Richard v. Mackay 4th March 1987, (1987) 11 TruLI 23 (but also later reported at [2008] WTLR 1667), Millett J said this as to the approval of the court at page 1671:
"Where, however, the transaction is proposed to be carried out by the trustees in the exercise of their own discretion, entirely out of court, the trustees retaining their discretion and merely seeking the authorisation of the court for their own protection, then in my judgment the question that the court asks itself is quite different. It is concerned to ensure that the proposed exercise of the trustees' powers is lawful and within the power and that it does not infringe the trustees' duty to act as ordinary reasonable and prudent trustees might act, but it requires only to be satisfied that the trustees can properly form the view that the proposed transaction is for the benefit of beneficiaries or the trust estate.
It must be borne in mind that one consequence of authorising the trustees to exercise a power is to deprive the beneficiaries of any opportunity of alleging that it constitutes a breach of trust and seeking compensation for any loss which may flow from that wrong. Accordingly, the court will act with caution in such a case
" . . .
16 In Tamlin v. Edgar [2011] EWHC 3949 (Ch)
"
The very fact that the decision of the trust is momentous, taking that word from the description of the second category, and that the decision is that of the trustees, not of the court, makes it all the more important that the court is put in possession of all relevant facts so that it may be satisfied that the decision of the trustees is both proper and for the benefit of the appointees and advancees. It is not enough that they were within the class of beneficiary and the relevant disposition within the scope of the power. It must be demonstrated that the exercise of their discretion is untainted by any collateral purpose such as might engage the doctrine misleadingly called a fraud on the power. They must satisfy the court that they considered and properly considered their proposals to be for the benefit of the advancees or appointees. . . " In addition, Vos LJ dealt with the position of trustees who have relied upon expert advice. At [10] he commented that:
"Although the basic tests that the court will apply in dealing with an approval application have not been much in dispute, the argument revealed an important difference of approach between the two sides. In essence, it was as to the circumstances in which the court might approve a transaction when expert advice had been followed by the trustees. Mr Cooper's argument was that the expert advice that the trustees received raised a number of questions that ought to prevent the court approving the intended sale, whereas Ms Penelope Reed QC, counsel for the trustees, and Mr Christopher Tidmarsh QC, counsel for the 1987 trustees, submitted that if the trustees received and followed expert advice, they should not be required to second-guess it and the court should not withhold its approval. As will appear in due course, I think it is important to distinguish carefully between allegations that trustees have not fulfilled their duties to the beneficiaries, and allegations that trustees' professional advisers have acted in breach of their duties to the trustees."
He went on at [72] to state that he did not accept that the trustees in that case were obliged to "second guess the professional view of the experts they had instructed" and at [77] commented that he did not think in that case that the trustees could be criticised for accepting the expert's clear view. He also pointed out at [78] that generally in an application of this kind, the trustee is not asking the Court to find facts but is asking the Court to decide "whether they have presented sufficient evidence to satisfy it that the trustees have fulfilled their duties to their beneficiaries in deciding upon the transaction in question and have formed a view which, in all the circumstances, reasonable trustees could properly have formed."
In fact, in this case, there has been cross examination as a result of which findings of fact in relation to the decision making process and the adequacy of the advice given are necessary. In addition, as I have already mentioned, as well as the desire for a blessing, in this case there is a question as to whether aspects of the proposal are within the scope of the Trustee's power. In that respect the application falls within category (1). I shall refer to those in due course.
The questions here are whether the Trustee is acting within its powers and if so, whether the New Regime is within the bounds of a proper exercise of its discretion. It is not disputed that the test to be applied in relation to the exercise of discretion is whether in reaching its decision the Trustee has taken into account all relevant and no irrelevant, improper or irrational factors and has reached a conclusion which a reasonable body of trustees faced with the same decision properly directing themselves could have reached. If the exercise is within the scope of the power and that question is answered in the affirmative it is neither for the parties nor for the Court to state whether it would have adopted the proposed New Regime or to put forward what it considers to be a more appropriate formula.
In essence therefore, this case is concerned with whether the Trustee is entitled to exercise the amendment power in order to allocate deficit contribution shares amongst a widened pool of Employers including both Current Employers and Historic Employers, many of which are commercial competitors, in a manner which in its view seeks to do equity as between them over the period since 2001. The New Regime is supported by Stena Line and International Marine both of which are Current Employers and opposed by P&O and Sealion both of which are Historic Employers and by Mr Brown on behalf of the Members.
Relevant Scheme History
The Scheme was established in 1978 and has, since the late 1990s, been in serious deficit. The 2011 actuarial valuation, conducted as at 31 March 2011, revealed that the Scheme had assets of £676m, liabilities of £888m on an on-going basis and as a result, a deficit on that basis of £212m representing a 76% funding level. As at 31 March 2011 the Scheme had approximately 30,000 Members. Since that time, the deficit has grown. The preliminary results of the 2014 actuarial valuation show that the deficit as at 31 March 2014 on an ongoing basis was £325m representing a funding level of 70%. A funding update in mid September 2014 revealed an ongoing deficit of £333m.
The deficit contribution regime under the Current Trust Deed and Rules has been in place since 2001. It arose from the proposal designed to repair the then deficit (the "2001 Regime") which following the approval of the Court given by Blackburne J in the 2001 case, led to the execution of a new deed and Rules on 31st May 2001 ("the 2001 Deed and Rules"). Prior to 2001 the main provision requiring Participating Employers to contribute to the Scheme was Rule 5.2 of the 1994 Rules which was in the following form:
"EACH Participating Employer shall contribute 8% of aggregate Pensionable Salaries, of the Members in his employment or such other rate as may be decided by the Trustees on the advice of the Actuary."
At that stage, there had been no express provision for the payment of deficit contributions but Rule 29.1 of the 1994 Rules envisaged that the Rules might be amended in order to increase contributions in the case of a deficit. It was as follows:
"If, as a result of the Actuary's report, it shall appear that there is a deficiency or anticipated deficiency in the Scheme's resources, the Trustees shall consider what if any action, having regard to any recommendations made by the Actuary in his report, should be taken either by way of increasing contributions or decreasing benefits to render the Scheme solvent. If necessary, the Trustees shall take such steps as are hereinafter laid down for amendment of this Deed and the Rules, or if the deficiency or anticipated deficiency cannot be made good, for the winding up of the Scheme."
Having obtained the approval of the Court in the 2001 case, the Trustee amended the Scheme to introduce the 2001 Regime pursuant to which the liability to contribute was placed upon those forty Participating Employers which, as at 31st October 1999, employed active members of the Scheme, or persons eligible to join it ("the Current Employers"). The deficit was divided amongst the Current Employers in proportion to each Current Employer's share of the liabilities attributable to all Current Employers as at 31 October 1999 and the schedule of contributions aimed at restoring the funding level of the scheme to 100% of MFR by April 2006, one year earlier than required by the relevant regulations. Under the 2001 Regime, the other Participating Employers of which there were around 200 (the Historic Employers), had no obligation to contribute to the Scheme. In fact, ten of those Historic Employers agreed to make voluntary contributions to the deficit between 2001 and 2006. They did so but have not done so since (the "Voluntary Employers").
The 2001 Regime also involved the closure of the Scheme to new Members with effect from 31st May 2001. From the same date continued employment as a Rating (a seafarer employed by a Participating Employer in a capacity other than an Officer or Master) ceased to constitute a basis for the accrual of additional years' pensionable service under the Scheme. A new contracted-in defined contribution pension plan was established. It was open to those who were currently contributing Members of the Scheme whose Employers acceded to it and to new employees. Further, under the 2001 Regime amongst other things: Rule 31.0(ii) was deleted and was replaced by a collective power in the Current Employers to wind up the Scheme in certain specified circumstances; the Current Employers gained certain rights in relation to withdrawal from the Scheme; provision for the funding target to be changed was inserted; and the holding of ad hoc meetings between the Trustee and the Employers to discuss investment matters was provided for.
Prior to 2001, Rule 31.0(ii) provided:
"31.0 THE trusts hereby constituted shall continue unless and until:
(i) determined by a resolution to determine the Scheme passed by the Trustees in accordance with the Trust Deed; or (ii) there be a deficiency or anticipated deficiency in the Scheme's resources with no agreed measures acceptable to the Participating Employers and approved by the Actuary for overcoming that deficiency." On one reading, the Rule could be understood as meaning that if a deficit emerged, and there were no "agreed measures" to overcome the funding deficiency that were acceptable to all Participating Employers, or to all Participating Employers affected by the proposed "measures", the Fund had to be wound up. On this reading, a single dissentient Participating Employer could cause a winding up. This has been referred to as the "Forced Wind-up Construction". Although the Forced Wind-up Construction was rejected in proceedings in 2009 to which I shall refer, until that time, the Trustee was concerned that an Employer could require the Scheme to be wound up when in significant deficit with the effect that benefits would not be met. It is not in dispute that the structure of the 2001 Regime was influenced by the Trustee's concerns about whether the Forced Wind-up Construction was correct. Accordingly, it is said that the Trustee felt constrained and sought to recover contributions only from consenting or non-objecting Participating Employers in order to avoid the risk of a winding up which would have been extremely disadvantageous to Members.
The effect of the 2001 Regime was to create a situation in which the Current Employers bore 100% of the deficit repair obligations despite the fact that only 32.5% of the Scheme's liabilities are attributable to the employment of Members by Current Employers. This resulted in what was termed cross-subsidy under which the Current Employers were liable to pay in respect of the past employment costs of Historic and Voluntary Employers. By 2006, the 2001 Regime had resulted in eliminating the MFR deficit on an "equity gilt" basis. However, by that time, a more prudent funding regime had been imposed by the Pensions Act 2004. In fact, despite the implementation of the 2001 Regime, as a result of the assumptions adopted by the scheme actuary, the 2005 actuarial valuation revealed a deficit of £93m on an ongoing basis (86% funded) and a deficit of £470m on a buy out basis.
In addition, in 2005 Patten J gave judgment in MNOPF Trustees v F T Everard & Sons [2005] EWHC 446 (Ch) , (the "MNOPF case") proceedings brought by the trustee of the Merchant Navy Officers Pension Fund (the "MNOPF") to determine which Employers were Participating Employers for the purposes of that scheme. It was held that certain former Employers remained Participating Employers within the meaning of the MNOPF Rules (which were similar to the Rules of the Scheme) and that they could be made liable for deficit contributions. Around this time, in March 2006, most of the Voluntary Employers ceased to contribute to the Scheme causing the financial burden of the 2001 Regime on the Current Employers to increase by 80-85%.
As a result of the extent of the burden placed upon the Current Employers and the decision in the MNOPF case, the issue of whether the Trustee, by exercise of its power of amendment under what was clause 30 of the 2007 Trust Deed and Rules, could alter or replace the 2001 Regime by imposing deficit repair contribution obligations on all Participating Employers including Historic Employers, was raised by Stena Line and considered at a Trustee Board meeting on 26 June 2006. In cross examination, Mr Edmund Brookes, the Chairman of the Trustee Board confirmed that it had been considered that widening the pool of Employers liable to make contributions and the eradication of cross-subsidy would increase covenant strength and that such a strategy was in the interests of Stena Line. Nevertheless, the proposal was rejected at that stage.
However, at a Trustee Board meeting of 1 August 2007, the Trustee agreed that it would apply to the Court to see whether it had power to make an MNOPF style amendment having decided in principle that it would wish to make such an amendment if it had the power to do so. A paper prepared by Mayer Brown International LLP ("Mayer Brown") which was considered at the meeting, explained that an MNOPF style amendment would enable the Trustee "to spread more equitably the responsibility for meeting the deficit in the Fund amongst those who were Employers of Members at the time at which liabilities in respect of such Members accrued." Mr Brookes accepted in cross examination that although expert advice had yet to be obtained, it was considered that such a step would be covenant enhancing which was an important part of the equation. He said that the Trustee relied upon the advice of Mayer Brown and that it considered that if further advice were necessary, Mayer Brown would have made it clear at the time.
Having taken further advice from Mr Christopher Nugee QC ("Mr Nugee") the Trustee decided on 29 July 2008 that it was no longer prepared to proceed with an application to the Court even if Stena Line paid for it. Eventually, the issue became the subject of proceedings commenced by Stena Line in 2009. The case was put first as a matter of interpretation of the 2001 Deed and Rules, considered as a whole and alternatively on the basis of estoppel by convention.
Mr Brookes explained in his third witness statement in these proceedings that if Stena Line succeeded in establishing that there was a power to make an MNOPF style amendment, the Trustee had in mind making all Participating Employers liable to contribute to the Scheme. Mr Brookes also summarised his evidence in the 2009 proceedings as to the basis for the Trustee's conclusion as follows:
"i. it believed that making an MNOPF-style amendment would be in the members' interests insofar as increasing the pool of Participating Employers which could be required to make contributions has a positive effect on the strength of the overall covenant; and
ii. it was noteworthy that the majority of the Scheme's liabilities related to ratings' service with Historic Employers."
Before the proceedings were commenced, by a letter of 27 April 2009, Stena Line also renewed its request that its contributions to the Scheme be paid into escrow. At a Trustee meeting on 29 April 2009, the request was acceded to in principle. In fact, the escrow was the subject of much negotiation and was not agreed until 2011.
To return to the chronology of events, proceedings were commenced by Stena Line in July 2009 to which the Trustee and P&O Ferries were joined. In Stena Line Ltd v Merchant Navy Ratings Pension Fund Trustees Ltd and P&O Ferries Ltd [2010] EWHC 1805 (Ch) , (the "2009 Proceedings") Briggs J (as he then was) determined that the 2001 Regime was not irrevocable and that the Trustee retained its full power of amendment which was broad enough, at least in principle to permit the Trustee to introduce a different deficit repair regime imposing contribution obligations upon Historic Employers as well as Current Employers. He also decided that there was no estoppel preventing the Trustee from doing so. His decision was affirmed in the Court of Appeal: [2011] EWCA Civ 543 (the "2011 Court of Appeal decision").
There is a dispute about the extent to which Briggs J's decision touched upon the issue of whether the Trustee had power to give credit for past contributions, a feature of the New Regime which has become known as Re-Apportionment. I will return to this issue when considering the submissions made in relation to Re-Apportionment below.
Summary of Decision for which approval is sought
Following the 2011 Court of Appeal decision, the Trustee began to consider the form of a new deficit contribution regime in the light of that decision. It is not disputed that throughout its considerations the Trustee took advice from Mr Nugee, its solicitor, Mayer Brown, its actuarial advisers Towers Watson Limited, ("Towers Watson") (including the scheme actuary, Mr Stoaling) and its covenant adviser, Lincoln International Pension Advisory Limited ("Lincoln").
The Trustee's decision making process took place over the course of nine key meetings including a meeting on 9 October 2012 at which the Trustee considered detailed proposals for the New Regime and decided (subject to the Court's approval and it is said, in principle only) to adopt the New Regime which in summary:
(i) augments the pool of Employers who can be required to pay deficit contributions to include all Participating Employers whether Current Employers or Historic Employers on the basis that each Employer is to be liable for a share of the deficit equal to the proportion of the Scheme's liabilities attributable to that Participating Employer ("Entire Pool Augmentation") with the apportionment of liabilities to each Participating Employer being calculated using an actuarial methodology which came to be known as Method C;
(ii) gives credit for all past deficit contributions previously made by Participating Employers including all those made under the 2001 Regime going back to 2001;
(iii) is to be implemented by use of a methodology devised and recommended by the Trustee's covenant adviser ("the Implementation Methodology").
The decision of the Trustee which, it is said was "in principle" was subject to a consultation exercise amongst the Employers which took place between 21 November 2012 and 1 February 2013 after which the Trustee confirmed its decision and decided upon a number of Ancillary Features to support the New Regime.
In summary, the New Regime which is designed to recover contributions from Participating Employers in order to repair the deficit in the Scheme operates in the following way: first, a "Deficit Share Amount" is calculated in respect of each Participating Employer. It is calculated by reference to the percentage of the liabilities of the Scheme referable to the benefits accrued in the Scheme by Members whilst in the employment of that Participating Employer, calculated by use of Method C together with an element by way of pre-emptive reallocation of liabilities from those Participating Employers who are determined to be unable to pay their share ("Orphan Loading"), the application of further Orphan Loading to adjust for overall shortfall in recoveries from Participating Employers and finally, an adjustment to reflect past deficit contributions already made prior to the introduction of the New Regime. It is anticipated that contribution obligations will subsequently be adjusted to take account of actual recovery experience and subsequent actuarial valuations. This has been referred to as "Phase 2 Orphan Loading".
In addition to the features which I have already mentioned, the New Regime includes more elements including the ability of the Trustee to make two or more Participating Employers with a relevant connection jointly and severally liable for each other's contributions, the power to require Participating Employers to pay a lump sum exit debt in certain circumstances and the power to permit Participating Employers as opposed to merely Current Employers to withdraw from the Scheme subject to certain criteria.
In the written Opening on behalf of the Trustee, Mr Tennet stated that the Trustee decided upon the New Regime in reliance upon the advice of Mr Nugee as to the test to apply and in accordance with that advice, directed itself that:
a. Its fundamental objective was to eradicate the deficit and return the Scheme to solvency in a way which it considered to be sensible, proper and appropriate;
b. It should exercise its powers for the purposes for which they were conferred which was to provide Members with their benefits;
c. Subject to ensuring that the Members received those benefits the Trustee could take into account the interests of the Participating Employers and it could, if it considered it appropriate address the cross-subsidy which had arisen.
Accordingly, it has decided to give effect to the New Regime and the supporting Implementation Methodology. The proposed amendments to the Current Trust Deed and Rules are set out in the Schedule to this judgment.
The New Regime is supported both by Stena Line and by International Marine, both of which are Current Employers with strong covenants. However, Mr Spink QC on behalf of P&O Ferries, a Historic Employer which ceased to pay voluntary contributions in 2006, and Mr Newman QC on behalf of Mr Brown oppose the approval of the New Regime. The widening of the pool of Employers liable to pay deficit contributions is challenged as is Re-apportionment under which future contributions will be set having taken account of contributions made by Current and Voluntary Employers since 2001 under the 2001 Regime. Elements of the Ancillary Features and Implementation Methodology are also challenged albeit that there have been some concessions in this regard.
Power of Amendment
The Trustee intends to exercise the power of amendment contained in clause 30 of the Current Trust Deed in order to effect the changes to the Current Trust Deed and Rules and establish the New Regime. Clause 30 provides as follows:
"The provisions of the Trust Deed or of the Rules may be varied or added to in any way by Deed executed under the seal of the Trustees. Every such variation must first be approved by a majority of the full number of Participating Employers' representatives and also a majority of the full number of the Members' representatives serving as Trustees or as Directors on the Board of any Corporate Trustee which approval may be signified either by a resolution passed by such majorities or by an instrument in writing signed by such majorities PROVIDED that no variation or addition shall be made which: (a) would have the effect of changing the main purposes of the Scheme, namely the provision of pensions for Members on retirement; or (b) would operative in a way to diminish or prejudicially affect the rights in respect of any Member annuitant or other beneficiary already earned; unless the Actuary shall advise that no other course is reasonably practical having due regard to the interests of all persons interested in the Scheme; or (c) would be contrary to the principle that the Participating Employers and the Members shall be equally represented on the Board of the Corporate Trustee of the Scheme; or (d) would contravene the requirements of sections 67 to 67I of the 1995 Act."
Questions have arisen as to the scope of the power and in particular as to whether it can be exercised with retrospective effect. I will return to those matters as they arise under the relevant issues below.
Factual Evidence
Although the composition of the Trustee Board has changed over time, Mr Brookes has been the Chairman of the Trustee Board throughout the period during which the New Regime has been under consideration. Although he is not a pensions professional by training, he has had extensive experience in relation to the Scheme and has also been a trustee of the MNOPF, the sister scheme to the Scheme which provides benefits in relation to Merchant Navy officers. Mr Brookes gave detailed and lengthy evidence in the form of his first and third witness statements as to the procedure adopted by the Trustee throughout the process of the formulation of the New Regime and as to the advice given and manner in which decisions were taken. He was also cross examined robustly and at length.
I found him to be a conscientious, intelligent and honest witness who whilst being unsurprisingly defensive at times, did his best to assist the Court. He gave evidence as to the complex and very lengthy decision making process to the best of his ability and recollection. Given the complexity of the subject matter, the amount of detailed expert advice which was obtained and the length of the period over which the process was undertaken, I did not find it surprising that, at times, Mr Brookes found it difficult to recall the precise nature of the discussion which had taken place at Trustee Board level. This was complicated further because he was also dealing with matters as a member of the Litigation Committee to which the Trustee Board had delegated some of its powers. When evaluating his evidence I also take into account that, at times, in cross examination he was only taken to part of a detailed professional report and not to the whole. Suffice it to say that I accept Mr Brookes' evidence and that I reject the submissions that as a result of Mr Brookes' occasional inability to recall the detailed discussion of the Trustee Board, despite detailed Minutes and the relevant professional advice papers, I should decide that matters were not properly considered or determined by the Trustee.
In addition, each of the Defendants filed witness statements in relation to the Propriety Issues: Stena Line relies on the 3rd witness statement of Mr Paul Stannard, Stena Line's solicitor; P&O Ferries relies on the witness statement of one of its directors, Mr Karl Howarth; Sealion relies on the witness statement of Mr Kenneth Thomas, its finance manager and company secretary; International Marine relies on the witness statement of Mr Michael Coates, an in-house solicitor for the Royal Dutch Shell group and that of Mr Andrew Blakeman, the finance director of BP Oil UK Limited; and Mr Brown relies on his own witness statement. However, none of the Defendants' witnesses has any first hand evidence as to the Trustee's decision-making process nor were they cross examined and I shall refer for the most part to the evidence of Mr Brookes. Mr Stannard's 3rd witness statement does contain some relevant first hand evidence about Stena Line's role in the escrow arrangement which P&O Ferries has criticised.
After the beginning of the hearing, P&O Ferries sought to rely upon a further witness statement of Mr Howarth dated 10 October 2014. It was concerned with the practical impact of the Implementation Methodology. In it Mr Howarth stated that P&O Ferries received from the Trustee in November 2012 an illustration of the anticipated share of the deficit and the contributions payable which was updated in 2014. The illustration revealed that P&O Ferries would be liable for 25% of the total liabilities of the Scheme which equated to more than £50m on 31 March 2011 deficit figures and £88m on 31 March 2014 figures. As a result, Mr Howarth and a Mr Pither made a presentation to Lincoln in August 2013 as to the financial position of the P&O Ferries Group which demonstrated that P&O Ferries could only afford to pay 30% to 44% of the annual deficit contribution indicated in the illustration with which it had been provided. Thereafter, the presentation was appended to a letter dated 9 September 2014 sent to Mr Brookes. However, Mr Howarth concluded that P&O Ferries' inability to pay within the ten year period was not discussed by the Trustee and the potential effect upon the operation of Orphan Loading was not taken into consideration.
Mr Brookes made a fourth witness statement in response in which he stated that Lincoln says that the presentation made to them in August 2013 "was not to be shared with the Trustee." Mr Brookes went on to add that he was not aware of the matters contained in the Presentation until he received the letter of 9 September 2014. He also stated that after the August 2013 meeting, Lincoln informed the Litigation Committee that it had met with P&O Ferries but did not discuss the nature or content of the presentation. He added that the August 2013 meeting was not concerned with covenant assessment and Lincoln did not suggest that any information received was relevant in that regard. He also stated that Lincoln had been asked to comment and advised "that they considered the Presentation at the time it was provided and their view was, and remains that it "does not contain information that would, of itself, enable a covenant rating of the P&O [Ferries] Group or P&O Employers to be determined."" He also stated that Lincoln's advice was that "the Presentation does not contain material that would affect their rating of those Participating Employers nor the overall rating of the Fund."
Ultimately, the treatment of the further evidence was agreed on the basis that P&O Ferries would not rely on Mr Howarth's second witness statement as evidence of the truth or accuracy of any of the matters or information which were said to have been communicated to Mr Brookes, or to Lincoln in the presentation by P&O Ferries Group in August 2013, or that the same go to prove that the P&O Ferries Group companies cannot or might not be able to pay contributions under the proposed New Regime. On that basis the Trustee did not object to the admission of the evidence but reserved the right to argue that the uses to which P&O Ferries was seeking to put the information were unsustainable and to argue that the matters were not a material consideration, even if true.
The decision making process in more detail - The Key Meetings and other ancillary decision making steps
In fact, the first meeting at which the planning in relation to a new regime took place on 23 September 2010, (the "First Meeting"). At that stage, a litigation sub-committee of the Trustee Board was reconvened of which Mr Brookes was also the chairman (the "Litigation Committee"). The Litigation Committee was intended to discuss the issues arising from the 2009 Proceedings but it was not intended that it should make any decisions. However, the scope of the work of the Litigation Committee was expanded on 13 December 2011. Their terms of reference were:
"The Trustee Board has delegated to the Committee all powers necessary to enable the Committee to prepare a set of proposed amendments to the Trust Deed and Rules to require all Participating Employers to pay deficit repair contributions, including in particular:
Give instructions to the actuary, administrators, solicitors and covenant advisers. Do all such other things and authorise execution of all such documents as the Committee might consider in its absolute discretion to be necessary or desirable in connection with the development of a new deficit contribution regime. The Committee shall make recommendations to the Trustee as to the proposed amendments and in relation to any other matter it thinks appropriate" Mr Brookes accepted in his third witness statement that the terms of reference reflected the assumption that all of the Employers both Current and Historic were to be made liable to make contributions under the Scheme and that the Trustee would wish to address the issue of cross-subsidy but that the Committee would investigate the covenant impact of such a regime. In cross examination, Mr Brookes confirmed that had anything emerged from the advice to be obtained which suggested that such a course was inadvisable, the Litigation Committee would have gone back to the Trustee and reconsidered. He also made clear that the role of the Litigation Committee was solely to make recommendations and that the decision making power remained vested in the Trustee. The Litigation Committee co-ordinated the professional advisers who had been instructed, namely Mayer Brown (legal), Towers Watson (actuarial) and Lincoln (covenant). The Committee members also attended the consultations with Leading Counsel about the New Regime. The product of this work included a set of proposals considered by the Trustee Board at its meeting on 9 October 2012 to which I shall refer in more detail.
There were nine substantive meetings of the Trustee Board upon which the Trustee relies as part of its decision making process. At each meeting a plethora of advice papers were tabled and on most occasions, the relevant advisers were present. The Minutes of the meetings refer to the respective papers and the conclusions reached. However, the Minutes do not necessarily set out the discussion if any which took place. It was Mr Brookes' evidence nevertheless, that each of the advisers' papers tabled at each respective meeting was considered by the Trustee which I accept.
By the date of the First Meeting, Briggs J having given judgment in the 2009 Proceedings, the appeal was underway and its outcome was awaited. Nevertheless, the Trustee determined that depending upon the outcome of the appeal, it would seek Court approval for amendments to the Scheme Trust Deed and Rules in order to change the contribution regime. It was also determined that the list of all Employers should be compiled. In addition, at the First Meeting, the Trustee was advised that if the pool of Employers which might be made liable for contributions was increased, a new method of apportionment of liabilities would be required. The Trustee received a paper prepared by Towers Watson, the actuarial firm of which the Scheme Actuary was a member. The paper of September 2010 contained details of four possible methods by which apportionment could be carried out. Towers Watson recommended Method C. Their conclusion in relation to that method was:
"This method is a practical approach balancing reasonable accuracy against cost and complexity. Although it still has some shortcomings, these seem very unlikely to be sufficiently serious to warrant using a more costly and time consuming approach."
In relation to Method D it was observed that it had been used as the basis for apportionment for the 2001 Regime and had required "an immensely complicated" computer program which had taken over two years to develop. It was stated that if this method were adopted the program would have to be re-written which would be a significant exercise. The report went on to conclude:
"A full "benefits based" apportionment would be slow and costly to implement and we expect that the apportionment of liabilities under this method would not differ significantly from the apportionment based on Method C."
Further, Method C was estimated to cost £60,000-90,000 and to take up to 4 months to put in place whereas Method D was estimated to take 12+ months to implement and to cost £750,000 +. Ultimately, Method C was recommended and was described as "reasonably accurate" and "significantly quicker and cheaper than Method D." A decision was made to apply Method C. The minute of the meeting records that following discussion, it was agreed that the future apportionment exercise be carried out in accordance with Method C. I should add that there is no documentary evidence as to the nature and depth of the discussion in relation to the decision to adopt of Method C.
At the First Meeting, the Trustee also considered a proposal from Stena Line pending the outcome of the appeal to halve the deficit contributions due on 31 March 2011 and payable by the Current Employers. This proposal was rejected.
The next meeting of the Trustee upon which it relies took place on 29 March 2012, (the "Second Meeting"). At that meeting, the decision to use Method C to calculate the future apportionment exercise was affirmed but it was decided to carry out the apportionment exercise from 31 March 2011 instead of 2010. That decision was taken on the basis of a paper submitted by Towers Watson. The paper also considered methodologies for giving credit for past contributions paid since 2001, noted that it would be necessary to consider the treatment of the Stena Line escrow account and identified the risk of Employer default if deficit contributions were sought from "untested" Historic Employers who had not been required to contribute for many years. It also mentioned the possibility that some Historic Employers would find contributions under the New Regime unaffordable. Lastly, it also introduced what has become known as Orphan Loading for the first time. It set out the concept of the "loading" of invoices, so that the invoices issued in the first year would be weighted to reflect an assumed rate of non-collection from defaulting Employers.
Finally, at the Second Meeting Mayer Brown confirmed that it was within the scope of the Trustee's power of amendment to introduce a deficit repair regime pursuant to which contributions were payable by all Participating Employers and that the power of amendment was sufficiently wide to enable the Fund to take account of/give credit for past contributions. Mr Tennet's advice was also reported to the Trustee Board. The relevant part of the Minutes is in the following form:
"Mrs James provided the Board with a summary of Mayer Brown's report included under Appendix D.
...
Mr Tennet had advised that the primary duty of the Trustee is to the members of the Fund. The Trustee does not owe any freestanding legal duty to Participating Employers to treat them "fairly". He had also advised that any decision in relation to the new deficit contribution regime should at this stage be determined on an "in principle" basis only, until all relevant information had been obtained by the Trustee, such as full Participating Employer and percentage liability share data, and the implications for the security of members' benefits of any new deficit contribution regime are identified and considered.
...
The Board noted that they could not determine whether it would be in the best interests of members for the proposed new regime to take into account past deficit contributions until the deficit apportionment data had been finalised. It was acknowledged that new specified percentages would be needed."
Thereafter, numerous papers were produced by the professional advisers. The first was produced by Towers Watson in April 2012. It provided an outline of the apportionment process and showed the rough percentage of liabilities that are attributable to the Participating Employers. The paper also gave an indication of the liability split between Current, Historic and Voluntary Employers. It revealed that an estimated 8% of the liabilities was attributable to Participating Employers which are dissolved. The paper was considered by the Trustee Board at a meeting on 27 April 2012. Towers Watson stressed that no decisions should be based on the contents of the paper, and accordingly, no decisions on the design of the New Regime were taken at that meeting.
Also in April 2012, Towers Watson prepared a paper for the Litigation Committee on what was termed "retrospective adjustment" but has become known as Re-Apportionment. The paper recognised that no decision had yet been, or could be, made on Re-Apportionment. Towers Watson then presented a further paper about "retrospective adjustment " to the Trustee Board meeting on 26 June 2012 in which it was stated that an important feature of the New Regime would be "the extent, if any, to which the new apportionment shares will apply retrospectively ". It considered making no allowance for past contributions in comparison with allowance back to 2007 and 2001. However, the paper stated that it used approximate data and that Towers Watson did not intend a decision to be made by the Trustee based on it. No decision was made but one of the Board of the Trustee asked that analysis be performed of giving credit back to 2010. That exercise was carried out and appeared in subsequent advice papers.
In addition, at the meeting on 26 June 2012, the Trustee Board considered a paper of June 2012 from Lincoln. The Minute of that meeting records that the Board noted the Lincoln report concluded that subject to confirmation based on more accurate Employer data, augmenting the pool of Employers to include Historic Employers would enhance the overall covenant supporting the Fund. The paper itself made clear that only Augmentation had been considered and that consideration of what has come to be known as re-apportionment required "a more thorough and accurate understanding of the Historic Employer base" and would take place in a separate paper. The conclusion on an ongoing basis was that: " . . . it seems likely that prospective Augmentation would result in day to day affordability of contributions at least as good as the Fund currently enjoys." In the draft the phrase "would not result in a material reduction in the day to day affordability of contributions" had been used. It seems that the more positive description was inserted in part as a result of email comments on the draft made by Mr Cullen the professional secretary to the Trustee.
In cross examination, Mr Brookes agreed that Mr Cullen's requests for changes to the draft report and the change made between the draft and the finalised version were not revealed to the Trustee Board. Mr Brookes also stated that he could not recall any discussion with Mr Cullen about the comments on the draft. He likened the process to an updating as new information became available. He also accepted that the advice at that stage did not support the objective of improving the employer covenant strength.
Further, in cross examination, Mr Brookes said that he interpreted the phrase "at least as good" in the final report to mean "the same or better" which I accept. He also stated that he had been re-assured by the content of the report which I also accept. In fact, the conclusion on an overall basis both in the final and the draft versions was that Lincoln considered Augmentation to be covenant enhancing. This is what is recorded in the minute of the meeting. Mr Brookes was unable to recall the length of the discussion which took place but noted that all members of the Trustee Board would have received the report in advance and had the opportunity to ask questions. Lastly, in this regard, he was taken to Lincoln's recommendation that in order to confirm that Augmentation was covenant enhancing in practice, it would need to be clarified whether "all or only a top portion of the Historic Employers by liability share" should be included in the Augmentation. Mr Brookes was unable to recall whether that issue had been considered. Nevertheless, the process proceeded by reference to full Augmentation. Mr Brookes commented that the New Regime was being refined by reference to an entire suite of tools and if one aspect had been found wanting, the Trustee would have reconsidered the relevant elements of the package.
At the same meeting a letter from Stena Line dated 23 May 2012 was considered. It suggested that it was not correct for the Trustee to approach the exercise of its amendment power by reference solely to the Members' best interests. It stated that the proper purposes for which the Trustee should exercise its powers to seek contributions were:
"(a) to ensure that MNRPF has sufficient assets to pay benefits as and when they fall due for the lifetimes of all current and future pensioners and (b) to achieve fairness as between the employers (current employers and former employers alike)."
Although the Minutes of the meeting state that Mr Brookes asked the Board to consider the letter, it also reveals that the solicitor from Mayer Brown who was present at the meeting suggested that the Trustee should first take the advice of Mr Nugee before any response and that was the course adopted. In the event, the response which post dated Mr Nugee's advice in consultation, was non-committal.
The consultation with Mr Nugee took place on 4 July 2012. At that stage it had already been arranged that Mr Nugee would advise again in consultation on 21 September 2012 and attend a meeting with the Trustee Board members on 27 September 2012. The consultation was attended by Mr Brookes and Mr Hall, Mr Stoaling (the Scheme Actuary), Mr Cullen (the secretary to the Trustee), Mayer Brown and Lincoln. Thereafter, a twenty page note of the advice given on 4 July and 21 September 2012 was produced and settled.
I should mention that prior to the consultation on 21 September 2012, Mr Nugee was provided with the drafts of the papers to be presented to the Trustee Board for the purposes of their meeting on 9 October 2012 to which I shall refer and at which it was anticipated that the Trustee would take the decisions regarding whether to introduce a new deficit contribution regime and if so, the structure and features of that regime. Those papers included Mayer Brown's draft advice paper which summarised Mr Nugee's advice for the Trustee Board. In this regard, the note of consultation states:
"Leading Counsel said that the papers provided the Trustee Board with appropriate information to enable it to consider the decisions which it is proposed shall be taken regarding the introduction of a new deficit contribution regime. Although the papers included considerable detail, they did not point towards a "right" answer indeed, it would be inappropriate for the Trustee's advisers to propose a "right" answer in relation to the decisions to be made by the Trustee Board the issues are ultimately questions of principle to be decided upon by the Trustee Board appropriately weighing up the relevant matters."
Mr Nugee then addressed the issue of whether there was sufficient scope under the amendment power to allow the Trustee to make amendments in order to introduce a new regime which would take account of deficit contributions already paid. He pointed out that the point had not been argued before Briggs J but that the references at paragraph 148 and 154 of the judgment in the context of the estoppel argument were consistent with the Judge having considered that credit for contributions already paid was possible. He added that the amendment power on its face was wide enough to allow such an amendment and that Arden LJ in the Court of Appeal had held that it should be construed in accordance with its terms, no more and no less. He concluded that the power was wide enough to permit an amendment to establish a regime which included giving such credit.
Before returning to the chronology of events and the advice given, I should mention that the Trustee accepts that in the 2009 Proceedings Briggs J did not make a specific declaration as to whether the Trustee has power to give credit for past contributions made by Current Employers. Mr Tennet on behalf of the Trustee submits that this was a feature of the MNOPF-style Rule which was the subject of the MNOPF case and that P&O Ferries conceded on behalf of the Historic Employers that it was within the scope of the power of amendment to introduce an MNOPF-style Rule prior to 2001. Briggs J dealt with the matter at paragraphs [148], [154] and [157] as follows:
"148 Those Non-P&O Debt Employers who agreed to make voluntary payments are in my judgment in no different position from those who refused. The representations made by the Trustee were the same to all the non-P&O Debt Employers, and I do not consider that the Trustee's silence after a refusal to incur a contractual liability can form the basis of a convention estoppel against the Trustee, whether or not a particular non-P&O Debt Employer then decided or declined to make voluntary payments on a purely ex gratia basis. In any event, it is and always has been part of the case of the Current Employers that any extension of contribution liability to those employers who made voluntary payments could only properly be on the basis of giving full credit for those payments, against any contribution liability thereafter imposed. That would in my judgment be an amply sufficient remedy to satisfy any unfairness or injustice which might otherwise have been caused by the Trustee's resiling from the alleged convention, if it had been established.
. . . . . . . . . . .
154 So far as concerns detrimental reliance, I have already concluded that the P&O Debt Employers did not on their own have an Old Rule 31 veto which they could deploy as a bargaining counter for the purpose of obtaining a permanent discharge from further contribution liability. As for their very substantial voluntary payments, their remedy if any convention estoppel had been established between them and the Trustee would, as I have already stated, be to have those payments credited against any future obligation, as the Current Employers already propose.
. . . . .
157 By an amendment made shortly before the hearing, Stena sought an additional declaration, to the effect that, if entitled to amend by the introduction of a new Rule 5.3A, it would, in the events which have happened be a proper exercise of that power to do so, such that the Trustee should be authorised to do so."
In my judgment, the reference made to credit in paragraph 148 should be understood in the context in which it was made which was an alleged estoppel by convention. In that context and had such an estoppel been established, Briggs J noted that it would have been sufficient remedy to satisfy any unfairness or injustice which might be caused by resiling from the alleged convention by imposing upon such Employers a legal obligation to contribute to give them credit for voluntary contributions made without a legal obligation to do so. The same is true of the reference in paragraph 154. It seems to me therefore, that Briggs J was not considering the use of the power of amendment to enable credit to be given, per se. However, it seems to me that impliedly at least, he must be taken to have concluded that such an exercise would have been within the power of amendment. Had he not considered it to be so, it seems to me that his conclusions in relation to estoppel would have little force.
In any event, Mr Nugee went on to consider the manner in which the Trustee should exercise the amendment power inter alia in the following way:
"Leading Counsel referred to the shorthand simplification adopted by lawyers when advising on the exercise by a pension scheme trustee of a discretionary power that a pension scheme trustee has a duty to exercise the power in the best interests of beneficiaries. Leading Counsel said that underlying this shorthand lay a number of principles.
Leading Counsel advised that a pension scheme trustee should focus on the overriding requirement for it to exercise its discretionary powers:
for the purposes of the trust/scheme; and
for the purposes for which the power was given.
By way of illustration, Leading Counsel referred to a family trust. The purpose of a family trust is to maximise the benefits for the beneficiaries of the trust. The interests of the beneficiaries are therefore aligned with the purpose of the trust. By contrast, a pension scheme also involves employers and the purpose of a pension scheme is to deliver the benefits specified in the trust deed and rules, not to maximise the benefits for the beneficiaries. The interests of the beneficiaries are therefore not always aligned with the purpose of a pension scheme. To illustrate this proposition: if a pension scheme trustee has a discretionary power in relation to a surplus, there is no overriding duty on the pension scheme trustee to use the surplus to augment benefits, although this would be in the interests of the beneficiaries, given that the purpose of a pension scheme is not to maximise the benefits for the beneficiaries. If a pension scheme trustee is faced with a deficit and is deciding whether/how to exercise its discretionary powers, the Trustee must determine the most "appropriate" way to make good the deficit which is consistent with the purposes of the pension scheme (i.e. to deliver the benefits specified in the trust deed and rules), rather than an overriding consideration of what is in the best interests of the beneficiaries."
He then highlighted that the main purpose of the Scheme was to provide members with benefits in accordance with the Trust Deed and Rules and that the amendment power was given for the purpose of promoting the purposes of the Scheme and not for altering them. He also advised that one of the matters for the Trustee to consider was the impact of the New Regime on the solvency of the Scheme because it affects the likelihood of the main purpose of the Scheme being achieved. In this regard he went on to add:
". . . . Consideration of the impact of the new regime on the solvency of the Scheme will necessarily involve an assessment of the impact on the strength of the overall employer covenant. Leading Counsel acknowledged that Participating Employers are not interchangeable in terms of covenant strength, and the way (and extent to which) the new regime allocates deficit contributions between them may affect the strength of the overall employer covenant. It is difficult to see how the Trustees could properly introduce a new regime if the Trustee has received advice that it would significantly reduce the strength of the overall employer covenant."
He went on to add that despite the fact that the impact of the New Regime on funding was an important matter it was not the only one to be taken into consideration. He added that if that were the case, the Trustee might impose deficit contributions only on the ten strongest Employers but to do so would not be an "appropriate or rational way of allocating deficit contributions between Participating Employers." In relation to loading all of the deficit contributions upon the strongest Employer alone he added that the Scheme was not set up so that such an Employer could be targeted in this way.
He also stated that the Trustee should not ignore the interests of Participating Employers when deciding how to exercise the amendment power. He said that they have a real interest in the decisions taken regarding funding and the impact of those decisions on their pension liabilities. He made clear that the Trustee should not ignore those legitimate interests which were relevant matters for the Trustee to take into account. However, he added that this was subject to the Trustee's duty to ensure that beneficiaries receive the benefits to which they are entitled pursuant to the Trust Deed and Rules, which in turn depends on the underlying solvency of the Scheme. Mr Nugee went on to add that although the way the Trustee can achieve the main purpose of the Scheme will be affected by employer covenant strength, where the Trustee was satisfied that there were various alternative acceptable ways of returning the Scheme to solvency, the Trustee had a discretion as to which way it chose.
In the context of the need to exercise the amendment power for proper purposes, Mr Nugee considered the issue of cross-subsidy between Participating Employers in some detail. Whilst recognising that there are inherent cross subsidies in an industry wide scheme, he stated that the 2001 Regime had created substantial additional cross subsidies and pointed out that under that regime, only the Current Employers were paying deficit contributions despite the fact that the deficit is attributable to pensionable service across the entire Participating Employer population. He postulated that it was difficult to conclude that the Scheme was established with the purpose of enabling the employment costs of one Participating Employer to be subsidised by another. He concluded that the cross-subsidies under the 2001 Regime did not compel the Trustee to change it, but did compel it at least to consider whether it ought to do so.
Mr Nugee also advised that he was wary of the notion that the Trustee's decision-making process should be driven by a single factor, for example, maximising covenant strength, and that the Trustee's decision on whether to widen the pool of Employers from whom deficit contributions could be received should not be driven just by the impact on overall covenant strength, that the application of Method C was permissible and that the Trustee had power to impose joint and several liability. Lastly, Mr Nugee also considered whether the Trustee would need to know the answer to the Open/Frozen Issues before any decisions could be taken on a New Regime. He stated that it depended upon whether the answer affected the covenant implications of any New Regime in a material way. If Lincoln reached the same overall conclusion on each of the "open" and "frozen" bases, he considered that the Trustee Board could properly conclude it was not necessary to resolve the open/frozen issue first.
I should add that in Mr Nugee's absence, Mr Tennet had advised the Trustee in March 2012 and as I have already mentioned, the advice was reported to the Trustee at the Second Meeting. Mr Newman on behalf of Mr Brown sought to make much of what he submitted were the differences between that advice and that of Mr Nugee and therefore, I will set out the salient points. However, Mr Brookes' evidence reiterated in cross examination was that the advice upon which the Trustee based its decision making was that of Mr Nugee together with that of Mayer Brown. This is consistent with the relevant Minutes and the other documentary evidence and I accept it.
In any event, it appears from the note of Mr Tennet's advice in consultation that he was asked to advise about the approach to be taken by the Trustee to the decision making process and what matters should be taken into account. Mr Tennet is recorded as having noted that it was very common for trustees to seek to repair deficits by imposition of deficit contributions on a number of employers in a way which was proportionate to the responsibility for the overall liabilities under the scheme. However, he also noted that there was no prohibition upon imposing joint and several liability between Employers. Having been asked about the position of the individual directors of the Trustee company, Mr Tennet commented that:
" . . . the Trustee must act in the best interests of the Members overall, as opposed to in the interests of any third party with whom the Trustee or a director of the Trustee has an affiliation. In taking any decision, the trustee directors should therefore put on one side the fact that they are employed by a particular Participating Employer."
He also commented that the Trustee "should exercise the amendment power to make amendments if it is satisfied that to do so is in the best interests of the Members of the Scheme and that it is exercising the power of amendment for proper purposes." He also commented that it would become clear which approach was in the best interests of the Members taking into account in particular the likely impact on cash coming into the Scheme over the short to medium term, the likely impact on overall employer covenant strength which directly affects the security of Members' benefits and the likely impact on existing goodwill and working relationships with the wider corporate groups in which some Participating Employers sit "because this could affect the continued willingness to fund deficit contributions due from under resourced Participating Employers which could in turn affect the security of Members' benefits". He also made reference to exercising the amendment power for the purpose of ensuring that the Scheme can deliver the benefits promised and that the paramount purpose was to return the Scheme to solvency and that the Trustee does not owe a free standing legal duty to Participating Employers to treat them "fairly" but that did not mean that the Trustee should not have regard to the financial impact of particular contribution regimes because it is generally not in the Members' best interests to put strain on Employers so that their ability to continue in business is prejudiced because it might weaken overall employer covenant. However, if different contribution regimes would be equally effective or there was no material difference between them, (what was termed a "tie break") it would be rational to take account of their impact on Participating Employers.
In July 2012, the Trustee wrote to Current Employers setting out the progress in relation to the proposed new regime. The letter stated that Lincoln had been commissioned to provide covenant advice and in particular to confirm: that widening the pool so that all Participating Employers can be required to pay deficit contributions would improve the strength of the overall employer covenant and therefore, the security of the Members' benefits. It stated expressly that "The Trustee Board's decision in principle in 2009 about widening the pool was made on this basis and confirmation is now required as part of its process"; and an assessment of the effect on the strength of the overall employer covenant of the new regime "taking into account deficit contributions already paid." In cross examination, Mr Brookes confirmed that it was expected that those steps would improve the strength of the covenant.
The third of the key meetings of the Trustee Board took place on 9 October 2012, (the "Third Meeting"). It was at this meeting that the Trustee considered the finalised advice papers and made the decision on whether to proceed with Augmentation and/or Re-Apportionment or to keep the 2001 Regime. In advance of the circulation of the six advice papers to be used for the purposes of the Third Meeting, the Trustee Board received an introductory briefing from all the professional advisers on 27 September 2012. It was Mr Brookes' evidence that despite the fact that the Trustee had taken the decision to proceed with Augmentation in principle on 29 April 2009, the position was considered afresh at the Third Meeting. I accept Mr Brookes' evidence in this regard. It is borne out by the form of the slides for the briefing session on 27 September 2012 which refer to reconsideration and if appropriate confirmation of the "in principle" decision.
On 27 September 2012, the members of the Trustee Board attended a lengthy briefing session at which each of Towers Watson, Lincoln and Mayer Brown gave slide presentations and were available to answer questions and provide explanations. On that occasion, Mr Nugee also addressed the Board at some length. Lincoln's slides reveal that they advised that on the frozen basis, the covenant strength remained "Fairly Strong" both on the 2001 basis and if Augmentation were adopted. On the open basis, Augmentation improved the covenant strength from Fairly Weak/Neutral to Fairly Strong. The Lincoln slides also reveal that the Trustee was asked to consider whether it wished to enhance rather than maintain the employer covenant. Mr Brookes accepted that he did not know whether this was discussed and it seemed likely that the discussion did not take place. However, he made clear that the meeting on the 27 September 2012 was lengthy and that the briefing provided was thorough and detailed which I accept.
The Minute of the Third Meeting records that each of the papers was considered and that the Trustee discussed at length the relevant matters to be considered when deciding upon any new deficit contribution regime and the weight to be given to each matter. In fact, each of the advisers gave a short reprise of their advice by reference to a joint power point presentation. It was acknowledged that the main purpose of the Scheme was to provide members with the promised benefits and it was felt that "all the options under consideration in relation to a new deficit contribution regime including retaining the current regime were consistent with the purposes of the Fund." Further, the Minutes record that the Trustee recognised that "it should ensure that any decision furthered the purposes of the Fund, but as regards other relevant matters, giving them appropriate weight was likely to involve balancing various matters without giving undue weight to one particular matter." It is stated that the issues which the Trustee went on to consider were cross-subsidy between Participating Employers, employer covenant strength, downside risk, and administrative cost and workability.
As the decision making process has been the subject of detailed criticism, I shall set out the relevant parts of the Minute despite their length:
"The key points discussed were (by reference to the five matters identified for consideration in the adviser papers):
3.1 Purpose of the Fund
It was acknowledged that the main purpose of the Fund is to provide members with the promised benefits set out in the Trust Deed and Rules. It was felt that all the options under consideration in relation to a new deficit contribution regime (including retaining the current regime) were consistent with the purposes of the Fund. 3.2 Cross subsidy between Participating Employers
It was acknowledged that substantial cross-subsidy between Participating Employers had arisen as a direct result of not all of the Participating Employers paying deficit contributions under the current regime. The Board considered the information about that cross-subsidy contained in the Towers Watson paper and in particular the table in paragraph 1.13 which showed the deficit contribution cross-subsidy that had arisen since 2001, and the extent to which that cross-subsidy could be addressed by reapportionment over various periods back to 2001. It was recognised that benefits payable under the Fund could be characterised as deferred pay which members have earned through employment with one or more Participating Employers. However, it was also recognised that the current regime was agreed by the RMT, by the Chamber of Shipping and by Current Employers, was approved by the Court and remained valid. Using reapportionment to reduce past cross-subsidy under the current regime could be said to be "undoing" or "re-doing" a regime which has been in place since 2001. As a matter of principle it was felt appropriate to seek to reduce the cross-subsidy under the current regime with the aim that, broadly, each Participating Employer is responsible for paying deficit contributions in respect of benefit liabilities which are attributable to members' employment with that Participating Employer. However, it was also important to weigh this up against the impact on the overall employer covenant. 3.3 Employer covenant strength
The Board considered the Lincoln International advice on the existing employer covenant and on the effect on the overall employer covenant of addressing cross-subsidy through augmentation or reapportionment (whether back to 2001, 2007 or 2010), having regard to the various classes of Participating Employer. It was noted that the broad conclusions of the Lincoln International employer covenant advice were the same whether the Fund was open or frozen for the purposes of the employer debt legislation. It was acknowledged that it was not necessary for the open/frozen issue to be resolved for the purposes of the decisions to be taken at the meeting in relation to the introduction of a new regime. Lincoln International's advice was that augmentation under the new regime was likely at least marginally to enhance the employer covenant. Lincoln International's advice was that reappointment under the new regime (whether it went back to 2001, 2007 or 2010) was of itself likely to have a negative impact on the employer covenant. However, Lincoln International also advises that if an appropriate implementation methodology was used for reapportionment (whether it went back to 2001, 2007 or 2010) it was likely at least to maintain the employer covenant. Lincoln International on some of the options for an implementation methodology as set out in their paper "Implementation Methodology Considerations". 3.4 Downside risks
The Board was concerned that non-collection of contributions would be a downside risk under a new regime. It was acknowledged that non-collection is already a risk under the current regime. Towers Watson explained that the risk could increase if there was augmentation of the pool of employers which can be required to pay deficit contributions under the new regime because the augmented pool would include employers which have never before been asked to pay deficit contributions and a material proportion of whom were assessed as providing a fairly weak covenant. The risk would further increase if there was reapportionment as well as augmentation because the size of the deficit contributions being imposed on employers which have never before been asked to pay and whose covenant was assessed as fairly weak would be increased in order to make allowance for contributions which had been already paid by Current Employers (and, depending on the period of reapportionment, by, Voluntary Employers). It was acknowledged that unwillingness to pay could be another downside risk under a new regime. It was recognised that the greater the deficit contributions which the Historic Employers are asked to pay, the greater the likelihood of there being unwillingness on their part to pay. Reapportionment would not only result in greater deficit contributions being apportioned to the Historic Employers but it may also increase unwillingness to the extent that it is perceived to be unreasonable because it is "un-doing" or "re-doing' a regime which has been in place since 2001. But not reapportioning could result in unwillingness amongst the Current Employers to continue paying. Lincoln International explained that the extent of this risk could only be fully tested once a new regime is in place and employers have been approached. They also explained that the Pensions Regulator had moved away from previous statements about the significance of willingness in assessing employer covenant. Rather the Pensions Regulator was focussing more closely on an employer's legal commitments to support a pension scheme. In this regard, it was noted that Participating Employers will be under a legal obligation to pay whatever deficit contributions are due under any validly introduced regime. However, the view was expressed that unwillingness was still a downside risk in practice - particularly if a Participating Employer could not itself pay its contributions without support from the wider corporate group in which it resides. Lincoln International advised that downside risks which would potentially arise under a new regime, whether through augmentation or reapportionment, could be mitigated through the use of an appropriate implementation methodology as explained in their paper "Implementation Methodology Considerations". The Board agreed that it would be appropriate to mitigate downside risks through the use of an appropriate implementation methodology even if the new regime involves augmentation and not reapportionment. The Board also agreed that no reliance should be placed on the Pensions Regulator using its statutory powers to issue a contribution notice or a financial support direction in relation to a non-paying Participating Employer. 3.5 Administrative cost/workability
The Board acknowledged that, if it was to decide not to introduce a new regime, it would still, where necessary, seek credit support agreements from the Current Employers in respect of payment of amounts due under the recovery plan. This would inevitably increase the complexity and the cost of the administration of the Fund. Introducing a new regime with augmentation (but not reapportionment) would further increase the complexity and the cost of the administration of the Fund, because it would at least involve a greater number of employers and is likely to involve an appropriate implementation methodology to mitigate downside risks. It was felt that this incremental additional complexity and cost was unlikely to be material in the context of the overall finances of the Fund. Introducing a new regime with reapportionment as well as augmentation was unlikely to increase the complexity and the cost of the administration of the Fund to a material extent compared to augmentation, depending on the implementation methodology chosen. 4. Decisions
The Board considered all of these matters and how it would weigh them up. The Board decided that the deficit contribution cross-subsidy which has arisen as a result of the current regime should be addressed. It also decided that it was appropriate to go back to 2001 in order to do so to the fullest practical extent, as it was apparent from the advice given by Towers Watson that reapportionment back to 2007 or 2010 (or some other date) would address that cross-subsidy to a lesser extent. The Board was satisfied that if that cross-subsidy was addressed through reapportionment the impact on employer covenant and the downside risks could be addressed through the use of an appropriate implementation methodology which Lincoln International could design, in conjunction with the Board and its other advisers. It was unanimously resolved: (a) To introduce a new deficit contribution regime which: (i) augments the pool of employers which can be required to pay deficit contributions to include all Participating Employers not just Current Employers, with percentage apportionment shares allocated using "Method C" (which is summarised in Appendix A of the Towers Watson paper dated 1 October 2012); and (ii) makes allowance for all past deficit contributions made since 2001 (and all s75 debt payments), using the method described in Section 4 and Appendix B of the Towers Watson paper dated 1 October 2012. (b) When implementing the above-mentioned new regime, to use an implementation methodology broadly in line with the Lincoln International paper "Implementation Methodology Considerations". (c) To expand the role of the Litigation Committee (as stated in the Terms of Reference dated 29 March 2012) to cover: (i) developing a proposal for the above-mentioned implementation methodology with Lincoln International and other advisers, for consideration by the Board; and (ii) preparing the consultation documentation to be sent to employers in relation to the above-mentioned new regime, for consideration by the Board; and to revise the Terms of Reference dated 29 March 2012 accordingly. (d) To ask the Investment Committee to review the Funds investment strategy in the light of the above-mentioned decisions at an appropriate time." The content of the Minutes is consistent with Mr Brookes' evidence that each of the matters set out in the Minutes was discussed. He says that the Trustee considered whether it was appropriate to make the proposed amendments in the light of the need to further the main purpose of the scheme which is to deliver to the Members the benefits set out in the Trust Deed and Rules and the need to give appropriate weight to the various factors without giving undue weight to any one factor. He made clear that the Trustee had in mind that widening the pool of Participating Employers to include Historic Employers would include those who had never been asked to pay deficit contributions before and might not be able to do so. He mentioned that on the Trustee's working assumption that the Scheme was "frozen" the overall covenant had been rated on the 2001 Regime basis as "Fairly Strong" (defined by Lincoln to mean "likely that the employer covenant will be sufficient to fully fund the pensions obligations") and that as a result the Trustee was satisfied that the covenant was sufficient to support a contribution regime which would deliver the benefits. He added that the Trustee considered that all of the options under consideration were consistent with the purposes of the Scheme in that they would all enable the Trustee to deliver the benefits and that as a result, the Trustee could take into account other factors including cross-subsidy. Furthermore, on the basis of Mayer Brown's paper for the Third Meeting to which I shall refer, he states that the Trustee considered the New Regime to be potentially covenant enhancing even on the basis that Re-Apportionment was adopted.
At the conclusion of the meeting, the Trustee unanimously resolved to adopt Augmentation (with Participating Employer's Percentages to be calculated using Method C) plus Re-Apportionment to 2001, and to use an Implementation Methodology broadly in line with Lincoln's Implementation Methodology Considerations paper.
Before turning to the advice papers themselves, I should add that in re-examination, Mr Brookes confirmed that the minutes of the Trustee meetings were drawn up initially by Mayer Brown, were then reviewed by each of the advisers present, thereafter were considered by Mr Brookes and the Vice Chairman of the Trustee Board and finally were reviewed by the entirety of the Board.
The six advice papers which formed the backdrop for the decision making process were: a Mayer Brown paper dated 1 October 2012 summarising Mr Nugee's advice; a Towers Watson paper on Re-Apportionment, also dated 1 October 2012 together with a supplemental paper on the same subject dated 8 October 2012; a Lincoln paper on covenant strength under the 2001 Regime, Augmentation and Re-Apportionment, assuming the Scheme is "frozen", dated October 2012 and an alternative version on the basis that the Scheme is "open"; and a Lincoln paper on the Implementation Methodology, dated 9 October 2012. Before the start of the Third Meeting, the Trustee Board had an opportunity to ask questions of the advisers from Mayer Brown, Towers Watson and Lincoln who at the start of the meeting also gave a short reprise of their advice.
In summary, the Mayer Brown paper stated that the Trustee had the "fundamental objective" of " . .eliminat[ing] the deficit / return the MNRPF to financial health in a sensible, proper and appropriate way" and explained that the main purpose of the Scheme is to provide Members with the promised benefits set out in the Trust Deed and Rules. However, it also stated that the Trustee could and should bear in mind the legitimate interests of Participating Employers, subject to its duty to ensure that beneficiaries receive the benefits to which they are entitled, which in turn depends on the underlying funding of the Scheme. It went on to state that the impact of the New Regime on funding and the overall covenant strength was an important matter but not the sole matter which should be considered. It reiterated the advice of Mr Nugee as follows:
"Mr Nugee has acknowledged that Participating Employers are not interchangeable in terms of covenant strength, and the way (and extent to which) the new regime allocates deficit contributions between them may affect the strength of the overall employer covenant. Mr Nugee said that it is difficult to see how the Trustee Board could properly introduce a new regime if the Trustee Board has received advice that it would significantly reduce the strength of the overall employer covenant."
It also included a table in the following form which has been the subject of much criticism:
Augmentation Augmentation
Ongoing contributions (with no steps to mitigate implementation risk) At least marginally covenant enhancing
Ongoing contributions (with steps to mitigate implementation risk) At least covenant enhancing
On a "last man standing" basis Covenant enhancing
Reapportionment Reapportionment
Ongoing contributions (with no steps to mitigate implementation risk) Likely negative impact but can be addressed by mitigation steps
Ongoing contributions (with steps to mitigate implementation risk) Potentially covenant enhancing
On a "last man standing" basis Covenant enhancing
In cross examination, Mr Brookes accepted that at the time, the Trustee may well not have spotted that the table did not record all of the nuances contained in the Lincoln report itself, some of which affected the conclusions which were set out in the table. Mr Brookes maintained nevertheless, that each of the Members of the Trustee Board had all of the papers and had the lengthy briefing session on 27 September 2012. He also maintained that if it had made an inaccurate decision it would have been advised by Lincoln who were present at the meeting.
In any event, he stated that he understood the covenant advice to mean that the New Regime would deliver an effect on covenant strength which was not neutral. He said, "If it could be the same or better, that isn't neutral. . . . "at least as good" has that potential extra connotation: it is not neutral." It is equally clear that despite having at first intended to seek to improve the covenant, the Trustee did not take up Lincoln's offer to advise on covenant strengthening. In fact, Mr Brookes confirmed in re-examination that the reassurance he had gained from the report was as a result of the overall conclusion in Lincoln's advice that the proposals were covenant enhancing.
The issue of cross-subsidy was addressed at para 5.8 of Mayer Brown's paper. It was stated that the Trustee could properly have regard to the issue. However, it had also been made clear that taking account of the interests of Participating Employers was subject to the Trustee's duty to ensure that beneficiaries receive the benefits under the Deed and Rules. Potential factors both in favour and against addressing cross-subsidy were set out. Included in the factors against addressing the issue were the fact that the 2001 Regime had been approved by the Court and that it might be said that Re-Apportionment was "re-writing" history and that the effect of such a "re-writing" would be to place a burden on Historic Employers which the Current Employers had indicated they would bear. It was also noted that Historic and Voluntary Employers might have made no financial provision for deficit contributions after 2001 and that Re-Apportionment would have a greater impact on them. The Appendix to the paper identified various potential periods for giving credit for past contributions, ranging from no credit, to 2010, 2007 or 2001, pointing out the impact of each period on cross-subsidy, covenant strength and whether it could be said to involve "re-writing" history. The significance of 2010 was described as being the fact that it was the date when contributions were first paid following the Trustee's "in principle" decision of 29 April 2009, 2007 was described as the date when contributions were first paid following the cessation of most voluntary contributions and 2001 as the date the 2001 Regime came into effect. In cross examination, Mr Brookes accepted that by addressing cross-subsidy a relative benefit was conferred upon Current Employers.
Reference was also made to the need to consider the administrative cost and workability of introducing the New Regime. It was appreciated that this could only be done finally after the Implementation Methodology had been developed, and it was an issue to which the Trustee Board later returned.
As I have already mentioned, the advice from Towers Watson in relation to the effects of Augmentation and Re-Apportionment was contained in two reports dated 1 and 8 October 2012 respectively. In the first report, the estimated split of liabilities on an entire pool Augmentation basis, giving no credit for past contributions, that is apportioned between the Participating Employers according to each Participating Employer's proportionate share of the Fund's liabilities attributable to all Participating Employers, was set out. The split of liabilities was also set out on the basis of Re-Apportionment back to 2001, 2007 and 2010 respectively and the split of the liability between Current, Historic and Voluntary Employers was shown in rough terms revealing a split attributing 32.5% of Scheme liabilities to Current Employers, 29.5% to Voluntary and 38% to Historic Employers.
It also stated that taking into account interest to 31 March 2013, and the amounts paid into escrow, £275m of deficit contributions have been paid since 2001 (including s 75 debt payments before that date), comprising: Current = £191m (69.4%), Voluntary = £78m (28.4%), Historic = £6m (2.2%). In fact, on the basis of a deficit of £200m and upon assumptions as to re-spreading orphan liabilities, the split of liabilities was set out in tabular form as follows:
Past contribution allowance period start year Past contribution allowance period start year Past contribution allowance period start year Past contribution allowance period start year
Employer Group 2001 2007 2010 No allowance
Current 9 (4%) 24 (12%) 53 (26%) 81 (40%)
Voluntary 70 (33%) 86 (42.5%) 72 (36%) 58 (29%)
Historic 132 (63%) 92 (45.5%) 77 (38%) 62 (31%)
Total 211 (100%) 202 (100%) 202 (100%) 201 (100%)
The paper also made clear that 13% of the Scheme liabilities were attributable to dissolved Employers but it was pointed out that payment might be received from other companies in the same group. It went on to state that there was uncertainty about which Employers would actually be able to meet the liability attributed to them and that the uncertainty would not be resolved until payment requests were made. Towers Watson also mentioned that under the New Regime, as before, orphan liabilities would be re-spread and that if credit were given for past contributions the effect was to increase orphan liabilities. Three different scenarios relating to failure to pay were set out which included the assumption that nothing was recoverable from dissolved Employers and that Employers dubbed "Very Weak" for covenant purposes would only be able to two thirds of their liabilities. The paper also made mention of the monies held in escrow and referred to those amounts being payable to Stena Line or the Scheme.
The Trustee Board also had two covenant reports from Lincoln, one on the basis that the Scheme is "frozen" and the other on the basis that it is "open" and a report on the proposed Implementation Methodology. In fact, although P&O Ferries and Mr Brown criticise some aspects of the covenant advice, it seems that the overall conclusions are not challenged.
On a frozen basis, Lincoln concluded that the current regime, a regime applying Augmentation together with the Implementation Methodology and a regime applying Augmentation together with Re-apportionment whether back to 2001, 2007 or 2010 when applied with the Implementation Methodology, should all be rated as Fairly Strong. "Fairly Strong" was defined as: "It is likely that the employer covenant will be sufficient to fully fund the pensions obligations." Lincoln also concluded in its Implementation Methodology paper that even without the application of that methodology, on a "last man standing basis", both Augmentation and Re-Apportionment tended to be covenant enhancing, since last man standing support was likely to come from Very Strong Employers. However, as to "ongoing covenant support", Augmentation but not Re-Apportionment was said to be likely to be at least marginally covenant enhancing.
On an open basis, Lincoln concluded that the Scheme's overall covenant strength under the current regime was what it described as "Fairly Weak/Neutral" but that the Augmentation proposal would improve it to "Fairly Strong" on the basis that a suitable Implementation Methodology was adopted. They concluded that they would also rate the covenant as Fairly Strong if Augmentation and Re-Apportionment whether to 2001, 2007 or 2010 were adopted with a suitable Implementation Methodology.
Both of the covenant reports contained pie charts for each scenario showing a breakdown of the Scheme's liabilities by strength of Employer. The commentary on the pie charts explained that under the current regime on a "frozen" basis, the Scheme has only one Very Strong Employer, whereas under the New Regime whether as a result of Augmentation or Re-Apportionment there would be five. Lincoln describes a "Very Strong" Employer as one in relation to which there is a "Substantial likelihood that [it] can fully meet the entire Fund's deficit on a solvency basis over one year."
In their assessment of covenant, Lincoln took no account of potential support from the wider corporate groups of Participating Employers and assumed that UK Government-funded Participating Employers had no recourse to additional Government funding. It also emphasised the weakening effect of Re-Apportionment (without an Implementation Methodology) on ongoing covenant support, rather than its positive effect on the last man standing covenant. Mr Brookes was cross examined extensively on the detailed content of the Lincoln paper. His response to the detailed questions was that he had relied upon the advice and the exercise of professional judgement by Lincoln and considered that Lincoln would have made the Trustee aware if it thought it necessary to obtain further information or costings on any particular aspect of the matter.
Finally, the Implementation Methodology paper provided a summary of available and suitable implementation methodologies on the basis that the actual design would be carried out after the main features of the New Regime had been decided upon. In particular, Lincoln advised that if Re-Apportionment were adopted, a robust Implementation Methodology could "ensure employer covenant remains at least as strong as the current Fairly Strong rating". The paper set out various possible approaches including re-spreading of orphan liabilities, Orphan Loading, (the grossing up of invoices to reflect an assumed default rate, to ensure that the "correct" amount is collected), requiring payment of contributions in lump sums from weaker Employers, requiring credit support (e.g. guarantees from group companies or third parties), or use of an escrow arrangement whereby Current Employers continue to pay amounts due under the 2001 Regime. It also made reference to the risk of non-payment by dissolved and Very Weak Employers.
In his third witness statement, Mr Brookes explains that at the Third Meeting, the Trustee satisfied itself that the covenant under the New Regime was sufficient to ensure the delivery of the promised benefits. He made clear that the Trustee's fundamental requirement was to find an appropriate deficit repair regime to return the Scheme to solvency so as to achieve the purpose of delivering the Members their benefits and only thereafter to address cross-subsidy. He also made clear that it had not been the objective of the Trustee to release monies to Stena Line generally or by reference to the escrow arrangement to which I shall refer.
The Minutes record that Lincoln advised that adoption of an Implementation Methodology was likely at least to maintain the employer covenant. Mr Brookes explained in his third witness statement, on the "open" analysis, the Trustee's decision enhanced the covenant to Fairly Strong (with an Implementation Methodology); on the "frozen" analysis the covenant already was Fairly Strong but with an Implementation Methodology the New Regime would as a minimum be no less strong than the current rating and potentially stronger. As I have already mentioned, "Fairly Strong" was defined by Lincoln as: "It is likely that the employer covenant will be sufficient to fully fund the pensions obligations". In cross examination, it was pointed out to Mr Brookes that at this stage, the Trustee had no information about the viability of the Implementation Methodology or its cost but appeared to have made a decision to adopt it nevertheless. It was Mr Brookes' evidence that Lincoln had given strong assurances that a workable and cost effective regime could be designed and that the Trustee had relied upon that assurance.
In relation to "undoing" or "re-doing" a regime which had been in place since 2001, the Minutes reveal that the Trustee recognised that this could be said to be the effect of Re-Apportionment but was nevertheless satisfied that Re-Apportionment was appropriate to address the cross-subsidy that had arisen under the 2001 Regime. The Trustee Board concluded that the cross-subsidy under the 2001 Regime should be addressed to the fullest practical extent and that it was appropriate to give credit back to 2001. In cross examination, Mr Brookes stated that the Trustee considered it right to address the issue of cross-subsidy although its priority was to secure the fund. However, he could not recall discussing the issue of giving credit back to 2001.
Further the Trustee Board recognised that Augmentation, and to a greater degree Re-Apportionment, was likely to lead to non-collection risk due to contributions being imposed on Employers with weaker covenants who had never been asked to pay deficit contributions before. It was nevertheless satisfied that the New Regime was appropriate, and that from the Scheme's perspective the non-collection risks could be addressed by an Implementation Methodology.
Further, the Trustee Board noted that Augmentation and Re-Apportionment would increase cost/complexity but that this was unlikely to be material in the context of the overall finances of the Scheme. The Trustee also decided that an Implementation Methodology would have been appropriate even for Augmentation without Re-Apportionment.
As I have already mentioned, the decision of the Trustee Board was to adopt Augmentation and Re-Apportionment with the application of a suitable Implementation Methodology. That decision was subject to a consultation exercise with the Participating Employers and at the end of the Third Meeting, the Litigation Committee's terms of reference were amended to include the proposed consultation. Thereafter, a letter dated 21 November 2012 was sent to all Participating Employers explaining the Trustee's decision on the proposed New Regime and inviting comments on the New Regime itself and upon some potential Ancillary Features which might be adopted to supplement it. The initial consultation period was extended by a month and ran to 1 February 2013. Mr Brookes explained in his first witness statement that Participating Employers were provided with further information at a consultation meeting with the Trustee's advisers on 7 December 2012 and via a "Q&A" document posted on the Trustee's website.
During the consultation period, the Trustee received further advice from Lincoln in a paper entitled "Preliminary 'Very Weak' Employer Affordability Consideration" which was dated 13 November 2012. It was concerned with the likely level of defaults and affordability of contributions under the New Regime. On 17 December 2012, the Trustee wrote to Participating Employers to inform them of the extension of the consultation period and of the Trustee's further decisions to suspend the Current Employer withdrawal mechanism under the 2001 Regime and to suspend the payment of contributions. The perceived need to suspend the withdrawal mechanism and the validity of the amendment to the Scheme by which this was effected are considered in detail later in the judgment under the Open/Frozen Issues heading.
Consultation responses were received from 43 Participating Employers representing 72% of the total Participating Employer's Percentages under the proposed New Regime. Further advice was then sought from Mr Nugee on the consultation responses and potential Ancillary Features of the New Regime at a consultation on 11 February 2013. Mr Nugee confirmed he had no concerns with the way the consultation had been conducted and advised that it was important for the Trustee to consider the consultation responses with an open mind and to consider whether the October 2012 decision remained appropriate in the light of those responses. He also considered draft papers prepared by Mayer Brown for the Trustee Board dealing with the consultation responses, and was satisfied with them. Mr Nugee also confirmed that it remained his view that Method C was an appropriate way of identifying the Participating Employer's Percentages under the New Regime. He also stated that in his opinion the Trustee had power to introduce the Ancillary Features and that it could properly decide to include them in the New Regime.
The next meeting of the Trustee took place on 5 March 2013, (the "Fourth Meeting"). At the Fourth Meeting, the Trustee considered the consultation responses and the proposed Ancillary Features and a number of further advice papers it had received. They were papers from Mayer Brown dated 28 February 2013 on the consultation responses and proposed Ancillary Features and on Employer discharges, a brief covering paper from Ensign (the Scheme's administrators) on the consultation, a Towers Watson paper on winding up triggers, dated 22 February 2013 and a paper from Lincoln on the covenant implications of Employer discharges, dated 5 March 2013.
At the Fourth Meeting, amongst other things, the Trustee considered the detailed table in relation to the consultation responses which had been provided by Mayer Brown in their paper, the use of Orphan Loading and the allocation of liabilities to Employers who are unlikely to be able to pay, seeking contributions from Employers who had ceased long ago to employ active Members and from those who had had no recent involvement in decisions concerning the Scheme, the issues surrounding "backdating" liability to 2001, "retrospective amendments" and "retrospectively" replacing a Court-approved/agreed regime, the apportionment method and use of Method C, the imposition of joint and several liability and the cost/administrative workability of the New Regime. Having considered all such matters, the Trustee Board decided to confirm its October 2012 decision in relation to the New Regime.
The Ancillary matters were also considered at the Fourth Meeting. The first of these was joint and several liability. The initial proposal considered on that occasion was subsequently refined at the meeting of the Trustee Board on 14 July 2014. In its refined form it would give the Trustee power to make two or more Participating Employers jointly and severally liable for each other's deficit contributions, where they are connected or associated within the meaning of ss 249 or 435 Insolvency Act 1986; or where one of the Participating Employers is or was supplying staff to another of the Participating Employers.
The second Ancillary matter was the proposed ability of the Trustee to fix individual payment plans for Participating Employers. The third was "synthetic s75 debts." This is a proposed power to impose lump sum exit debts on non-statutory Participating Employers so that they trigger contractual liability under the Rules for synthetic "s 75 debts" upon their insolvency or upon the winding up of the Scheme. This proposal too was refined at the Trustee Board meeting on 14 July 2014 and further on 23 September 2014. As modified, it is proposed that the synthetic s 75 debt would be triggered (i) where a Participating Employer suffers an insolvency event or it enters solvent winding up (whether in the UK or overseas) or (ii) if the Scheme goes into winding up.
Fourthly, the Trustee Board considered the proposal that Rule 30 of the Trust Deed and Rules be modified to allow Historic Employers in addition to Current Employers to withdraw from the Scheme. This was in response to a passage in the judgment of Briggs J in which he had envisaged that Rule 30 might need to be amended if Historic Employers were made liable, to avoid the "apparently discriminatory consequences" for one class of contributors, Current Employers, being able to withdraw from the Scheme but not others. Fifthly, for the same reason, the Trustee Board considered the amendment of Rule 31 to allow Historic Employers as well as Current Employers to terminate the Scheme in certain circumstances. Sixthly, the Trustee Board considered the proposed power to allow a Participating Employer which is in "credit" under the New Regime (having already made deficit contributions in excess of its share of the deficit under the New Regime) to off-set the credit against contributions due from another Participating Employer. Lastly, under this head, the Trustee Board considered the proposed amendment of the Rules to make clear that a Participating Employer's Percentage is not reallocated in the event that it ceases to employ Ratings.
Having considered Mayer Brown's advice paper on the Ancillary Features and received further advice from Mayer Brown, the Trustee Board decided in principle to include the Ancillary Features in the New Regime.
The next important meeting of the Trustee Board took place on 26 March 2013 (the "Fifth Meeting"). The Trustee Board considered the potential drafting changes to the Deed and Rules to introduce the New Regime and the Ancillary Features. In addition, Lincoln gave a presentation on Orphan Loading and the possible incidence of non-payment under the New Regime. In addition, the re-drafting of Rule 31 came under consideration. Having received advice from Towers Watson, it was agreed that the need either for a unanimous decision to wind up or the agreement of five Current Employers representing five separate corporate groups with combined Current Employer's Percentages of 30% should remain unchanged.
In October 2012, Lincoln's "open" scheme covenant analysis had proceeded on the basis that the C2 Employers with (arguably) zero percentage shares were the two ExxonMobil companies. Subsequently, it was confirmed that there were many more C2 Employers. Accordingly, Lincoln carried out a further covenant analysis on the "open" basis on the assumption that there are twenty-one C2 Employers dated May 2013. The outcome was that on the revised "open" basis, the covenant under the 2001 regime would be Very Weak whereas under the New Regime the covenant would be Fairly Strong with Augmentation, and Fairly Weak/Neutral with Re-Apportionment (2001, 2007 or 2010) without the application of any Implementation Methodology If the Implementation Methodology were also applied the covenant strength under Re-Apportionment was stated to be at least as strong as a Fairly Strong rating.
The revised covenant analysis on the "open" basis was considered at the next meeting of the Trustee Board which took place on 4 June 2013, (the "Sixth Meeting"). Having considered the revised report, and the conclusion that the covenant strength would be improved on the "open basis" which Mr Brookes described as in the interests of Members, the Trustee Board confirmed its October 2012 decision to proceed with Augmentation plus Re-Apportionment to 2001 with the adoption of an appropriate Implementation Methodology.
At the Third Meeting the Trustee Board had required Lincoln to design an Implementation Methodology which would ensure that, whether the Scheme was "open" or "frozen", the covenant was at least as strong as the current Fairly Strong rating (on the "frozen" basis). It was designed by Lincoln in conjunction with the Trustee's legal and actuarial advisers during autumn 2013, supervised by the Litigation Committee. An update was provided to the Trustee Board at its meeting on 10 December 2013, but the proposed Implementation Methodology was not completed until January 2014. In cross examination, Mr Brookes stated that the Trustee had been assured from the start that a suitable Implementation Methodology could be devised.
In summary, the Implementation Methodology works on the basis that each Participating Employer will be liable for a share of the deficit known as a "Deficit Share Amount" calculated as follows: each Participating Employer is given a "Participating Employer's Percentage" of the deficit (calculated in proportion to its share of the Fund's liabilities); this amount is increased by Orphan Loading to reflect anticipated orphan liabilities; it is then adjusted to give credit for past contributions. Each Participating Employer is required to pay its Deficit Share Amount in two instalments, the first being two thirds of the amount due with the balance due a year later. However, if the Deficit Share Amount exceeds £100,000, the Participating Employer may request an extension of the period to pay in front-loaded instalments with interest (an "Individual Payment Plan"). The payment period is based on the Participating Employer's own covenant strength or on the provision of credit support from other entities to improve its covenant. A Participating Employer that can demonstrate it is unable to afford its contributions (an "affordability constrained employer") may request an extended payment period. It may be required to restrict its activities (e.g. payment of dividends) or it may, where feasible, be asked to provide external credit support. If amounts payable by an affordability constrained Employer fall due after the end of the Recovery Period, Orphan Loading will be increased to ensure recovery of this long "tail" of contributions from the other Employers within the Recovery Period (but the affordability constrained Employer is not released from liability for the "tail" of contributions). This is viewed as a covenant-strengthening feature of the Implementation Methodology which ensures that the "tail" of contributions is covered up-front by the other Employers. In the event of liabilities becoming orphaned, the orphaned Participating Employer's Percentage will be re-spread proportionately amongst the other Participating Employers. In addition to the mechanism in the Implementation Methodology, it is proposed that the Trustee would have power to impose joint and several liability.
Lincoln prepared an updated analysis of the covenant report taking account of the Implementation Methodology on the "frozen" and the "open" bases. On the open basis they reported that the covenant would be improved two rating categories from Very Weak to Fairly Strong under the New Regime, with the share of contributions supported by Very Strong or Fairly Strong Employers increasing significantly from 5% to 39%, and with an increased number of Very Strong and Fairly Strong Employers supporting the covenant. On the "frozen" basis the New Regime increased the share of contributions supported by Very Strong or Fairly Strong Employers from 12% to 39% and increased the number of Very Strong and Fairly Strong Employers supporting the covenant, albeit that the overall covenant remained in the same Fairly Strong category as the current regime. Both reports explained that Lincoln had adopted a prudent approach to the reliance placed on last man standing covenant. This was on the basis that by the time liabilities were re-spread to the Very Strong Employers, their covenant might have deteriorated materially. Lincoln explained that "we have adopted the approach that the best support to the Fund in the long term is Participating Employers that can afford their own liabilities, with only a relatively small allowance made for Very Strong employers".
It is common ground amongst the experts that the New Regime (plus the Implementation Methodology) does indeed strengthen the existing Fairly Strong ("frozen") covenant.
In cross examination, Mr Brookes also stated that the Trustee had in mind the effect of the New Regime upon the weaker Employers. He also accepted that he had understood that partial augmentation in the form of targeting a top slice of Historic Employers with strong covenants would have been likely to have a positive effect on the covenant. In addition, he accepted that the June 2012 Lincoln paper referred to the need for a decision upon whether augmentation should be limited to a top slice of Employers but could not recall a discussion on the topic. He also accepted that the decision to instruct Lincoln on the basis of Full Augmentation had been taken by the Litigation Committee and that the Trustee Board had no information on a partial augmentation regime. Accordingly, Mr Spink says there was a procedural failure and it was irrational of the Trustee to exclude investigation of the partial augmentation route.
The next meeting of the Trustee Board took place on 24 January 2014, (the "Seventh Meeting"). The proposed Implementation Methodology and Lincoln's updated covenant reports were considered. Lincoln gave a detailed presentation in relation to their covenant advice and the Implementation Methodology on which the Trustee Board made comments and asked questions. Thereafter, the Trustee Board decided that the Implementation Methodology be approved in principle for adoption to support the New Regime.
At the start of the meeting, Mr Brookes had reminded the Trustee Board that its overarching consideration in deciding on the New Regime was whether it would promote the main purpose of the Fund, namely to provide Members with their promised benefits, that the strength of the employer covenant was at the heart of the Implementation Methodology, and that the focus of the Trustee Board should therefore be to ensure that adopting the Implementation Methodology protects the security of Members' benefits. In his third witness statement Mr Brookes stated that on the basis of the Lincoln covenant advice presented at the Seventh Meeting, the Trustee Board was satisfied that the New Regime was in the interests of Members by promoting the main purpose of the Scheme being the provision of the promised benefits. Further, at the Seventh Meeting, Lincoln advised that an escrow arrangement was unnecessary on the basis of the covenant enhancement that could be achieved by the proposed Implementation Methodology.
The penultimate meeting of the Trustee Board at which aspects of the New Regime were discussed, took place on 14 July 2014 (the "Eighth Meeting"). The outstanding issues were explained in papers from Mayer Brown, Lincoln and Towers Watson. The advisers were also present at the Eighth Meeting and explained their advice. First, as a result of criticisms raised by P&O Ferries, having received advice from Lincoln, the Trustee Board considered whether it wished to proceed with partial augmentationand decided against doing so. However, in cross examination, Mr Brookes accepted that when preparing their paper, Lincoln had not been asked to compare covenant strength under the New Regime with that which could be achieved on Partial Augmentation
In addition, Mr Brown had stated that Lincoln should have "stress tested" the Implementation Methodology by considering alternative funding targets or Recovery Plans, including for example, seeking to reach full self-sufficiency for the Scheme within a 3 year Recovery Period. As a result, the Trustee Board asked Lincoln to stress test the Implementation Methodology so that the Trustee could be satisfied that it could be used irrespective of the funding target and Recovery Plan that might be adopted in the 2014 Actuarial Valuation or any future actuarial valuation.
As a result, at the Eighth Meeting, Lincoln presented an advice paper which demonstrates how the Implementation Methodology would operate in the assumed scenario of a target of self sufficiency within 3 years based on an estimated deficit of £600m. This was the assumed scenario set out in Mr Brown's expert's report. Lincoln confirmed that the Implementation Methodology is sufficiently flexible to allow such an approach to be adopted. Lincoln advised in such circumstances, the overall covenant on the "open" and "frozen" bases would remain in the Fairly Strong category. In cross examination, Mr Brookes confirmed that it was Lincoln's advice which had been relied upon and not the way in which the matter had been put in the paper provided by Mayer Brown for the meeting which suggested that it had been the Implementation Methodology itself which had been stress tested.
Further, at the Eighth Meeting the Trustee Board reconsidered the costs and administration of the New Regime with the benefit of a detailed paper from Ensign, the Scheme's administrators. Ensign's paper stated that the current budget for administrative expenses was £7.5m per annum, including £85,000 per annum annualised costs for collecting contributions under the 2001 Regime. Under the New Regime, the annualised cost would be an estimated £205,000 plus one-off set-up costs of up to £200,000. The costs were discussed in some detail and it was concluded that no further detail was needed and that it was not necessary to reconsider the earlier decisions in relation to the New Regime as a result of costs and administration issues.
In addition, at the Eighth Meeting, an issue as to whether extended payment periods for stronger Employers under the Implementation Methodology are contrary to the Pensions Regulator's (the "tPR's") guidance was discussed. Lincoln advised on potential alternatives to this feature of the Implementation Methodology but confirmed that it remained their view that it complied with tPR's guidance. The point and the advice were noted and the Trustee decided to keep this particular feature of the Implementation Methodology.
A further point was also addressed, namely the assertion by one of the five Very Strong Employers that it is not a Participating Employer at all. Lincoln advised that this had no effect upon their covenant advice set out in their January 2014 reports and as a result, the Trustee confirmed that the issue did not change its earlier decisions. The Trustee also considered revised Member and Employer data and papers from Towers Watson and Lincoln which confirmed that the changes had very little impact on their previous advice. Lastly, the Trustee Board dealt with approval of the final version of the Implementation Methodology, refinement of the proposal for joint and several liability, off-setting of credits and synthetic s 75 debts.
As I have mentioned, thereafter, on or around 9 September 2014, Mr Brookes was made aware of the content of the presentation by P&O Ferries to Lincoln in August 2013. Mr Brookes sent the information on to Mr Cullen who forwarded it to Lincoln. I have set out the evidence in this regard at paragraph 48 above.
The last of the Trustee meetings central to the process of determining the New Regime proposal took place on 23 September 2014 (the "Ninth Meeting"). At the Ninth Meeting, the Trustee approved the revised terms of the synthetic s 75 debt provisions which had been explained to the meeting by Towers Watson in a paper and by means of slides. A draft amended Deed and Rules containing the proposed provisions to implement the New Regime was also approved. The proposed amendments to the Deed and Rules include: revised definitions; a new Employer contribution rule at Rule 5.2; provisions giving effect to Augmentation at Rule 5.2(iv)(a)-(d); provisions giving effect to Re-Apportionment to 2001 at Rule 5.2(iv)(e); provisions in respect of Orphan Loading and re-spreading at Rule 5.2(iv)(f); power to set Individual Payment Plans at Rule 5.2(v)-(vii); power to impose joint and several liability at Rule 5.2(viii); synthetic s 75 debts upon a Participating Employer entering insolvency or solvent winding up, including power to impose joint and several liability for the debt at Rules 5.5 and 5.5A; amended provision for re-spreading of anticipated orphan liabilities at Rule 5.6; withdrawal provisions extended to Participating Employers at Rule 30; an extension of the winding up power to Participating Employers at Rule 31 and provision for synthetic s 75 debts upon the Scheme's winding up at Rule 31.6 and 31.6A.
Expert Evidence
Experts' Reports were prepared and filed on behalf of the Trustee, P&O Ferries and Mr Brown. In addition, each of the experts was cross examined at some length. They were: Mr Taylor Dewar BCom, ACA, MABRP of Ernst & Young LLP ("Mr Dewar") who was instructed by Mayer Brown on behalf of the Trustee; Mr Kevin Murphy FCA, a partner of Chantrey Vellacott DFK LLP ("Mr Murphy") who was instructed on behalf of P&O Ferries; and Mr Gary Squires, a fellow of the Institute of Chartered Accountants, a licensed Insolvency Practitioner and a partner in Zolfo Cooper LLP. He is also the Head of Pensions Advisory Services for his firm, ("Mr Squires"). He was instructed by Burges Salmon LLP on behalf of Mr Brown.
(i) Mr Dewar
Mr Dewar was required to give his opinion upon the strength of the overall employer covenant under the New Regime taking into account the Implementation Methodology amongst other things. He produced a report together with a first and second addendum. Mr Dewar is a highly experienced employer covenant specialist whose evidence was careful and measured. I found him to be an impressive and entirely reliable witness.
I shall summarise the central points of his expert evidence. On the basis that the Scheme is "frozen" Mr Dewar considered that the overall employer covenant would be stronger under New Regime, albeit still within the "Fairly Strong" category used by Lincoln. He also considered that on the frozen basis, the New Regime represents a reasonable approach to dealing with the deficit. On the basis that the Scheme is "open" rather than "frozen", Mr Dewar concluded that the overall employer covenant would be significantly stronger under the New Regime and that once again it represents a reasonable approach to dealing with the deficit. Furthermore, he considered the steps in the Implementation Methodology to deal with Participating Employers with affordability constraints to be appropriate and consistent with tPR guidance. He also considered the steps in the Implementation Methodology to permit Participating Employers a longer payment period on the basis of their covenant strength to be appropriate and consistent with tPR guidance, enabling the Trustee to take a proportionate and cost effective approach.
In cross examination he confirmed that he did not consider Lincoln's advice to be defective in any way and that he considered their approach to be prudent. He also added that when one starts with Full Augmentation, the effect of the Implementation Methodology is gradually to re-distribute debt to the stronger Employers which has the effect of strengthening the employer covenant and reduces the likelihood of having to rely upon the last man standing. He also stated that given the number of Participating Employers it is very difficult to achieve a Very Strong covenant rating but that given the number and the last man standing in the background, the covenant strength was more than capable of securing the benefits. He added that whether one demands contributions from the strongest Employers first or last makes no difference to covenant strength but that there may be a greater propensity to challenge if one were to go straight to such Employers. However, he accepted that the same effect could be achieved by requiring the strongest Employers to pay the deficit, place their contributions in escrow and then pursue the weaker Employers, as Mr Newman suggested in his submissions.
In relation to Partial Augmentation, Mr Dewar pointed out that it requires the Trustee to make a judgment at the outset as to which Employers are included and which are excluded. He said that it is difficult to define where the line should be drawn and difficult to apply it in practice whereas there are no such practical problems with Full Augmentation. He was adamant that increasing the pool of Participating Employers obliged to pay contributions has a positive effect on covenant strength. He also observed that releasing weaker Participating Employers from their liabilities might weaken the overall employer covenant and not extract value from all Participating Employers, and thereby be detrimental to Members' interests. He also observed that in his Supplemental Report, Mr Murphy criticises the Trustee for failing to consider the impact of imposing a liability on Very Weak Employers, but ignores the fact that Participating Employers receive a Deficit Share Notice prior to the issue of any invoice, and they can then request to be considered for Option 4 whereby the Trustee can consider whether to reduce the liability and/or extend the payment period if appropriate. In fact, in cross examination, Mr Murphy accepted that he was not an expert in relation to the financial and accounting issues concerning the effect of the receipt of a notice by a Very Weak Employer which was the subject of his Supplemental Report and he stated that he could not comment in detail and that despite his reference to it, FRS12 was not relevant to the issue.
In relation to the alternative illustrative regime produced by Mr Gary Squires on behalf of Mr Brown, which he describes as being more aligned to the "best interests" of the Members, Mr Dewar noted that it seems to minimise both Collection Credit Risk and Contingent Credit Risk by increasing the Funding Target; reducing the recovery period to three years; respreading Orphan Liabilities based on expectations of non-recovery of Deficit Share Amounts from Participating Employers as well as on an annual basis compared to as and when liabilities actually become Orphan Liabilities; eliminating Individual Payment Plan Options 2 and 3; and adding specific policies and procedures in relation to recovering Deficit Share Amounts from dissolved and defaulting Participating Employers.
tc "140 Mr Dewar's opinion on Mr Squires' Alternative Regime - summary" \l 2However, Mr Dewar concluded that Mr Squires' proposals generally do not represent a reasonable approach because: they are unnecessary, given the strength of the overall covenant under the New Regime; they do not appear to be in line with general market practice nor with the recovery plan of the other major fund in the sector (the MNOPF, which has a 12 year recovery period); they risk having an adverse impact on the strength of the individual Participating Employers' employer covenants such that the overall covenant strength could be weakened; it is not in line with tPR guidance (which focuses on technical provisions); and various elements of it (especially the short recovery period of three years, which Mr Squires admits is unusual) would significantly reduce the Scheme's flexibility and the Trustee's ability to deal with either favourable market conditions or higher than expected contributions during the first two years of the three year recovery period. He also points out that Mr Squires' regime would place undue financial pressure on the Participating Employers and would be likely to result in claims of unfairness from some Stronger Participating Employers; it would be likely to increase cross-subsidy due to the higher initial burden placed on Weaker Participating Employers; none of the schemes that Mr Dewar works with have self-sufficiency as their primary funding target, and where it is set as a secondary target the recovery period is significantly longer than 3 years. tPR guidance is based on technical provisions rather than self-sufficiency.
In the Addendum to his report, Mr Dewar stated that he did not believe tc "141 Conclusions and comments" \l 2that the Towers Watson's paper "MNRPF: Actuarial Valuation as at 31 March 2014 Assumptions and preliminary results" dated 23 September 2014, Lincoln's paper titled "MNRPF: Covenant Assessment 2014 Valuation Preliminary Conclusions dated 22 September 2014" and Tower Watson's quarterly funding update as at mid-September 2014 as to the increased deficit, had any effect on the opinions he expressed in his original report. He added that a Fairly Strong employer covenant should deliver the appropriate funding and protections for Members' benefits, is acceptable and it is not necessary to seek a Very Strong covenant. In addition he stated that it would be very difficult for the overall employer covenant rating to be Very Strong on Lincoln's scale, given their prudent approach and without removing the Not Rated, Dissolved, No information, Very Weak, Fairly Weak/Neutral and Fairly Strong Employers, which would mean a loss of covenant support from the majority of Employers. He added that changes in the strength of 22 individual Employers' covenants since October 2012 emphasise the need for a flexible Implementation Methodology.
(ii) Mr Murphy
Mr Murphy is both a Chartered Accountant and an Insolvency Practitioner. He accepted that covenant assessment represents only 25-30% of his work and that he only had experience of one relatively small multi-Employer scheme. He produced a report and a supplementary report and was asked to consider the extent to which the Augmentation envisaged under the New Regime and Re-apportionment to various dates affects the overall employment covenant in respect of the Scheme. He was also asked to consider the extent to which Orphan Loading set out in the Implementation Methodology strengthens the overall employer covenant under the New Regime and whether the advice given by Lincoln contained material omissions or errors in relation to those matters. I found Mr Murphy to be a straightforward and helpful witness who sought to assist the Court.
In summary, Mr Murphy was asked to consider the extent to which the Augmentation envisaged by the New Regime affects the overall employer covenant, the extent to which the Trustee's proposals in relation to Re-Apportionment affects the overall employer covenant, as at the various reallocation dates and the extent to which Orphan Loading as set out in the Implementation Methodology strengthens the overall employer covenant under the Trustee's proposed New Regime.
Mr Murphy proceeded on the basis that the Scheme is "frozen." tc "144 Executive Summary [D/70]" \l 2In summary, he concluded that the Trustee has an opportunity to strengthen the employer covenant and thus enhance the ultimate prospect of the Members receiving their promised benefits. He reviewed the covenant advice requested by and provided to the Trustee and was concerned about insufficient emphasis on the importance of the objective of strengthening overall covenant, along with conflict between this objective and that of avoiding cross-subsidy. He was concerned that Lincoln had not been asked to advise on alternative methods of Augmentation or apportionment. He noted that despite the advice provided in the Lincoln June 2012 Augmentation Paper, Lincoln was not subsequently asked to advise on the covenant implications of Entire Pool Augmentation/ Method C compared with alternative approaches, nor on the impact of the "central" issue of Employer affordability of contributions. He does not consider that the Trustee was provided with adequate advice on the possible implications of the transfer of significant liabilities to the Very Weak Employers estimated to be an increase from £42m to £196m after Orphan Loading. Furthermore, he notes that Lincoln was not asked to and did not provide the Trustee with sufficiently detailed advice on the impact on the overall covenant of the five Very Strong Employers following augmentation. Mr Murphy also has concerns that Lincoln's assessment of their impact in terms of overall covenant strength was flawed, in particular Lincoln's assessment that the overall covenant would be "Fairly Weak / Neutral" after reapportionment but before mitigation. However, I should add at this stage that this conclusion was based on Mr Murphy's assumptions as to the identity of three of the Very Strong Employers which he subsequently accepted was incorrect. Mr Murphy's overall conclusion when these issues were viewed together, was that the scope of the covenant advice requested by and received by the Trustee fell significantly short of what Mr Murphy considered was necessary to enable the Trustee to make a fully informed decision on the structure of the New Regime.
However, on the assumption that Lincoln's view of the impact of the five Very Strong Employers is correct and based on several other assumptions, Mr Murphy had no doubt that the covenant in the New Regime is stronger than the covenant in the Current Regime, but points out it would be counter-intuitive if the Trustee selects a regime which, even after mitigation, exhibits an initial reduction in the allocation of liabilities to the Stronger Employers. Mr Murphy has no material criticisms of the scope of the instructions provided by the Trustee to Lincoln regarding the Implementation Methodology, other than the Trustee was not advised on the likely costs.
In his Supplementary Report, Mr Murphy disagrees with Mr Dewar's view that "the covenant advice provided to the Trustee Board contained sufficient information to form the basis of the Trustee's decision-making process regarding the New Regime". Mr Murphy believes that the Trustee should have been provided with further information regarding the covenant implications of Full Augmentation (and the alternative) in 2012. He believes that the Trustee should have been provided with further information regarding the possible implications of imposing significant liabilities on the Very Weak Employers. Further, it remained his view that the Trustee should have been provided with additional information regarding the covenants of the Very Strong Employers, in the absence of which it would have been unable to fully consider the advantages/disadvantages of Full Augmentation and the alternatives, and could not have fully considered covenant risks arising from reapportionment.
In cross examination, Mr Murphy accepted that he approached the issue of covenant assessment differently from the method adopted by Lincoln. Mr Murphy adopts a single overall assessment which takes account of the "last man standing" whereas Lincoln discount the last man standing element. However, he accepted that different reputable covenant advisers can reasonably take different approaches to covenant assessment. He also accepted that Augmentation would increase covenant strength. In addition, he accepted that he had not considered some of the documentation and had only considered the position on the basis that the Scheme was "frozen". He also accepted that in the light of the slides provided by Lincoln it was acceptable for the Trustee on the basis of Lincoln's assurances, to be confident that an adequate Implementation Methodology could be devised. He also commented that there was a good likelihood of the covenant strength produced under the New Regime "meeting its obligations" and that the covenant produced by the New Regime meets his own strong covenant test. In addition, he confirmed that he did not disagree with Lincoln's conclusions rejecting Partial Augmentation.
(iii) Mr Squires
Mr Squires produced a Report and addendum and a Supplemental Report. He was asked to review Lincoln's advice and specifically to consider whether after consideration of answers provided by Lincoln to questions dated 25 April and 20 May 2014 it was within the bounds of "reasonable covenant advice." He was also asked to determine whether there were alternative regimes that could be expected to better serve the interests of Members compared with the proposed Implementation Methodology. He was also instructed to advise on the footing that the Trustee has a duty to "act in the best interests of the Fund's members" and that "best interests" means best financial interests. He was also instructed to assume that the best interests of Members could be addressed by minimising the risks to which they are exposed in order to maintain the current level of benefits.
I found Mr Squires to be a careful and impressive witness. He accepted that it is reasonable to take different views in relation to covenant strength and that such strength is just one of a number of considerations. He also accepted that he took a different view from Lincoln in that he would not discount the effect of the last man standing whereas Lincoln had done so.
In summary, the conclusions he reached in his written evidence were that Lincoln's advice was deficient for the following reasons: the Implementation Methodology allows for stronger Employers to be permitted to pay contributions over an extended period which Mr Squires says is not congruent with tPR's guidance on reasonable affordability and is therefore inconsistent with the Trustee's stated objectives; Lincoln's work did not consider the impact of the Implementation Methodology under various scenarios, and therefore the Trustee did not take into account all relevant considerations in proposing the Implementation Methodology; Lincoln did not analyse the impact of setting an alternative Funding Target, e.g. self-sufficiency, or the impact of alternative Recovery Periods. Without this advice the Trustee could not properly consider the impact of these elements on Orphan Loading, covenant, affordability of contributions and Members' interests; if Lincoln had performed stress testing on the alternative scenarios mentioned above, they may have concluded that the employer covenant is sufficiently robust to support a regime which is materially better for Members, using a "true up" mechanism to address any concerns about additional stress being placed on weaker Participating Employers.
As instructed Mr Squires also considered an illustrative "best interests" regime. He concluded that in order to minimise risk it is in Members' interests for the Recovery Plan to be as short as possible, target self-sufficiency, be practical to implement and to avoid the risk of value destruction by causing a Participating Employer's insolvency when there is the potential for recovery via a longer payment period. In this context, Mr Squires considered that a framework along the lines of the Implementation Methodology could be adopted as long as: the target was non-reliance on covenant within three years through de-risking and funding to at least self-sufficiency; any amounts not expected to be received within three years should be "orphan loaded", with annual readjustment based on actual experience; only those Participating Employers with "affordability constraints" should be permitted extended recovery plans; and appropriate policies for the recovery or abandonment of debts from dissolved and defaulting Participating Employers should be adopted.
I should also add that Mr Squires does not disagree with Lincoln's conclusion that on both an Open and a Frozen basis the New Regime including the Implementation Methodology will result in a covenant at least as strong as the Current Regime.
In cross examination, he agreed that different reputable covenant advisers can take different approaches to covenant assessment. He also agreed in cross examination that the Members will be better off if the Trustee makes an amendment to bring Strong Employers on the hook compared with the present position. He added that it was a positive development from the Members' point of view and that bringing stronger Employers in was something which Members could feel comfortable supporting. As a corollary, he agreed that releasing Employers from contribution obligations would be likely to reduce the strength of the covenant using his covenant assessment methodology. He went on to confirm that he had no problem with the strength of the covenant after the introduction of the New Regime, there was no gamble being taken with the employer covenant after all and the New Regime does not expose the Members to an unacceptable risk of their benefits being unfunded. He also confirmed that he considered Lincoln's covenant advice to be within the bounds of what was reasonable and now that stress testing had taken place, considered the New Regime to be sufficiently robust and that Members would benefit from knowing that the Implementation Methodology works.
However, in his opinion, the Illustrative Regime would be better for Members by transferring risk of ultimate underfunding from Members to stronger Participating Employers. He considers that the potential impact of the Trustee choosing an alternative Funding Target (such as self-sufficiency) is untested by Lincoln, which represents a material shortcoming in their analysis and prevents the Trustee from properly considering the impact of a range of potential Funding Targets on covenant and affordability of contributions. He says that an additional shortcoming of Lincoln's work is that he has seen no evidence that they have considered the potential impact on covenant of the Trustee choosing an alternative Recovery Period, which could lead to additional administrative burden and cost to the Trustee and increased strain on a number of Participating Employers. Mr Squires suggests that a practical solution to concerns regarding his Illustrative Regime would be to either only apply Orphan Loading to the strongest Employers, or for the strongest Employers to pay money into an escrow account to cover "at risk" contributions. However, he considers the Trustee's proposals to impose joint and several liability and a 'synthetic s75 debt' against non-statutory Participating Employers to be broadly covenant enhancing and that they should be incorporated into any collection regime.
Further, in the addendum to his report, Mr Squires noted that in his report he had stated that automatic setting of contribution timetables for Employers based solely on covenant strength was not consistent with tPR Guidance. He noted that the changes to tPR Guidance arguably reduce the relative importance of affordability in determining the length of recovery plans. However, he stated that the Implementation Methodology bases any extension solely on covenant, rather than the suite of factors identified by tPR. Therefore he remains of the view that the automatic extension under the Implementation Methodology, while pragmatic, is inconsistent with tPR Guidance and therefore with the Trustee's stated objective to comply with it. Nevertheless, in cross examination he accepted that when setting the Recovery Plan, something which has yet to take place, the Trustee would be able to tailor it in order to comply with tPR Guidance. He also accepts that the revisions to tPR Guidance may result in a situation where the Illustrative Regime is more demanding on Employers than would be suggested by tPR's principles outlined in the Revised CoP3. However, he believes that the Illustrative Regime achieves the outcome of illustrating a potential contribution regime that would be more aligned to Members' "best interests" (i.e. the Trustee's duties) than that outlined in the Implementation Methodology.
Mr Squires' supplemental report is a response to further evidence, in particular the expert evidence of Mr Dewar. Mr Squires understands Mr Dewar to be making two key points: that because Lincoln chose to use a four-grade rating system, a material change in covenant strength could occur without resulting in a change of grading with which Mr Squires agrees; and a Very Strong covenant grading on Lincoln's scale would, in Mr Dewar's view, be difficult to achieve as a consequence of a number of factors including the size of the deficit, the contributions to fund the deficit within a reasonable period and the number of Employers responsible for contributions. Whilst not commenting on Mr Dewar's experience, Mr Squires agrees with Mr Dewar because Lincoln's approach treats covenant as an average of individual employer covenants, rather than an aggregate. However, he concludes that while under the approach adopted by the Trustee it would be difficult to achieve a Very Strong covenant, it could be achieved under different assumptions.
Conclusion in relation to expert evidence
Despite the copious written advice and the lengthy cross examination of the expert witnesses, in fact in closing both Mr Spink on behalf of P&O Ferries and Mr Newman on behalf of Mr Brown sought to distance themselves from the expert evidence. It must be borne in mind that the only issue for the Court is whether the adoption of the New Regime is within the scope and proper exercise of the Trustee's powers. It is not for the Court or any party to suggest other and what they consider better ways in which the purposes of the Scheme and the power can be achieved.
Although it seems to me that the expert evidence was over lengthy and complex, it was of some assistance. In my judgment, the following points can be distilled from it. First, all three of the experts accepted that Lincoln's approach to covenant assessment and its conclusion were reasonable. None of them asserted that Lincoln's methodology and the Implementation Methodology in particular, were unreasonable and in fact, they all agreed that the employer covenant is stronger under the New Regime than it is at present whether on an open or a frozen basis and that the New Regime neither gambles with the covenant nor exposes the Members to unnecessary risk. Furthermore, Mr Squires went as far as to say that the Members would be better off under the New Regime. Further, in fact, none of the experts advocated partial augmentation and for example, Mr Murphy did not disagree with Lincoln's basis for rejecting such a strategy.
Further, Mr Dewar was not cross examined on large parts of his evidence in which he rejected the criticisms which had been raised of Lincoln by Messrs Murphy and Squires. In this regard, I consider that it is important to note that Mr Murphy accepted in fact, that when he wrote his report he had not had sight of many of the relevant documents and that Mr Squires accepted that his Illustrative Regime was a product of his instructions and that the New Regime is a "positive development" from the Members' standpoint.
Criticism of the New Regime and the decision making process
I now turn to the criticisms raised in relation to the proposed New Regime. For the most part, I deal with each such criticism under the heading of the relevant agreed issue. However, Mr Newman's submissions cut across the structure of the agreed issues.
Despite the myriad of detailed points that were taken during the trial it seems to me that it is important to bear in mind that for the purposes of the application which has been made there are only two benchmarks which are relevant. The first is whether any proposed exercise of the power of amendment is, in fact, within the scope of the power itself, is a proper exercise of the power for its purposes and is not a fraud on the power. The second is whether in taking the decision to implement the New Regime and the particular aspects of it taken as part of the whole, the Trustee has not taken into account irrelevant, improper or irrational factors and has not reached a decision which no reasonable body of trustees properly directing themselves could have reached. In this regard, despite the fact that a trustee must not misdirect itself or take account of irrelevant factors, I take particular note of the distinction drawn by Vos LJ in the Cotton v Earl of Cardigan case between allegations that the Trustee has not fulfilled its duty and allegations, if any, that the professional advice taken and reasonably relied upon is in some way defective. With those benchmarks firmly in mind, I will set out the submissions made in relation to each of the agreed issues.
Issue 1 whether it would be proper to amend the Scheme to introduce a new regime under which all Participating Employers (rather than only Current Employers) are liable to fund the Scheme proposed rule 5.2(i)? ("Augmentation")
Issue 2 If the answer to Issue 1 is "yes" whether it would be proper for each Participating Employer's liability under the New Regime to be calculated by reference to the percentage of the liabilities of the Scheme that is attributable to the pensionable service of Members whilst employed by that Participating Employer proposed rule 5.2(iv) (a) (d)?
Mr Spink on behalf of P&O Ferries accepts that it is plain that hypothetically the scope of the amendment power is sufficiently broad to enable an amendment of the type envisaged in Issue 1. This accords with the decision of Briggs J in the 2009 Proceedings. However, Mr Spink points out that the Trustee declined to put any proposed Rules before the Court on that occasion and accordingly, he says that one does not start from a position of special legitimacy attached to Full Augmentation. In fact, he says that the propriety of the decision to widen the pool of Employers liable to fund the Scheme to include all Participating Employers (Full Augmentation) is open to criticism on three grounds. First, he says that it fails to bring about any significant strengthening in the overall employer covenant (the "overall covenant"); secondly, he says that it is inherently flawed, because it consists of two supposed objectives which are bound to fail and which therefore should never have been decided upon; and which depend upon a complex web of provisions the majority of which would be unnecessary were it not for the initial strategy, ("the Bootstrap"); and thirdly, it results from a process in which the Trustee has failed to obtain sufficient evidence in relation to the capacity of "Very Weak" or "Fairly Weak / Neutral" Participating Employers to meet their required deficit contribution; the impact upon the overall covenant of the five "Very Strong" Participating Employers; and/or the potential for partial augmentation and its impact on the overall covenant ("Lack of relevant information").
(i) The Overall Covenant
First, Mr Spink submitted that the avowed purpose of the Trustee in implementing Full Augmentation, was to eradicate the cross-subsidy inherent in the 2001 Regime, which is not itself a purpose of the Scheme. He accepts that its removal would be permissible if it were a facet of delivering the main purpose of the Scheme in the sense of delivering the benefits. However, he points out that the New Regime itself involves a large amount of cross-subsidy and that it is not necessary to deliver the benefits. Secondly, Mr Spink points out that Full Augmentation is in fact a fiction. He says that the indications are that many Participating Employers will not or may not be able to pay which makes Orphan Loading and the Implementation Methodology necessary. This is illustrated by the conclusion in Mr Murphy's report that upon Full Augmentation without more, 44.5% of the deficit liability will be attributed to Weaker Participating Employers classified as "Very Weak", "Dissolved", "Not rated" and "No information".
Further, Mr Spink suggests that the Trustee has failed to decide to use the amendment power in order to bring about a significant improvement in the overall covenant, or even to try to do so. He went on to add that he considered that it would be bizarre for the Trustee to fail to try to create such a situation.
(ii) The Bootstrap
Under this head, Mr Spink says that a number of the more complex elements of the New Regime are only necessary because of the decision to apply Full Augmentation and all the more so when its effects are then exacerbated by what he terms retrospective "Re-Apportionment". He characterises the proposal as: fully augment the pool of contributing Employers so that all Participating Employers are included within it; attribute a percentage share of the deficit to each Participating Employer; apply a retrospective credit to each Participating Employer's share on the basis of contributions made by them under the Current Regime; in the first year, add 54% to each Participating Employer's Percentage Share on account of anticipated orphan liabilities; potentially adjust the percentage share of some Employers downwards to allow for the fact that they cannot or may not be able to pay it or all of it without the Trustee incurring excessive cost or time; and potentially increase the percentage share of some other Employers to take account of the fact that others will not be able to pay all or part of heir share of the deficit.
(iii) Lack of relevant information
As I have already mentioned, Mr Spink says that Full Augmentation was never a necessary part of any new deficit repair regime. He points out that one aspect of Full Augmentation is the allocation of a substantial portion of liabilities to dissolved Employers. Mr Spink suggests that it is a bizarre approach to fulfilling the main purpose of the Scheme particularly when other options have not been considered. The Trustee did not obtain any evidence on the impact on various potential 'partial augmentation' arrangements and only considered the issue at all at the Eighth Meeting. The minutes of that meeting record that it was "noted" in October 2012, when the principle of Full Augmentation had been decided upon by the Trustee, that it had not been "necessary " to consider partial augmentation. Mr Spink says that this remains unexplained and that it was irrational not to have considered the alternatives properly.
Mr Spink accepts that a partial augmentation approach would have required the Trustee to make judgments "as to who is in and who is out" but submitted that the Trustee could have taken advice on this issue and it should have been guided by the need to fulfil the Scheme's main purpose. He says of the paper on partial augmentation prepared by Lincoln that it was after the event and did not inform the Trustee's decision making process.
Further, Mr Spink says that Lincoln was not asked by the Trustee to provide (and did not provide) advice that was close to sufficiently detailed on the impact on the overall covenant of the five (or four) Very Strong Employers after the first stage of the deficit repair mechanism took effect, that is, after the full augmentation of the pool. He also says that an additional lacuna in the material considered by the Trustee prior to making its decision was evidence and advice concerning the capacity of the weakest Employers to pay the contributions required as a result of their deficit share and the potential practical effect on them if they were not able to do so. On the basis of Full Augmentation alone, 44.5% of the deficit liability would be attributed to Participating Employers classified as "Very Weak", "Dissolved", "Not rated" and "No information". As a result of these deficiencies, Mr Spink submits that the Trustee could not and did not properly or fully consider the potential disadvantages of Full Augmentation, nor the potential alternatives to it. He says that it is an improper purpose to decide to eradicate cross-subsidy whilst closing one's mind to considering other alternatives.
Further, Mr Spink points out that in cross examination Mr Brookes agreed that the Trustee had decided in principle in 2007 to introduce Full Augmentation and that the Trustee's approach was to apply Full Augmentation unless there was reason to conclude otherwise but that it did not consider alternatives nor ask Lincoln to do so. However, there was no expert evidence available to the Trustee in 2007 or for that matter in 2009. He says that thereafter, the Trustee went about obtaining such expert advice to confirm that Full Augmentation would improve the overall employer covenant.
Furthermore, he says that from June 2012, Lincoln having replaced "not materially detrimental" in the draft report with "at least as good" despite the changes sought by Mr Cullen, the Trustee proceeded on the revised basis that the covenant advice needed only to confirm that the New Regime including the Implementation Methodology would "at least maintain" the overall employer covenant rather than enhance it. He also submits that the failure to reveal Mr Cullen's requests and the material change was remarkable. He says that Mr Brookes' evidence that he cannot recall any discussion with Mr Cullen about this and his attempt to justify not telling the Board on the basis that it could be likened to an updating as new information becomes available was one of the more unreliable parts of Mr Brookes' evidence. The central point upon which Mr Spink relies is that the Board was not informed that Lincoln was not willing to state that there would be an improvement in the employer covenant and there was no discussion about the change in objective, in other words abandoning the intention to improve the covenant. Mr Spink also makes the point that Mr Brookes accepted in cross examination that the advice at that stage did not support that objective. Mr Spink also points to the table produced by Mayer Brown to which I referred and says that it was misleading.
In addition, Mr Spink points to the fact that Mr Brookes could not recall any discussion of Lincoln's question posed in their slides for the September 2012 meeting as to whether the Trustee wished to enhance rather than maintain the employer covenant. Further, there is no other evidence of such a discussion. He submits that this was irrational, a crucial oversight on the part of the Trustee and evidence of an improper purpose. He also says that the characterisation of the decision to proceed with Full Augmentation in October 2012 as "in principle" should be treated with care. He says that if it were truly in principle, it would have been re-visited but that there is no evidence of this.
Mr Spink also highlights that: Mr Brookes accepted that he had understood that partial augmentation in the form of targeting a top slice of Historic Employers with strong covenants would have been likely to have a positive effect on the covenant; the Lincoln paper referred to the need for a decision upon whether augmentation should be limited to a top slice of Employers but he could not recall a discussion on the topic; the decision to instruct Lincoln on the basis of Full Augmentation had been taken by the Litigation Committee; and that the Trustee Board had no information on a partial augmentation regime. Accordingly, Mr Spink says there was a procedural failure and it was irrational of the Trustee to exclude investigation of the partial augmentation route.
Further, he points out that in July 2014 in response to the concerns raised on behalf of P&O Ferries, only one form of partial augmentation was considered and then no expert assessment was provided to enable the Trustee to compare the effect on the overall employer covenant of the proposed regime as against the Current and the New Regime. Mr Spink submits that the Trustee failed to instruct Lincoln to address the issue of partial augmentation from the view point of improving the covenant strength above that which could be achieved by Full Augmentation and therefore the advice received was insufficient.
P&O Ferries' position in relation to Issue 2 is subject to all of the submissions made on their behalf in relation to Issue 1. In addition, it is said that the level of the discretion which the Trustee proposes to reserve to itself in relation to contributions is excessive.
Mr Tennet's response to Mr Spink
In summary, Mr Tennet submits that Mr Spink's case in this regard is bound to fail. He points out that the New Regime includes within in it all the advantages of partial augmentation without the need for the Trustee to seek to draw a line between Employers. He also pointed out that none of the experts advocated partial augmentation and that Lincoln in their July 2014 paper prepared for the Eighth Meeting identified a number of drawbacks and did not advocate Partial Augmentation. In fact, they advised that they "cannot see from a covenant perspective any reason why partial augmentation ought to be "adopted"." Neither Mr Squires on behalf of Mr Brown nor Mr Murphy on behalf of P&O Ferries suggested that there was any fault in that advice.
Mr Tennet also points out that the minute for the Eighth Meeting makes clear that the Lincoln paper was considered and that Lincoln gave further oral advice at the meeting. Accordingly he says, it cannot be said that the advice was not properly considered by the Trustee. In fact, he says that covenant advice was received on six partial pools: not making an amendment and keeping the 2001 Regime; Augmentation only; Re-Apportionment to 2010, to 2007 and to 2001; and all of the those variables minus two C2 Employers; minus twenty-one C2 Employers; excluding dissolved Employers from the pool; excluding eight discharged Employers; and the effect of excluding the Very Weak and dissolved Employers.
Mr Tennet says that Mr Brookes' evidence is clear that the key decisions were made at the Third Meeting with the benefit of professional advice and had not been predetermined in any way. This was not challenged in cross examination. As to the criticism that the Trustee changed its objective in 2012, Mr Tennet points out that Mr Murphy agreed that it was common sense to assume that Augmentation would be covenant enhancing. Furthermore, Mr Tennet submits that the overall conclusion in Lincoln's draft report was that Augmentation was "covenant enhancing" and that that was what was recorded in the Minutes of the 26 June 2012 meeting. It was consistent with the advice contained in the Implementation Methodology paper dated 9 October 2012 which recorded that on a last man standing basis both Augmentation and reapportionment "will tend to be covenant enhancing" and that Augmentation with prospective reapportionment would be likely to be at least marginally covenant enhancing.
Further, Mr Tennet says that the approach taken by the Trustee in relation to covenant advice on Re-Apportionment was entirely consistent with the advice which it had received from Mr Nugee. He had advised that the Trustee would "need to know what the impact would be on the strength of the overall employer covenant if the new regime were to take into account deficit contributions already paid" and went on to add that "if the Trustee receives employer covenant advice that taking into account deficit contributions paid since 2001 would have no adverse effect on the strength of the overall employer covenant, it is the right thing to do". The advice sought included an assessment of the effect on the strength of the overall Employer covenant of the New Regime taking into account deficit contributions already paid. Mr Tennet submits that this is not an irrational or flawed process and given that the New Regime with the Implementation Methodology is in fact, covenant enhancing is devoid of merit.
In relation to the submission that Mayer Brown's table is misleading, Mr Tennet pointed out that it was sent to Lincoln and that both Mayer Brown and Lincoln were present at the relevant meetings and made joint presentations at the Third Meeting.
Mr Newman's attack upon the New Regime
Before stating my conclusions in relation to Mr Spink's submissions under Issues 1 and 2, it is important also to set out the nature of the approach taken by Mr Newman on behalf of Mr Brown. Whilst supporting Mr Spink's approach in part Mr Newman takes a broader and more fundamental approach to his criticism of the New Regime. It is not limited to a specific Issue and I deal with it here because it applies generally to the central issues of Augmentation and Re-Apportionment (Issues 1, 2 and 4) as well as other additional elements of the New Regime.
Mr Newman submits that the Trustee has made a fundamental error in its approach. He says that by the New Regime it has sought only to maintain rather than to improve the strength of the employer covenant and that the purpose of eliminating cross-subsidy amongst other things benefits Current Employers and not the Members. As a result, Mr Newman says that the Trustee seeks to exercise the power of amendment for an improper purpose being for the benefit of Current Employers and not for the objects of the power, that it has failed to act in the best interests of the Members of the Scheme and in exercising its discretion has taken into account factors which are irrelevant and omitted to consider all those which are relevant.
(i) The Beneficiary Principle
Mr Newman submitted that the Trustee has a fiduciary duty to act in the best interests of the beneficiaries of a trust. He referred me to Cowan v Scargill [1985] Ch 270, a case concerning the exercise of the investment power of an occupational pension scheme. It is not in dispute that the exercise of the power of amendment in this case is also administrative and therefore, Mr Newman says that this case is closely analogous. In particular, he referred me to the following passages from the judgment of Sir Robert Megarry V-C at 286H to 287B and 292D-E:
"The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries. This duty of the trustees is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests."
. . . . . .
I reach the unhesitating conclusion that the trusts of pension funds are in general governed by the ordinary law of trust, subject to any contrary provision in the rules or other provisions which govern the trust. In particular, the trustees of a pension fund are subject to the overriding duty to do the best that they can for the beneficiaries . . ."
He went on at 294H to 295A:
"Some of the evidence filed by the defendants tended to show that the prohibitions [i.e. the proposed investment restrictions] would not be harmful to the beneficiaries, or jeopardise the aims of the fund and that some pension funds got along well enough without any overseas investments. Such evidence misses the point. Trustees must do the best they can for the benefit of their beneficiaries, and not merely avoid harming them. . . . ."
Mr Newman contends that the Trustee's claim that the Scheme covenant will not be damaged by the proposed exercise of the amendment power is similarly beside the point and that the Trustee has not sought to act in the best interests of the beneficiaries by seeking to exercise the power of amendment in a manner which would strengthen the covenant. In this regard, Mr Newman also took me to Buttle v Saunders [1950] 2 All ER 193 and Re Charteris [1917] 2 Ch 379, subsequently followed and applied in Martin v The City of Edinburgh District Council [1989] 1 PLR 9, Harries v Church Commissioners for England [1992] 1 WLR 1241 and finally to the Cotton v Cardigan case.
Re Charteris was concerned with an express power to postpone sale in a will trust. It was held that it was the trustees' duty to exercise the discretion in a way which was in the interests of the estate as a whole and not to consider the interests of either one or other of the beneficiaries as paramount. Buttle v Saunders was concerned with whether trustees holding a property on statutory trusts for sale were under a duty to "gazump" where they received a higher offer before the sale was complete. It was held that they were under an overriding duty to obtain the best price for the beneficiaries. Martin v The City of Edinburgh District Council, a Scottish case, was concerned with whether trustees were acting in breach of trust in having decided not to invest in South Africa. Two questions were considered by the Court, the first of which was whether the Council had given proper consideration to what was in the best interests of the beneficiaries. At [32] Lord Murray made reference to the "obvious duty of trustees to apply their minds to the best interests of the beneficiaries as a major and separate issue." At [28] he had set out what he discerned to be the principles in Cowan v Scargill in the following way:
" . . . . (1) in a trust to provide financial benefits the trustees have a duty to secure the best financial interests of the trust within the law in accordance with the trust purposes; (2) in such trusts the foregoing duty includes a duty to invest the trust assets to the best financial advantage; (3) as part of that duty the trustees have a duty not to fetter their investment discretion by ab ante decisions; (4) the duty not to fetter investment discretion includes in particular a duty not to fetter it for reasons extraneous to the trust purposes, including matters of political or moral judgment as distinct from financial or economic judgment (though these may interconnect or overlap); and (5) if the trustees do apply an ab ante policy whether general or particular they do not protect themselves from breach of trust by considering which substitute investment will serve the trust as well or better than the original."
Harries v Church Commissioners for England was also concerned with investment policy in which the Vice Chancellor Sir Donald Nicholls considered that his views were in accord with the decision in Cowan v Scargill .
In addition, Mr Newman referred me to extracts from Thomas on Powers, Pettit, Finn and Lewin all of which he says treats the "best interests" of the beneficiaries as a separate duty. He also referred me to Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342, a decision of the Federal Court of Australia. It was concerned with breaches of statutory duty which included the duty to act in the best interests of the members of a trust. In a lengthy judgment Murphy J considered the meaning of what he described as the best interests duty by reference amongst others, to the cases to which I have been referred, the extra judicial statement of Lord Nicholls to which I shall refer below and an extract from Thomas on Powers in which Professor Thomas describes the duty as "foundational" or an "umbrella" duty. At [484] he concluded:
" . .. that the imposition of a duty to act in the best interests of the members in ss601FC(1)(c) and 601FD(1)(c) does not extend its content beyond previously understood general law boundaries. I see the best interest duty as foundational and operating in combination with other duties."
If he is wrong about the existence of a separate duty, Mr Newman says that the matter should be approached through the prism of the proper purpose principle. He submits that in defining the purpose as the delivery of the benefits under the Scheme, enabling the interests of the Employers to be taken into account as long as they do not conflict with the purposes of the Scheme in the sense of the delivery of the benefits, the Trustee has failed to take account of the objects of the power itself, the members and beneficiaries. Accordingly, the power must be exercised exclusively in their best interests and not for anyone else. He says that it is not open to the Trustee to characterise the purpose of the Scheme in an abstract manner and as a result ignore the objects of the power. In this regard, he referred me to Topham v Duke of Portland 46 ER 205, a case concerning a purported exercise of a power of appointment with the intention of benefiting a non-object. Not surprisingly it was held that the power was created for the benefit of the objects within the range of the power and could not be exercised to benefit others.
He says that the purpose of the power is inextricably linked to its objects. Further indicators are the nature of the trust property itself, the nature of the power and its terms. The trust property is the Employers' debt obligation to the Scheme which secures the accrued rights of the members. It is not in dispute that the nature of the power is administrative and the terms of the power are that of a unilateral amendment power in the hands of the Trustee. Mr Newman submits that there is nothing in the terms of the power itself to indicate any need to take the interests of Employers into consideration. Furthermore, once Employers were required to fund the deficit on a buy out basis on a winding up, any power which they may have had to threaten a winding up was neutralised and they were left without a negotiating position. Nevertheless, he says that the Trustee has taken no account of the unilateral nature of the power.
Furthermore, he says that even if the proposed exercise of the power furthered the proper purposes, it would not save an exercise which also benefits a non- object. Mr Newman says that the proposed amendments benefit Employers and therefore, cannot be saved. He goes as far as to say that it is a fraud on the power and referred me to Re Dick [1953] 1 Ch 343 where a power of appointment exercised in favour of an object of the power for the purposes of benefiting a non-object was struck down.
In this regard, he made six points: (i) the main purpose of the New Regime is to eradicate cross-subsidy; (ii) Mr Brookes accepts that the eradication of cross-subsidy benefits the Current Employers; (iii) He also accepts that the purpose of the eradication is not to benefit members; (iv) The Employers are not objects of the power; (v) Any benefit to Members is incidental and does not detract from the foreign purpose; and (vi) It is immaterial that the intention of the Trustee was proper. The presence of the improper purpose he says is fatal. In addition to cross-subsidy, Mr Newman drew attention to the position since 2010 which he says is even more stark. He says that the contribution holiday which will be rolled into the new deficit and the treatment of the monies held in escrow are clearly of financial benefit to the Employers.
However, Mr Newman says that there are three circumstances in which the interests of the Employers could be taken into account, none of which apply here. They are (i) where the Employer is the object of the power, for example where there is a return of surplus; (ii) where the Employer's interests inform the Trustee as to the best interests of the members and are incidental to those interests, for example, where contributions would be so onerous that they would put the Employer out of business; and (iii) where there is a tie break in which both scenarios are in the best interests of the Members.
Further, he says that the situation in this case is a world away from that under consideration in Edge v Pensions Ombudsman [2000] Ch 602 in which Chadwick LJ 635D stated that the interests of Employers could be taken into account. That was a case concerning the distribution of surplus in which as a result, benefits had already been fully provided for. It also concerned a bilateral amendment power exercisable only with the consent of three quarters of the Employers.
(ii) Mr Nugee's advice
Mr Newman went on to point out what he says are flaws in Mr Nugee's advice to the Trustee. These include the fact that no mention is made of Cowan v Scargill , the view that trustees have to bear in mind the legitimate interests of the sponsoring Employers when exercising an amendment power and that "the interests of the beneficiaries are . .. not always aligned with the purpose of a pension scheme." Mr Newman says that Mr Nugee also failed to point out that the Employers were not objects of the Scheme and did not emphasise that where there are a range of purposes of the Scheme it is the duty of the Trustee to choose what is in the best interests of the members. He also criticised what he described as Mr Nugee having taken the 2001 Regime as a benchmark and the assertion that imposing deficit contributions only on the ten strongest Participating Employers would not be an "appropriate or rational way of allocating deficit contributions." He also draws attention to the advice that the Trustee is compelled to consider whether it ought to take steps to reduce or eliminate additional substantial cross-subsidy inherent in the 2001 Regime and the statement that it is "difficult to conclude that the Scheme was established with the purpose of enabling the employment costs of one Participating Employer to be subsidized by another . ." Mr Newman says that there is nothing in the Trust Deed and Rules itself which requires one to come to such a conclusion.
As a result, Mr Newman says that Mr Nugee's advice was inadequate and as a result the Trustee misdirected itself because Mr Nugee advised that where the Trustee was satisfied that there were various alternative acceptable ways of returning the Scheme to solvency, the Trustee had a discretion as to which way it chose. He says that in fact, a "tie break" situation only arises where all of the alternatives are in the best interests of the members. Lastly, he drew attention to Mr Nugee's reference to Urenco UK Ltd v Urenco UK Pension Trustee Company Ltd & Anor [2012] PLR 307 and in particular, to Warren J's conclusion at [45] that when exercising an amendment power which he described as being vested in the trustee, it should take into account not only the interests of all of the beneficiaries but also those of the Employer. In fact, as Mr Tennet pointed out the exercise of the power of amendment was subject to the consent of the Employer. I should say at this stage, that I consider that the actual nature of the power of amendment renders Warren J's conclusion all the more powerful and I reject Mr Newman's criticism of Mr Nugee in this regard.
(iii) Mr Tennet's advice
Despite the fact that the Trustee's decision is not based upon the advice of Mr Tennet, Mr Newman also made lengthy submissions about Mr Tennet's advice to the Trustee dated 7 March 2012. He refers to the fact that Mr Tennet made reference to the best interests of the members and used that term in conjunction with the proper purposes of the Scheme. Mr Newman seeks to draw a distinction between that advice and that of Mr Nugee and the position of the Trustee before the Court. However, as it is not in dispute that the Trustee relied upon the advice of Mr Nugee and not that of Mr Tennet, I do not propose to refer further to the details of that advice and the submissions made. It seems to me that save for the forensic point which Mr Newman sought to make in the light of the fact that he says that Mr Tennet now seeks to espouse what he describes as different advice before the Court, in the light of the fact that the advice was not relied upon by the Trustee, the issues raised are irrelevant. I also consider the alleged forensic point to be neither here nor there.
(iv) Mr Newman's concerns
In addition to his main submission that the New Regime is not in accordance with the best interests principle and accordingly, must be rejected, Mr Newman is concerned that the New Regime may fall down in practice. In particular, he says that there are four features which are not in the members' best interests. They are what he describes as its uncertain nature, the application of the principle of Orphan Loading, the contribution holiday and re-apportionment, (which is dealt with by Mr Spink on behalf of P&O Ferries under Issue 4). I will take each in turn. However, I will make my findings in relation to them under the appropriate Issue heading.
In relation to the uncertain nature, Mr Newman drew attention to the fact that there are some decisions yet to be made. The Implementation Methodology contains numerous blanks which depend upon other factors yet to be determined including the length of the Recovery Period and the funding target to be adopted. These will affect covenant strength. Mr Tennet's response on behalf of the Trustee is that such flexibility is appropriate and that the Lincoln papers dated January and July 2014, the first of which was on the basis of a £200m deficit and a ten year recovery Period and the second of which adopted a £600m funding target and a 3 year Recovery Period (the parameters advocated on behalf of Mr Brown), both resulted in a Fairly Strong covenant. Mr Newman says that nevertheless, the Trustee has not stress tested the Implementation Methodology and in fact, has no intention of adopting the parameters which he advocates. He says that even if I am against him on the law I should not approve the Trustee's proposal unless assumptions are adopted which are no less beneficial to members than those suggested by Mr Squires. Lastly, he points out that despite the continued development of the elements of the New Regime no updated legal advice was obtained after February 2013.
In relation to Orphan Loading, Mr Newman characterises it as manipulating liability share in order to create the desired covenant strength. He says that it is not a genuine risk management system. Mr Newman says that the first assumption as to a 33% risk of non-collection from very weak Employers is insufficiently cautious and does not err on the side of the Members. It assumes that 100% will be collected from Employers categorised as Fairly Weak over a period of 10 years despite the fact that those Employers may not remain in the same category and that the ten year period may not dovetail with the Recovery Period. He reminded me that in cross examination Mr Dewar stated that Lincoln had reached their conclusion on recovery based on the likelihood of wider group support for weaker Employers whilst nevertheless disregarding Employer driven actions for the purposes of covenant assessment.
The second phase of the Orphan Loading process occurs after year 1 when liabilities are re-adjusted on the basis of the experience of recovery. Mr Newman raises three concerns. First he says that the figures assume a 10 year Recovery Period which may not be the case. Covenant enhancement therefore, depends upon the length of the Recovery Period which is an unknown. Secondly, Mr Newman points out that by its very nature, Phase 2 takes effect at the earliest in year two. The delay involved increases the risk of non-collection because it increases the opportunity for Employers to take steps in order to seek to avoid their contribution obligations. Thirdly, Mr Newman points to the reference in the Implementation Guide to dialogue between the Trustee and the Employers and the fact that if an Employer refuses to agree to a payment regime and to pay, there is no explicit mechanism by which that unrecovered obligation can be orphan loaded at Phase 2.
Mr Newman also points to the effect of the suspension of contributions since December 2012 which has resulted in a £47m increase in the deficit in the Scheme. It is proposed that this is rolled into the overall deficit. He says this amounts to replacing cash in hand with a long term "IOU" from a wider and more diverse group of Employers and cannot be in the best interests of the members.
Lastly, he dealt with Re-Apportionment, something which Mr Spink has dealt with in more depth to which I refer under the heading of Issue 4. Mr Newman says that re-apportionment is purely in the interests of Employers and is contrary to the interests of Members. He points out that after re-apportionment 63% of the deficit is borne by Employers with a covenant rated Very Weak or below which he says is of clear benefit to Current Employers and contrary to that of the Members. He aligns himself with P&O Ferries in this regard and goes on to say that the Trustee's reliance upon the Implementation Methodology is misplaced. Without Re-Apportionment, he says that there is no need for Implementation Methodology at all.
Opposition to Mr Newman's approach in relation to the best interest principle and his response
In his Opening, Mr Tennet contended that the authorities were contrary to Mr Newman's legal analysis. In particular, he says that Edge v Pensions Ombudsman is against Mr Newman and that there is no indicator that the Employer's financial interests are only relevant to the extent that the members are interested in the Employer's financial health. Further, he referred me to the judgment of Chadwick LJ at 627C, where he states the following:
"The matters to which we have referred are not to be taken as an exhaustive or a prescriptive list. It is likely that, in most circumstances, pensions trustees who fail to take those matters into account will be open to criticism. But there may well be other matters which are of equal or greater importance in the particular circumstances with which trustees are faced. The essential requirement is that the trustees address themselves to the question what is fair and equitable in all the circumstances. The weight to be given to one factor as against another is for them."
He also referred to Law Debenture Trust v Lonrho [2003] PLR 13 (a case on power to augment benefits) at [3], Patten J recorded Mr Nugee's submission as follows:
"It became apparent early on in the submissions of Mr Nugee QC on behalf of the Company that even if, on the true construction of the Scheme, the trustee has prima facie an unfettered power to augment benefits, the Company would wish to contend that those powers should not be exercised on a narrow basis, having regard only to the interests of the members and other beneficiaries. I was referred to various authorities, including the decision of the Court of Appeal in Edge v Pensions Ombudsman (2000) Ch 602 , (1999) 4 All ER 546 , as supporting a requirement for the trustee to exercise its powers so as to further the purposes of the Scheme as a whole, thereby bringing into consideration the legitimate interests and expectations of employee and employer alike. At the highest level of generality I doubt whether this statement of principle is likely to attract dissent from any of the parties represented before me. . . "
At [31], Patten J went on:
"I do not accept that once the trustee decides to exercise the [power to augment] in circumstances which require additional contributions in order for the increase to be funded, the employer and the members are then free to choose whether or not to comply with those terms. The safeguard against the unreasonable imposition of an additional burden on either party is the requirement that the power to impose terms should be exercised on actuarial advice and must of course be exercised in a fiduciary manner. When no surplus exists, the trustee will have to satisfy itself on proper grounds that a reason exists to utilise the power over and above the annual review, and that a proposed increase which can only be funded by additional contributions is justified, having regard, amongst other things, to the burden which will be imposed on employer and member alike."
Mr Newman says that this is a case in which the Employer's interests were taken into account as a matter of construction of the power itself and as a result of a surplus the Employer was a legitimate object of the power. He points out that there is only reference to the burden upon the Employer and that a situation which would jeopardize further contributions would not be in the Members' interests. He says therefore that there are circumstances in which the interests of the Members and the Employers elide but that this is not one of them. In response, Mr Tennet asks rhetorically how a duty to act solely in the best interests of the Members can depend on whether there is a surplus or not, given that the existence of a surplus is dependent to a great extent upon the assumptions applied by the actuary.
Mr Tennet also referred to Smithson v Hamilton [2008] 1 WLR 1453 , in his written opening. That was a case concerned with an alleged mistake in pension scheme documentation and the application of the principle in In Re Hastings Bass as it then was. In the context of discussion of amendments generally, the judgment of Sir Andrew Park records the following:
"101 That is not to say that, if the trustees had happened to notice a feature of the rules (like rule 3.5.2.1 ) which appeared to be unintentionally onerous upon PFPL, they (the trustees) would have been obliged to keep quiet about it. If they thought that something had gone wrong in the drafting to the detriment of PFPL though not of members of the scheme, they were fully entitled to draw it to PFPL's attention. Mr Newman has said, in his written reply to Mr Stallworthy's submissions that "no decision of the trustees should be made without the employer's interests being considered and taken into account". I accept that, but I do not think that it has any impact on this case."
In fact, Sir Andrew Park went on at [102] as follows:
"For all that trustees ought not to disregard the impact on the employer of something which they contemplate doing . . . . it must surely be accepted that the trustees are in place essentially to look after the interests of the members of the scheme, not of the employer."
Mr Tennet also drew attention in his written opening to Phoenix Venture Holdings v ITS Ltd [2005] PLR 379 which was concerned in part with a challenge to a trustee resolution in connection with the exercise of a power of apportionment of a s 75 debt. The advice received by the trustee from Leading Counsel is recorded in the Judgment at [21]. Amongst the matters that the trustee was advised to consider were the adverse effect of the apportionment on the entity (the Company) to whom the debt was apportioned and the fairness of the apportionment. At [68] Sir Andrew Morritt V-C said that if the issue had arisen, he would have been prepared to order a trial of the issue of whether "proper consideration" had in fact been given to "the legitimate interests of the Company." Also, at [48] in connection with an earlier exercise of a power of amendment, it is recorded that Counsel for the Company contended that in exercising the power to amend "the Trustee was bound to have regard to the interests of the Company." Sir Andrew Morritt V-C said "I agree". In this regard, Mr Newman points out that it is not suggested that the interests of the Employer trumps those of the Members and in fact, the Members' interests were not directly engaged because the Employer was not able to pay the debt in any event. He says therefore, that it takes the matter no further forward.
Mr Tennet also relies upon the Rule 29.2 of the Scheme and the observations made by Patten J in the MNOPF case at [50] upon the very similar Rule to be found in the Officers' Scheme. The Rule itself is in the following form:
"If, as a result of the Actuary's report
it shall appear that there is a deficiency or anticipated deficiency in the Scheme's resources, the Trustees shall consider what if any action, having regard to any recommendations made by the Actuary in his report, should be taken either by way of increasing contributions or decreasing benefits to render the Scheme solvent. If necessary, the Trustees shall take such steps as are hereinafter laid down for amendment of this Deed and the Rules, or if the deficiency or anticipated deficiency cannot be made good, for the winding up of the Scheme."
Patten J's observations are as follows:
"50 The answer to Mr Nugee's points about possible unfairness [to a certain class of employers] is that the Trustee is given a discretion under Rule 29.2 as to how to deal with the problem of a deficiency, and it can exercise that discretion in a way which takes into account any well-founded arguments [from those employers] that the imposition of liability for additional contributions would be either unjust or disproportionate."
Mr Tennet says that if in approaching how to address a disclosed deficit the Trustee was required not to take into account the interests of Employers Rule 29.2 is drafted in a remarkable way. In addition, he says that the reference to the interests of the Employers in Rule 30.4 which is concerned with the withdrawal premium, is an indicator that such interests should be taken into account here. With regard to the MNOPF case, Mr Newman says that the case was only concerned with construction and that the propriety of the amendment itself did not arise. He also points out that Arden LJ made clear in the 2011 Court of Appeal decision that the construction of the Rules should be approached without any particular predisposition. Mr Newman says therefore, that the terms of the Scheme give no support for a construction of the amendment power which would take into account the interests of the Employer.
Mr Tennet also referred to two cases concerned with treatment of surplus. In Thrells v Lomas [1993] 1 WLR 456 (where the discretion was surrendered to the Court) Sir Donald Nicholls V-.C. took into account inter alia the source of the surplus and the financial position of the Employer in deciding how to exercise the discretion in respect of surplus. Secondly, in Alexander Forbes v Halliwell [2003] PLR 269 the Court was concerned with surplus in the context of winding up. At [22] Hart J recorded submissions from Mr Newman and then commented on them as follows:
"Secondly, in deciding that the appellant was 'in effect expecting the members to meet part of the employer's obligation' and that this could not 'be said to be acting in the best interests of the members', it was submitted that the Ombudsman had overlooked the fact that in exercising its discretion over surplus the trustees were not bound solely to consider the interests of the members, but were entitled and indeed bound to consider the interests of the employers as well: indeed, if its obligation were solely to consider the interests of the members it was difficult to see how any surplus could have been allowed to be returned to the employers at all
.
In my judgment those criticisms of the ombudsman's determination are justified
the essential question was how much of the surplus should be used to augment members' benefits and how much should be allowed to go to the employers."
Mr Newman submits that both are concerned with surplus and therefore, different considerations apply.
Finally, Mr Tennet contends that the alleged overriding duty to act in the best interests of beneficiaries is inconsistent with the analysis in ITS v Hope [2009] PLR 379. In that case, a question arose as to whether the power to buy out beneficiaries' benefits could be exercised to confer an external financial benefit on certain Members to the exclusion of others placing the Scheme in a position in which it was unable to meet the benefits of the remaining Members. It was held that the powers of the scheme had to be exercised for the purposes for which they were conferred and accordingly, could not be exercised in the manner proposed even though it might be in the Members' best financial interests.
He also drew attention to what he says are the absurdities of Mr Newman's argument. He says for example that if the best financial interests of the members are always paramount, in schemes where the trustee has unilateral power to augment benefits, the trustee would always conclude that it should do so if the Employer could afford it and where the trustee has a unilateral power of amendment, the trustee would inevitably use the power to remove any non-entrenched feature of the scheme that protected Employers' interests or limited members' rights and the trustee would always be under a duty to seek the immediate repair of an entire deficit, if necessary by driving the Employer into insolvency where benefits were no longer accruing. This he points out is contrary to tPR Guidance. Mr Newman submits that in the circumstances of this Scheme the consequences are far from absurd.
Mr Simmonds on behalf of International Marine supports Mr Tennet's position. He submits that Mr Newman's formulation of the duty of the Trustee to act solely in the best interests of the Members is a distortion of the relevant principles. He says that the best interest principle is not separate from the proper purpose principle and adds nothing to it. He says that it is clear from Cowan v Scargill that the purpose of the trust defines what the best interests are and that they are opposite sides of the same coin. He says that this approach is supported by the way in which the matter is dealt with in Harries v Church Commissioners and in Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) in which the principle is described as a portmanteau.
Both Mr Simmonds and Mr Tennet also referred me to an extract from an article by Lord Nicholls in "Trustees and their broader community: where duty, morality and ethics converge", (1995) 9(3) TLI 71:
"Benefit and best interests are really interchangeable expressions. Both have a wide and elastic but not unlimited meaning. In this context, each requires an examination of the object with which the trust was established. To decide whether a proposed course is for the benefit of the beneficiaries or is in their best interests, it is necessary to decide first what is the purpose of the trust and what benefits were intended to be received by the beneficiaries. Thus, to define the trustee's obligation in terms of acting in the best interests of the beneficiaries is to do nothing more than formulate in different words a trustee's obligation to promote the purpose for which the trust was created. "
Mr Simmonds also submits that Mr Newman's use of "objects of the trust" as a synonym for the beneficiaries is inaccurate. Rather, he says, it is a synonym for the purpose which in the context of a pension scheme is the provision of benefits as part of a commercial remuneration structure. He says that this is the way in which the term "object" is used in Duke of Portland v Topham (11 E.R. 1242) and referred me in this regard to the judgment of the Lord Chancellor at [54] at which he states:
"
the settled principles of the law upon this subject must be upheld, namely, that the donee, the appointor under the power, shall, at the time of the exercise of that power, and for any purpose for which it is used, act with good faith and sincerity, and with an entire and single view to the real purpose and object of the power and not for the purpose of accomplishing or carrying into effect any bye or sinister object . . ."
He also points out that the Members themselves are not entitled to the entirety of the fund. They have limited interests. He submits that the Trustee is acting for the purposes/object of the Scheme by seeking to fund the benefits under the Rules and the continued health of the Employers is consistent with that proper purpose. Mr Simmonds points out that this does not mean that the Scheme is without an "object" in the sense of persons in whose favour the Court can decree performance of the trust. This is the essence of the "beneficiary principle", first made apparent in Morice v Bishop of Durham (1804) 9 Ves 399. In this regard he referred me to paragraph 8.148 of Underhill & Hayton's "Law Relating to Trusts and Trustees" 18th ed, at which the following extract from Re Denley [1969] 1 Ch 373 at 383-4 per Goff J is set out:
"Where, then, the trust though expressed as a purpose is directly or indirectly for the benefit of an individual or individuals, it seems to me that it is in general outside the mischief of the beneficiary principle."
He went on to refer me to the judgment of Chadwick LJ in Edge v Pensions Ombudsman at 623A-D where he stated:
" . . . At the risk of stating the obvious, that "main purpose" rule embodies three concepts which are fundamental to a pension scheme of this nature. First, the purpose of the scheme is to provide the retirement and other benefits to which the members, pensioners and dependants are entitled under the rules. . . . The scheme is not set up as a unit trust, under which the member would be entitled to a proportionate share in the fund. . . .. . .. .Third, the task of the trustees is to maintain a balance between assets and liabilities valued on that actuarial basis; so that, so far as the future can be foreseen, they will be in a position to provide pensions and other benefits in accordance with the rules throughout the life of the scheme."
Mr Simmonds also referred to passages from the judgment of Scott VC in Edge v Pensions Ombudsman [1998] Ch 512 at first instance which were endorsed by Chadwick LJ in the Court of Appeal. They are at 537D-H and are to the effect that "the continued viability of the respective Employers was something that, in the interests of the pension scheme and its members as a whole, the trustees were entitled to want to promote", that the trustees were entitled to recommend a package dealing with surplus which included reductions in future contributions and were not obliged to deal with the Employers at arm's length.
Mr Simmonds points out that Edge was not a case in which the Employer was named as an object of the power to distribute a surplus and Mr Newman's argument is entirely contrary to the outcome of the case. If he were right, the Trustee ought solely to have sought to maximise the Members' benefits. Furthermore, Mr Simmonds points out that the Court of Appeal expressly agreed with the Vice Chancellor that it was proper for the trustees to have taken into account the matters which they did. In this context the Court went on to add at 626F-H:
"They must, for example, always have in mind the main purpose of the scheme to provide retirement and other benefits for employees of the participating employers. They [the trustees] must consider the effect that any course which they are minded to take will have on the financial ability of the employers to make the contributions which that course will entail. They must be careful not to impose burdens which imperil the continuity and proper development of the employers' business or the employment of the members who work in that business. The main purpose of the scheme is not served by putting an employer out of business."
He also drew attention to the passage at 627C-D to which I have already referred.
Mr Simmonds also submits that in fact, the Trustee is in "tie break" territory here. He says that there is nothing in the proper purposes principle which requires the Trustee to adopt the most extreme, most risk free funding regime. The Trustee is acting pursuant to the proper purpose of the Scheme and is entitled to take into account the interests of the Employers.
He makes three further short points. First, he asks rhetorically, what is the point in having Employer representatives on the Trustee Board and having a dual majority principle which requires a majority to agree to an amendment unless the Employer representatives whilst acting in a trustee-like manner can nevertheless take into account the interests of the Employers? Next he reminded me that the provisions of the Scheme must be construed against the relevant taxation background. He took me to an extract from IR12 (1979) at paragraphs 16.4 and 16.18 which makes clear that in the case of centralised schemes, the Inland Revenue requirements were always that unnecessary cross-subsidy should be avoided. Thirdly, in this regard he reminded me that within the structure of the statutory funding regime, to be found in Pensions Act 2004, both the trustee where the rules give them a unilateral power to fix contributions and the regulator where the regulator exercises unilateral powers over Employers because the trustees have fixed contribution levels without agreement are required to take into account the interests of the Employer. In the light of the fact that the policy objective behind the 2004 Act is to protect members' interests it is likely that the statutory provisions are intended to reflect trust law.
Lastly, he submits that Mr Spink's suggested approach of some form of partial augmentation has nothing to recommend it, it is unfair and would perpetuate cross-subsidy. As to Mr Newman he points out that he appears to accept the Full Augmentation approach but without expert support suggests that the Trustee should focus on the four strongest Employers and then seek to "true up" the situation by seeking contributions from others. Mr Simmonds submits that these suggestions are unsupported and vague. Is it intended that an escrow arrangement should be adopted or that the Trustee should rely upon joint and several liability in some way? In any event, he says that it is open to the Trustee to take any of these courses in the future. The Implementation Methodology is flexible and can be changed. It is for the Trustee to choose and in doing so it would be within the spectrum of what is reasonable for the purposes of the test in Public Trustee v Cooper.
Mr Simmonds and Mr Tennet are supported in their views by Mr Green who appears on behalf of Stena Line. Mr Green emphasises that the main purpose of the Scheme is to provide benefits to members in accordance with the Rules of the Scheme from time to time. Accordingly, he says it is within the scope of the amendment power and a purpose of the amendment power for such power to be used to seek to meet that purpose. Mr Green concurs with Mr Nugee that references to a "duty to act in the best interests of the beneficiaries " may be a useful short-hand, but in a pension scheme the evaluation of such interests has to be in the context of what the rights of the beneficiaries actually consist of which is to have the benefits provided to and in respect of them in accordance with the terms of the scheme. He submitted that the orthodox formulation of how a trustee should exercise a fiduciary discretion is to be found in Edge v Pensions Ombudsman at 627D-E and that it is that the trustee should exercise the power for one or more proper purposes, taking into account relevant considerations but not irrelevant ones. Mr Green adds that there is no place in this formulation for automatically imposing overriding duties on the trustees to advert solely to members' interests. On the contrary Chadwick L.J. makes clear at 627D-F:
"Properly understood, the so-called duty to act impartiallyon which the ombudsman placed such relianceis no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant. If pension fund trustees do that, they cannot be criticised if they reach a decision which appears to prefer the claims of one interestwhether that of employers, current employees or pensionersover others. The preference will be the result of a proper exercise of the discretionary power."
Mr Green submits therefore, that contrary to what Mr Newman suggests the final sentence of the extract from Chadwick LJ's judgment at 623D set out at paragraph 214 above is not intended to subordinate all aspects of the Employers' interests to a duty to do whatever most advances members' interests. He also adds that Edge is not dealing with the equitable distribution of the funding burden in industry-wide schemes, and that the last sentence of the extract is simply a comment that members will be hurt if the Employer goes out of business, not a suggestion that the role of the Employer is only relevant insofar as it benefits members.
In addition, he referred me to Briggs J in the 2009 Proceedings at [96] [97] at which he describes a power of amendment as being there to allow a scheme to adapt to the inevitable changing conditions that will occur whilst the Scheme is operative. Mr Green also reminded me that the scope of a power of amendment is not to be artificially read-down, where its language is wide, and no provisos have been introduced reducing its operation: per Arden LJ in the 2011 Court of Appeal decision at [55] when considering this very power.
He also submits that the 2009 Proceedings confirmed that it is within the scope of the power of amendment to bring in all Participating Employers as contributors to the Scheme and therefore, he says that it is obviously within the purpose of the power of amendment to do so, as long as the Trustee is not using such power for an object foreign to the Scheme. He adds that an equitable imposition of contribution obligations in relation to individual Employers is within the legitimate purposes of the amendment power although it must be subordinated to the main purpose of ensuring a reasonable level of certainty that benefits will be met. He also emphasises that in all iterations of the Rules, each Employer has had to pay contributions reflecting the ongoing accrual of their own employees' pensions. He says that there is no hint that the position is intended to change if there is a deficit and that in such circumstances the strongest Employers have to meet it.
In addition to Mr Tennet, both Mr Simmonds and Mr Green also highlighted what they say are a number of absurdities which arise if Mr Newman is correct. For example, they say that deficits would have to be reduced immediately by a one-off lump sum contribution wherever the Employer could pay and the Trustee had the power to set contributions. Furthermore, they say that trustees would have to demand contributions in multi-Employer schemes from the Employers that were strongest at the time to avoid taking any risk that those Employers might become unable to pay before the deficit was redressed. This would be done irrespective of the extent to which the deficit related to those Employers' employees. Further, where an Employer was strong and the scheme well funded, the trustee should make unilateral benefit augmentations (potentially up to Inland Revenue limits) because this would be in members' best interests. They say that this is not how pension schemes are run.
Furthermore, Mr Green points out that if Mr Newman is right, the 2001 Regime, blessed by Blackburne J having heard from representative parties, was in breach of the Trustee's duties. It split the contributions rateably between the pool of "Current Employers" rather than targeting the strongest Employers. He also points out that unlike in a private trust, which is a bi-partite relationship between trustee and beneficiary, occupational pension scheme trusts are tri-partite in nature because Employers have a continuing role under them. Therefore, it is unsurprising that the purposes of an occupational pension scheme and of the powers under it include purposes relating to the treatment of the Employer and are not simply limited to furthering the interests of the beneficiaries. The continuing role and interest of Employers reflects the fact that the Employers are the primary funders of the scheme, with ongoing funding obligations under the rules and statute. Therefore, the way that the burden of funding the benefits is distributed and the way that the necessary funding is ascertained are of the most direct concern to them; an occupational pension is part of the pay that the Employer is providing to the employee or former employee through the vehicle of the scheme; and the Employer owes to its employees duties of good faith in the exercise of its powers under the scheme, and the duties continue to be owed to those who leave the employment and thereby become former employees.
Further, he reiterates that it is within the Trustee's legitimate exercise of discretion to seek to apportion the deficit contribution liability amongst all of the Employers as far as possible. He points out that Mr Newman's suggestion that the Very Strong Employers should first be required to contribute is "plucked out of the air", perverse and creates an economic advantage for other Employers which are direct commercial rivals. The suggestion that their contributions should be held in escrow is also just not how pension schemes work and would create difficulties in relation to the tax treatment of the contributions.
He also points out that if Mr Newman were correct that the proposed Full Augmentation amounts to a fraud on a power because it benefits Current Employers then no new regime could be formulated which even reduced contributions as a result of bringing in, for example, a number of strong Participating Employers. He says that no fraud on a power arises here. It is legitimate to take into account the interests of the Employers as long as it is consistent with the main purpose of the Scheme.
With regard to Mr Brown's case on the facts, Mr Tennet points out that his own expert in cross examination rejected the notion that the New Regime exposes the members to unnecessary risk that their benefits will be underfunded or that it gambles with the covenant, and that Mr Brown opposes the New Regime, even though his expert accepts that it makes members "better off." Furthermore, Mr Tennet says that he has not identified a better regime and points out that Mr Newman says that as a matter of law following the 2009 Proceedings the Scheme already enjoyed a last man standing support of all the Participating Employers, without the need for a rule amendment. In those circumstances, Mr Tennet submits that on Mr Newman's case, in fact, all contribution regimes are equally good and the tie break principle comes in.
Conclusions in relation to the submissions of Mr Newman and Mr Spink:
(i) "Best interests" principle
In this regard, I agree with Messrs Tennet, Green and Simmonds that the "best interests of the beneficiaries" should not be viewed as a paramount stand-alone duty. In my judgment, it should not be treated as if it were separate from the proper purposes principle. In fact, it seems to me that the way in which the matter was put by Lord Nicholls extra judicially sums up the status of the best interests principle and the way it fits in to the duties of a trustee. It is necessary first to decide what is the purpose of the trust and what benefits were intended to be received by the beneficiaries before being in a position to decide whether a proposed course is for the benefit of the beneficiaries or in their best interests. As a result, I agree with his conclusion that " . . to define the trustee's obligation in terms of acting in the best interests of the beneficiaries is to do nothing more than formulate in different words a trustee's obligation to promote the purpose for which the trust was created."
In my judgment, it is clear from Cowan v Scargill that the purpose of the trust defines what the best interests are and that they are opposite sides of the same coin, an approach which is supported by the way in which the matter is dealt with in Harries v Church Commissioners , another case concerning investment policy and in Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (No 3) in which Murphy J made comments which were obiter in which he described the principle as a "portmanteau". The learned Judge's comments were made in the context of his consideration of a statutory duty to act in the best interests of the members of a trust. He explored the common law and equity in some depth and concluded that the statute did not extend beyond the general law. If by his conclusion that the "best interest duty" operates "in combination with other duties" he meant that it flows from and is moulded by the trustee's obligation to promote the purpose for which the trust was created, I agree. As Lord Nicholls pointed out, first it is necessary to determine the purpose of the trust itself and the benefits which the beneficiaries are intended to receive before being in a position to decide whether a proposed course is in the best interests of those beneficiaries.
I have to say that I gained little assistance from Re Charteris and Buttle v Saunders . Those cases were concerned with issues arising in private trusts, the former being concerned with the exercise of discretion in favour of the estate as a whole and the latter with the duty to obtain the best price for the estate. In neither case was it necessary directly to analyse the more complex question which arises here.
I also agree with Messrs Tennet, Simmonds and Green in relation to the relevance of the principles in Edge v Pensions Ombudsman and that there is no indicator in that case that the Employer's financial interests are only relevant to the extent that the members are interested in the Employer's financial health. Although that case involved the manner in which an actuarial surplus should be dealt with, it should also be borne in mind that the Employer was not an express object of the power relating to surplus. Nevertheless, it is quite clear from the extracts from the judgment of Chadwick LJ to which I have referred, that it was considered perfectly legitimate to consider the interests of the Employers in that case and that the continued viability of the Employers was something which the trustees were entitled to promote.
In this case, of course, the Scheme is closed to new membership and the continued accrual of benefits and is in severe deficit. However, given the uncertainties inherent in the administration of a pension scheme and the fact that a surplus or deficit is to some extent merely the product of the actuarial assumptions which have been applied, it seems to me that it would be wrong and entirely artificial to conclude that different duties arise depending upon whether there is a surplus or a deficit. In this case, given the extent of the deficit and the urgent need for deficit contributions in order to secure the benefits, it seems to me that the relevance of the position of the Employers capable of making such contributions and their interests is much the same as the circumstances which Chadwick LJ was considering and in the same way, it is perfectly legitimate for the Trustee to take such matters into account when exercising its powers for the purpose of promoting the purposes of the Scheme.
Accordingly, in my judgment, as long as the primary purpose of securing the benefits due under the Rules is furthered and the employer covenant is sufficiently strong do fulfil that purpose, it is reasonable and proper should the Trustee consider it appropriate to do so, to take into account the Employers' interests both when determining whether to widen the pool of those liable to contribute and when considering whether to seek to reduce the element of cross-subsidy. In such circumstances, it seems to me that it is legitimate to take into account the relative burdens placed upon the Employers as commercial competitors.
For the sake of clarity, I should add that I agree with Mr Green that this is consistent with the extract from the judgment of Chadwick LJ in Edge at 626F-H and that there is nothing in that passage to suggest that the interests of the Employer are only relevant insofar as they benefit members. Further, as Mr Simmonds points out, there is nothing in the proper purposes principle which requires the Trustee to adopt the most extreme, most risk free funding regime without reference to any other factors.
My conclusion is strengthened by the fact that it seems to me that if Mr Newman's argument were correct a trustee would always be required to act in the best financial interests of the members by increasing benefits to full Inland Revenue maxima before considering how else to deal with the surplus. If this had been the case, it seems to me that not only would Scott VC's judgment have been different but the judgment of Chadwick LJ in the Court of Appeal would have taken a very different form.
It also follows that I reject Mr Newman's formulation of a "tie break". It seems to me that the effect of his formulation would be that it could never arise until Inland Revenue maximum benefits were secured and that accordingly, the effect would be severely to limit trustee discretion not only in this Scheme and in relation to the decisions which this Trustee is required to make but in every scheme and every situation, in a way which is not borne out in practice or in the case law as a whole. It seems to me that such an effect is a good indicator that the best interests principle is not freestanding. In my judgment, this is also illustrated by the practical consequences highlighted by Messrs Simmonds, Tennet and Green which they describe as absurd and to which I referred at paragraphs [210] and [223]. This conclusion is also supported by Mr Green's point that if Mr Newman were right, the 2001 Regime itself would have been arrived at contrary to the duties of the Trustee. It split contributions between Current Employers rather than targeting only the strongest.
My conclusion is also consistent with Warren J's decision in the Urenco case, the dicta from the judgment of Patten J as he then was in the Law Debenture Trust case and in the MNOPF case, the further dicta from the judgment of Sir Andrew Park in Smithson v Hamilton (albeit expressed in a rather different context) and the views expressed by Sir Andrew Morritt VC in the Phoenix Venture Holdings case. However, in the case of Phoenix , I accept Mr Newman's submission that the interests of the members were not directly engaged because the employer was not able to pay the section 75 debt in any event.
Such a conclusion is also consistent with the approach to construction in relation to this very clause, adopted by Arden LJ in the 2011 Court of Appeal decision and with Rule 29.2 of the 2007 Rules. As Mr Tennet points out, if the Rules as a whole should be construed in a way which precludes taking into account the interests of the Employers in relation to how to deal with a disclosed deficit, Rule 29.2 is very curious. I also agree with Patten J's observations in relation to the very similar rule in the MNOPF scheme to which I referred at paragraph [206].
It follows from what I have already decided that I also reject Mr Newman's submission that in fact, in proposing the New Regime which includes Full Augmentation and Re-apportionment which as a result, has the potential for the reduction of contributions paid by some Employers, the Trustee is acting in a way which amounts to a fraud on the power of amendment in the sense of the exercise of a power with the purpose of benefiting a non-object. I agree with Mr Simmonds that the purpose of the Scheme and therefore, the purpose of the amendment power is to further the purposes of the Scheme by securing the benefits of the Members. In my judgment, there is nothing improper when furthering the purposes of the Scheme by securing the benefits, if an effect is that some Employers may possibly and ultimately pay less. This does not render the Employer an object of the power. If that were the case, then any exercise of the amendment power so as to widen the pool of Employers liable with the potential effect of strengthening the overall employer covenant would be characterized as a fraud on the power. That cannot be correct. Secondly, having the effect of potentially lessening the liability of Current Employers is not the same as a purpose of conferring a benefit upon them. As Mr Brookes described it in cross examination, addressing cross-subsidy had the effect of conferring a "relative benefit" upon Current Employers. His evidence was not however, that the Trustee has decided to exercise the amendment power for the purpose of conferring even a relative benefit upon Employers or some of them.
The possibility that the ultimate liability of any Employer or group of Employers may be reduced by the proposed exercise is at best an effect of the purpose for which the power is proposed to be exercised, namely the securing of the benefits. In this regard, it should also be borne in mind that such a possibility is just that and at the end of the day, given the inherent uncertainties, it seems to me that it cannot be said after all necessary Orphan Loading has taken place that any particular Employer or group of Employers will necessarily pay less.
I should also mention that I disagree with Mr Newman's submission that in formulating the purposes of the Scheme in what he describes as an abstract fashion, the Trustee and as a result, the Scheme falls foul of the beneficiary principle. As Goff J pointed out in the extract from Re Denley to which I was referred, where a trust although expressed as a purpose is directly or indirectly for the benefit of individuals, it is outside the mischief of the beneficiary principle. It is not seriously suggested in this case, that there is no one on whose behalf the trusts of the Scheme can be enforced.
I am fortified in this conclusion by the fact that if Mr Newman and for that matter, Mr Spink were correct, despite the decision of Briggs J in the 2009 Proceedings and Arden LJ in the 2011 Court of Appeal decision, the Trustee would never be able to use the amendment power to widen the pool of Employers liable to contribute to the Scheme if, as a result, the contributions of any individual Employer might be reduced, without acting in fraud of the amendment power. Such a conclusion is entirely contrary to those decisions and would also be entirely arbitrary given that the pool of contributors under the 2001 Regime was arrived at as a result solely of consensus. Such a conclusion would also in effect, give life to a reprise of the estoppel argument which was soundly rejected.
(ii) The Advice of Mr Nugee and Mr Tennet
It follows from what I have already said that in my judgment, Mr Nugee was correct in the way in which he advised the Trustee as to the purpose of the amendment power and the factors which could be taken into consideration when exercising the discretion, including cross-subsidy to which I will return. It will also be apparent from what I have already said that I do not consider that there was anything inadequate in the advice as a whole. As I have already mentioned, as I accept Mr Brookes' evidence that the Trustee relied upon the advice of Mr Nugee and not that of Mr Tennet, it is unnecessary to address Mr Newman's submissions with regard to Mr Tennet.
(iii) Further conclusions in relation to the decision making process
Both Mr Newman and Mr Spink have criticised the decision making process of the Trustee and raised the specific concerns to which I have referred. I will deal with them in turn. Before doing so, it seems to me having taken account of all of the evidence both written and oral and in particular Mr Brookes' explanation that each of the advisers' papers tabled at each of the Key Meetings were considered by the Trustee at the relevant meeting, there can be little doubt but that the Trustee considered the detailed professional advice contained in each of those papers when making their decisions. In my judgment, this is borne out by the Minutes of those meetings (which were professionally produced and checked by Mr Brookes amongst others). The fact that they do not set out the detail of discussions upon each of the topics on every occasion does not detract from my conclusion. Further, this conclusion is not diminished by Mr Brookes' evidence in some instances that he could not recall the discussion or in some cases, the length of it.
Furthermore, Mr Brookes' evidence in his third witness statement to the effect that the decision made by the Trustee at the Third Meeting was made on the basis of the advice papers which had been presented to the Trustee Board and explained at the briefing meeting on 27 September 2012 was not challenged in cross examination and therefore, it is not open to P&O Ferries or Mr Brown to contend otherwise. Even if Mr Brookes' approach was informed by his involvement in the matter over a lengthy period since 2007, it does not seem to me that his evidence as to the basis for the decision of the Trustee Board itself is affected. In this regard, I also take account of the fact that it is not disputed that the composition of the Trustee Board changed over the period during which the New Regime was under consideration and that accordingly, the composition of the Board was different in 2012 from 2009.
Further, in my judgment, the issue over the form of the conclusion in the Lincoln paper of June 2012 and the way in which it was portrayed by Mayer Brown takes the matter no further forward. The paper presented in its final form in June 2012 and the advice before the Trustee Board in October of that year was considered and Mr Brookes explained that all of the relevant advisers were available at the briefing meeting in September and at the October Meeting to explain and respond to questions. Had Lincoln's ultimate conclusions been different from the way in which they were portrayed by Mayer Brown, it seems to me that it is more likely than not that it would have been pointed out.
Furthermore, it is not disputed that Lincoln were instructed to devise the Implementation Methodology to ensure that covenant was "at least as strong" as the current Fairly Strong (frozen) rating. Mr Brookes' evidence in this regard, which I accept, was quite unequivocal. He stated that he understood the covenant advice to mean that the New Regime whether on the open or frozen basis, would deliver an effect on covenant strength which was not neutral. He said, "If it could be the same or better, that isn't neutral. . . . "at least as good" has that potential extra connotation: it is not neutral." It seems to me that that was entirely consistent with the ultimate conclusion reached in the paper which was recorded in Mayer Brown's table.
It is also accepted that the Trustee was satisfied that the Fairly Strong covenant on the frozen basis was sufficient to support a contribution regime which would deliver the benefits and neither Lincoln nor Towers Watson raised any concerns in this regard. To reiterate, it is clear that after June 2012 the covenant advice was and was understood to mean that the New Regime would deliver covenant at least as strong as that under the Current Regime and that the Trustee proceeded on this basis from October 2012. Quite properly, Lincoln had phrased their advice in terms of the covenant strength being "likely to be sufficient" to deliver the promised benefits. In my judgment, nothing turns on the use of such a phrase. It is merely consistent with prudent professional advice which seeks to take account of the fact that the very nature of the issues encompasses future uncertainties.
This is also consistent with the expert evidence as to the effect of the New Regime upon covenant strength. Mr Dewar considered that the employer covenant would be "significantly stronger" under the New Regime and "more than capable of delivering for the fund", Mr Murphy accepted that it would be stronger and accepted that the position under the New Regime would be "very comfortable" even if subject to deterioration in the future and Mr Squires accepted that it would be at least as strong, that there was no gamble being taken or unacceptable risk to the members' benefits and confirmed that he was not suggesting that there was any problem with the covenant.
I consider Mr Spink's attempt therefore to suggest that the Trustee's objective in relation to covenant strength had slipped merely to maintenance especially in the light of its failure to take up Lincoln's offer to advise on covenant strengthening and to elevate those matters into a material and major error on the part of the Trustee is unsustainable on the evidence. Mr Brookes' evidence to which I have referred accords with Lincoln's advice and the Mayer Brown paper. In addition, the slides prepared by Lincoln for the briefing meeting and the Implementation Paper described the New Regime as "potentially covenant enhancing" which was why Mr Brookes confirmed that he felt re-assured by the covenant advice.
Further, in the light of the evidence concerning the covenant strength and the expert evidence to which I have referred, it seems to me that Mr Spink's submission based upon the failure to bring Mr Cullen's comments and the way in which they were reflected in the final version of Lincoln's advice to the attention of the Trustee Board, takes him nowhere in relation to the propriety of the decision making process.
Further, it is not in dispute that the Trustee's fundamental objective was to find an appropriate deficit repair regime to return the Scheme to solvency and to achieve the purpose of delivering the Members' benefits. It was Mr Brookes' unchallenged evidence that addressing cross-subsidy was subject to the Trustee being satisfied that the New Regime could meet its fundamental objective of delivering members' benefits and that the Trustee was satisfied at the Third Meeting that all of the options under consideration would enable it to do so. In those circumstances, the Trustee considered that it was entitled to take account of cross-subsidy. I agree. In such circumstances, I consider it within the breadth of the Trustee's discretion to decide how best to achieve an appropriate contribution model.
I should add that it must be obvious that when agreeing to the Stena Line escrow arrangement, there was at least a possibility that monies would be repaid to Stena Line under a new regime. As it was Mr Brookes' unchallenged evidence that in deciding on the New Regime, the Trustee did not act with the objective of releasing money to Stena Line, it seems to me that any return of money would be an effect and not a purpose of the exercise of the power. In any event, Mr Brookes points out that on the facts, no money will be released to Stena Line from the escrow.
Furthermore, Mr Brookes' evidence in cross examination in relation to the nature of the decisions made in October 2012 was quite unequivocal and I accept it. He stated that the decisions as to full Augmentation and Re-apportionment in principle and were subject to any further updated advice and most importantly were subject to the work to be done on an implementation scheme. In re-examination, he agreed that until the Trustee knew what the Implementation Methodology was it could not determine finally that full Augmentation and Re-apportionment was the regime it wished to pursue.
It is also accepted by all that covenant strength is only one factor relevant to whether members receive their benefits. Furthermore, it is not suggested that Lincoln's advice is outwith the bounds of what is reasonable. In fact, the experts were agreed that it was within the bounds of reasonable covenant advice.
I also reject Mr Spink's argument that there was a procedural failure and that it was irrational of the Trustee Board not to investigate partial augmentation and that the advice it did received was insufficient because it did not instruct Lincoln to address partial augmentation from the view point of improving covenant strength above that which could be achieved by Full Augmentation. It seems to me that in the light of the unequivocal advice which was received from Lincoln albeit not until July 2014, Mr Spink's argument cannot succeed. Advice in relation to partial augmentation and its effect upon covenant strength was received and considered. As I have already mentioned, Lincoln advised that from a covenant perspective they could not see any reason why partial augmentation ought to be adopted. The minute of the Eighth Meeting makes clear that the advice paper was considered and that Lincoln gave further oral advice at the meeting. Furthermore, none of the experts advocated partial augmentation and Mr Murphy did not disagree with the bases upon which it was rejected by Lincoln. Accordingly, in my judgment although advice in relation to partial augmentation was not obtained at an early stage, there is no basis for Mr Spink's criticism.
The submission that the Trustee had adopted the strength of the covenant under the 2001 Regime as a benchmark which was capricious for the purpose of delivery of the members' benefits, was made by Mr Newman for the first time in closing. I agree with Mr Tennet that this avenue is not open to Mr Newman, having failed to put the allegations to Mr Brookes in cross examination. In any event, in my judgment, the submission is unsupported by the evidence to which I have already referred. The Trustee relied upon Lincoln's advice that covenant strength was "likely to be sufficient" to deliver the promised benefits.
I also agree with Mr Tennet that there is nothing in Mr Newman's suggestion that the Trustee ignored the unilateral nature of the amendment power. The Trustee was advised by Mayer Brown in its 1 October 2012 paper that the amendment power was unrestricted and that it was for it to decide what was proper and appropriate to do.
I have already dealt in part with Mr Newman's submissions to the effect that a Fairly Strong covenant does not "ensure" the delivery of benefits. First, I have already found that the Trustee is not under a duty solely to maximize benefits. Furthermore, as Mr Newman himself accepts, the operation of defined benefit pension schemes is all about managing risk. Accordingly, there is no such thing as a circumstance in which benefits can be "ensured" in the sense of guaranteed. The task of the trustee and in this case, the Trustee, is to manage risk in a reasonable way and to adopt a regime which it is reasonably satisfied will return the Scheme to solvency having adopted reasonable assumptions. This is a matter for the Trustee having taken proper professional advice.
It also seems to me that based upon the papers submitted to the Trustee at the Third Meeting and Mr Brookes' unchallenged evidence that the Trustee considered all the options available including Augmentation only and the three forms of Re-Apportionment to different dates, would fulfil the purpose of the Scheme, namely to deliver the benefits under the Rules, it was for the Trustee in its discretion to determine which of the acceptable methods which were also within the scope of the power of amendment (to which I shall refer under Issue 4) to adopt. In my judgment, in order to arrive at such a situation, it is not necessary to have eliminated all risk or taken all possible steps to do so. If that were the case, the ambit of trustees' discretion would be artificially curtailed. In fact, if Mr Newman is right, in this case, it would be necessary for the Trustee to adopt factors more restrictive than those proposed by Mr Squires before it could place itself in a position in which it could exercise its discretion.
Further, it is accepted that Lincoln advised in their Implementation Methodology papers that downside risks which would potentially arise under a new regime whether through Augmentation or Re-apportionment could be mitigated by use of an appropriate implementation methodology. As a corollary therefore, it is not true to say that the Trustee was advised that no implementation methodology would be necessary if Augmentation alone were adopted. Accordingly, I reject Mr Spink's criticism that Implementation Methodology would not have been necessary at all if re-apportionment had not been adopted. That is not borne out in the professional advice received.
Lincoln also advised in their Implementation Methodology paper that Augmentation and Re-Apportionment tended to be covenant enhancing on a last man standing basis. Mr Dewar agreed with that conclusion and Mr Murphy confirmed that Lincoln's conclusions were not unreasonable. However, Mr Squires doubted that this arose as a result of the New Regime, taking the attitude that the Scheme is last man standing without the need for an amendment. In this regard, I prefer the evidence of Mr Dewar who concluded that a prudent covenant adviser would take account of those actually liable under the Rules at any given time. However, I also accept Mr Spink's submission in this regard that in fact, the Trustee was advised overall to concentrate on ongoing covenant assessment in its decision making process.
Mr Newman also suggested that the Trustee had failed to obtain updated legal advice. Quite clearly, as regards the test to be applied, it did not go back to Mr Nugee after October 2012. However, the evidence shows that it was advised by Mayer Brown throughout and it seems to me that this is not a valid criticism. Mr Spink also criticised the Trustee for making its decision before the Implementation Methodology was designed. Given Mr Brookes' evidence that they were assured that it would be possible and Mr Dewar's unchallenged evidence that it was reasonable for Lincoln to say that they could design an appropriate Implementation Methodology and that the matter remained under review, in my judgment there is nothing in this point. Furthermore, I agree with Mr Tennet that there is nothing in Mr Newman's assertion that once the Implementation Methodology had been designed, each of the decisions should have been revisited. It seems to me that as the decisions had been taken on the basis that a suitable Implementation Methodology could be designed, once Lincoln had done so and satisfied the Trustee, there was no need to re-visit the original decisions.
Further, in closing, Mr Spink contended for the first time, that the consultation process had been defective. The allegation that there was no meaningful consultation, amongst others, was not put to Mr Brookes in cross examination. Mr Tennet addressed the points nevertheless in his closing. He pointed out amongst other things, that Mr Nugee had reviewed the consultation material and had stated that he had no concerns. As Mr Tennet points out, the complaint takes no account of the presentation made by three advisers to consultees. Slides were presented on that occasion which amongst other things referred to the intended credit mechanism. The Orphan Loading and estimated default rates which Mr Spink suggests were concealed, were in fact, set out in the Q&As. Lastly, in this regard, in closing, Mr Spink contended that Q&A3 was defective because it did not make clear the role of Stena Line. In this regard, Mr Tennet responds that the position of Stena Line was well known, that the Trustee had not sought comments from Stena Line on the New Regime and it was Mr Brookes' unchallenged evidence that the Trustee had not been influenced by Stena Line's letter of 23 May 2012 when making its decisions. It seems to me that on that basis, the criticism is without foundation.
In closing Mr Spink developed the criticism that the Trustee had failed to obtain sufficient information as to the complexity and cost of the New Regime and when it did in July 2014 it was far too late. These were not put to Mr Brookes. In any event, it was his unchallenged evidence that the Trustee did consider these issues.
Mr Spink also made mention of a criticism that the Trustee failed to obtain sufficient information as to the impact of the New Regime on weaker Employers. However, Mr Brookes' unchallenged evidence was that the Trustee had such matters in mind. The issue is also considered in numerous of the professional advice papers including Towers Watson's papers for the Second and Third Meetings, Lincoln's paper for the Third Meeting and its Implementation Methodology paper.
As to Mr Newman's concerns about the operation of the New Regime in practice, it seems to me that they are not of a level which goes to the heart of whether in fact, the Trustee is conducting itself within the proper parameters of its discretion in seeking to adopt the New Regime. None of the experts have suggested that the New Regime is unreasonable nor have they raised the questions which Mr Newman has posed. Furthermore, the retention of blanks in the Implementation Methodology at present can be of no surprise. As Mr Tennet points out they are a necessary reflection of the fact that it is dependent upon variables which will be adjusted and is intended to be capable of being used in the future in respect of different recovery periods, payment plans and actuarial valuations.
Further, it seems to me that Mr Newman's assertion that Orphan Loading as it appears in the Implementation Methodology does not amount to a genuine risk management system is unsustainable. It flies in the face of the evidence of the experts all of whom were satisfied with Orphan Loading. In fact, Mr Squires, Mr Brown's expert described Orphan Loading as "practical and expedient" and "reduc[ing] risks to members."
I also consider that the points raised in relation to the assumed rate of non-collection of debts from Employers and the effect of the length of the recovery plan on phase 2 Orphan Loading go nowhere. Mr Squires did not seek to criticize these elements of the New Regime nor has it been suggested that Lincoln's advice was unreasonable in this respect. It was accepted that the Implementation Methodology should be sufficiently flexible to deal with future eventualities and it will be up to the Trustee to take appropriate steps in the future. The last of these points falls into the same category. Mr Newman raised concerns that Phase 2 Orphan Loading involved a degree of Employer involvement and consensual discussion. Once again this is not something which caused the experts any concern. They considered the Implementation Methodology to be reasonable. In any event, the Implementation Methodology provides for the whole of a deficit share to be paid in two instalments over a short period, if in fact, consensus is not reached.
Lastly, Mr Newman complained about the suspension of contributions in 2013 and 2014. In fact, this is not part of the New Regime or the approval application by the Trustee. As a result, I shall not address it any further.
Before turning on to Issue 3 I should make it clear that all the conclusions which I have reached which touch on Reapportionment are subject to the matters which are raised separately under Issue 4 below. I should also add that that only element in dispute in relation to Issue 2 was as to the width of the proposed discretion concerning the imposition of contributions. This was not developed in submissions and in any event, it seems to me that there is nothing improper or outwith the scope of the amendment power in the proposed discretion nor is any separate criticism of the decision making process made. I should also make clear that in the light of the matters which I have already set out and subject to the further issues to be dealt with below, I do not consider that the Trustee seeks to act beyond its powers or in fraud of them, that there was anything irrational in the Trustee's decision making process nor in my judgment did they take into account irrelevant or fail to take into account relevant matters. It seems to me therefore, that both Issues 1 and 2 should be answered in the affirmative.
Issue 3 Whether for the purposes of the proposed Rule 5.2(iv)(a), it would be proper to calculate each Participating Employer's Percentage as at 31 March 2011 using Method C?
Mr Evans on behalf of Sealion says that the use of Method C as defined in the Towers Watson paper dated September 2010 referred to at paragraphs 53 and 54 above, as the first step in the process of apportioning to each Participating Employer its share of the total liabilities of the Scheme would not be proper. Sealion is a Participating Employer and a Historic Employer but not a Voluntary Employer. It differs in this respect from P&O Ferries.
Mr Evans does not complain about the Trustee taking a pragmatic approach to the apportionment of the deficit between Employers in the sense that he accepts that it may be necessary to compromise accuracy for expediency and/or cost. Mr Evans also made clear that he does not seek to attack the decision to adopt Method C on the basis that it is an irrational or improper decision or on the basis that its adoption is unreasonable. He says however, that it was the decision making process by which Method C was arrived which was flawed and therefore, it cannot be adopted. In this regard, he distinguishes between reliance upon proper professional advice and a failure by the Trustee itself, properly to take account of all relevant factors when making its decision. He says that instead of weighing up the relevant factors and taking the decision, at the First Meeting the Trustee merely accepted the recommendations of Towers Watson. He says it should have requested detail in relation to the comparative cost of Methods C and D, the likely delay and the relative accuracy of the methods.
Further, Mr Evans says that at the First Meeting the Trustee merely accepted the Towers Watson recommendation without more, the further Towers Watson paper presented at the Second Meeting merely reiterated the previous advice subject only to revising the valuation date, and the Mayer Brown paper presented at the meeting merely summarised Mr Tennet's advice that Method C was within the scope of the Trustee's power to introduce a new regime but did not contain any further analysis of the advantages and disadvantages of Method C. The Trustee nevertheless, confirmed its earlier decision to adopt Method C.
Mr Evans does not seek to challenge the advice given by Mr Nugee and recorded in the settled note of the consultations of July and September 2012 that the Trustee was entitled to adopt Method C as a pragmatic approach to the design of the new regime or the Mayer Brown and Towers Watson papers presented at the Third Meeting both of which referred to Method C and led to a further confirmation by the Trustee at that meeting of its adoption of Method C. He submits that there was no consideration whether in the papers to which I have referred, in the consultation process and the comments on the responses to that process, produced by Mayer Brown, or at the Fourth Meeting of the magnitude of significance of the cost and time savings which were the basis of the Trustee's decision to adopt Method C rather than Method D. Mr Brookes' evidence in his third witness statement was that the Trustee accepted the Towers Watson recommendation.
He questions the sufficiency of the information upon which the decision was made on three grounds: the lack of detail in relation to relative cost; the lack of detail in relation to relative timing; and the lack of analysis of the relative accuracy of Methods C and D. In relation to cost, he points out that the first Towers Watson report contained only a rough estimate of relative costs and despite Mr Tennet's note of advice given at a consultation on 7 March 2012 which records that the Trustee was justified in incurring costs even if they were a significant sum in order to inform its decisions, no detailed analysis was undertaken. He contrasted this with the level of detail in relation to the costs of the Implementation Methodology. In relation to delay, Mr Evans says that in fact, it has taken more than twelve months to design the entirety of the New Regime and more than twelve months since permission to appeal to the Supreme Court was refused in November 2011 and therefore, it may have been appropriate to use Method D. He also says that although it is accepted that it was necessary to determine the apportionment of liability shares before covenant advice could be given, it did not follow that the covenant advisers could not start work at all until after the method of apportionment was decided upon. Lastly, he says that as Method D was used for the purposes of the exercise undertaken in 2001, when departing from it, it was necessary to obtain more detailed information about the loss of accuracy and the risks involved.
In summary, Mr Tennet says that the Trustee was entitled to rely upon professional advice which it did and that it is recognised in the Pensions Technical Standard which relates to actuarial advice that in the preparation of that advice, both the extent of the relevant information which is sufficient for the purposes of assumptions and whether the extent of any work is proportionate as to the scope of the decision in question are matters of judgment. He also says that in accepting a recommendation, the decision maker can be taken to have engaged with the reasoning and the assessment of each of the options which are also set out. In relation to the reasoning itself he says that there is nothing wrong in an adviser setting out the relative cost, timescale and accuracy of potential approaches and suggesting a pragmatic way forward. Furthermore, he says that in the circumstances, "ballpark figures" were perfectly adequate.
Lastly, he says that it can be no criticism of a decision making process that matters in relation to probable time frame were taken into consideration which would or might have panned out in a different way. In any event, he disputes that had Method D been adopted, the apportionment exercise could have been undertaken and the approval application progressed by the date on which it was made. He points out that what Mr Evans described is "speculation." Of course, if the Trustee were required to reconsider whether Method C or Method D should be adopted, it would have to take into account the fact that if Method D were adopted, it would be at least another twelve months before the covenant advisers had a definitive liability apportionment upon which to work. Lastly, as to accuracy, Mr Tennet says that this is classic Cotton v Cardigan territory. The fact that more detail as to relative accuracy could have been obtained is immaterial. The Trustee was entitled to rely upon the professional adviser to provide sufficient information upon which the decision could be made.
Conclusion:
First, in my judgment, there can be no question but that it is appropriate and that the Trustee was fully entitled to rely upon the professional advice which it received in this regard from Towers Watson and Ensign and that furthermore, the Trustee was entitled to rely upon the professional advisers to provide what it considered in its judgement to be sufficient detail from which to evaluate the strength of the different relevant factors and to make the decision. In my judgment, therefore, there is nothing in the point that further detail in relation to costs, timetable or accuracy should have been obtained. In any event, in relation to timing, I accept Mr Tennet's submission that subsequent events are irrelevant.
Further, even if the Trustee were not entitled to rely upon the professional advice received and the adequacy of the detail contained, given the nature of the information as to cost and accuracy, it seems to me that it was entirely proper and reasonable to accept the advice in the form in which it was presented without need for more. Secondly, it seems to me that Mr Evans' submissions are based upon the statement in Mr Brookes' third witness statement that the Trustee Board accepted the recommendation in the Towers Watson report. However, the Minute of the First Meeting also records that the decision was taken "following discussion." There was no cross examination of Mr Brookes upon this issue. It seems to me therefore, that there is nothing to suggest that the Trustee did not consider the Towers Watson papers which were presented and in which all of the issues were addressed. Further, it seems to me that in the light of the content of the Minute and the presentation of the papers themselves, the Trustee can be taken to have engaged with the reasoning in the papers, to have assessed the options and properly to have made its decision.
Accordingly, in my judgment, the challenge to the adoption of Method C as a means of calculation for the purposes of apportionment is unfounded and Issue 3 should be answered in the affirmative.
Issue 4 Whether it would be proper for the New Regime to give credit for deficit contributions paid under the 2001 Regime (payments made by Current Employers' contributions under Current Rule 5.2 and ex gratia contributions by Voluntary Employers) and for payment of section 75 debts? (Re-Apportionment)
This question was addressed by Mr Spink on behalf of P&O Ferries and the class which it represents. It is concerned purely with the question of whether there is power to re-apportion liabilities under the Scheme giving credit for what has been paid since 2001. Mr Spink on behalf of P&O raises four separate arguments against what he describes as the Trustee's proposed retrospective apportionment. First, he says that it is outwith the scope of the power of amendment altogether. Secondly, he characterises it as an attempt to re-write history, which he says is an improper purpose. Thirdly, he relies upon his bootstrap argument and lastly, he deploys his "lack of relevant information" argument.
In more general terms, Mr Spink also says that the Trustee's decision in relation to re-apportionment is fatally flawed because it gave no real consideration to the fact that the mechanism requires a re-writing of history, and if and to the extent that it did, it merely relied upon Mayer Brown's advice that the principle did not involve any element of retrospectivity without coming to a conclusion itself. Furthermore, he says that in this, the Trustee was driven by the desire to eradicate all cross-subsidy, even in the past which was an improper purpose.
Mr Spink submits that Re-Apportionment is truly retrospective and as such is ultra vires the amendment power. He says that the deficit is inflated by putting back into it the contributions paid since 2001 together with interest on them and then re-apportioning them between the wider class of Employers. He points out that the 2001 Regime which was approved by the Court was a package of measures which included the imposition of deficit repair contributions upon Current Employers together with changes in the rights and benefits of Employers under the Scheme including rule 30 withdrawal, Rule 31.1 termination and consultation with Employers in relation to investment decisions. As part of the package, the Scheme was also closed and membership contributions ceased. Mr Spink says that the Historic Employers did not sign up to those changes including in particular the removal of Rule 31.0(ii) and as a result, should not be required retrospectively to become subject to the contribution obligations since 2001.
Mr Spink points to the way in which re-apportionment was addressed in the March 2012 Towers Watson report in which there is reference to "retrospective application". The same is true of the draft papers produced for the meeting on 27 June 2012. However, by the time of the Towers Watson report of 9 October 2012 the heading had been changed and no longer referred to retrospection. I should say immediately at this stage, that I consider the way in which the proposal was labelled by the professional advisers to be entirely irrelevant. The real question is whether it was in fact, retrospective and as a result within or without the amendment power or was otherwise an impermissible re-writing of history.
Further, Mr Spink says that the fact that it is proposed that the Current Employers are awarded interest on the contributions already paid is consistent with the contributions they have made, never having been paid. In other words, he says that this is seeking to re-write history. He also went on to suggest that the Trustee had not been advised as to the "re-writing history" issue. In response, Mr Tennet points out that it was Towers Watson which suggested that interest should be awarded in order to give credit for the present day value of money and submits that this is a perfectly reasonable approach.
In closing, Mr Spink also submitted that the Trustee failed to deal with the retrospectivity issue as raised in the Employer consultation. This was not raised with Mr Brookes in cross examination and therefore, is not open to P&O Ferries to pursue. In any event, it is not in dispute that the Trustee was provided with full anonymised consultation responses. Further it was Mr Brookes' unchallenged evidence that all feedback from the consultation was considered.
I shall set out each of Mr Spink's four main arguments in more detail.
(i) Scope of Amendment Power
First, as I have already mentioned, Mr Spink argued that retrospectivity is outwith the scope of the amendment power in Clause 30 of the 2007 Deed and Rules. In relation to the principles to be applied to construction in the context of a pension scheme, Mr Spink urged me to adopt the approach set out by Warren J in PNPF Trust Company Limited v Taylor [2010] EWHC 1573 [2010] PLR 261 at [127] to [145]. This included the settled principles requiring the scheme provisions to be interpreted in the light of all the provisions of the scheme in question and against the background of the relevant statutory regime governing the administration of occupational pension schemes. Warren J also identified three principles pursuant to which apparently wide words in an amendment power could be read restrictively. They were: as a matter of narrow interpretation solely of the words in context; secondly, because a term limiting the scope of the power should be implied; and/or thirdly, because the exercise of an apparently wide provision:
"
must
be confined to such [uses] as can reasonably be considered to have been within the contemplation of the parties when the [deed] was made, having regard to the nature and circumstances of the [deed]." (Authorities in the line of Hole v Garnsey [1930] A.C. 472)"
Mr Spink says that reading the amendment power in a practical and purposive way and in context, it does not contain any words which can reasonably be read as permitting a retrospective amendment. The only phrase which might lead to a contrary conclusion is "may be varied or added to in any way ". However, Mr Spink says that there is no reason to read "in any way" as synonymous with "at any time" and, even if there were such a reason, there is a leap between "at any time" and "with effect from any time". He says it would have been straightforward to include words making it plain that retrospective amendments were permitted, if that had been the intention.
He also seeks to distinguish the well-known passage from the Judgment of Millet J in Re Courage Pension Scheme [1987] 1 All ER at [537G] which might be cited in support of a wide interpretation of amendment powers. The passage is as follows:
"It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life. This is particularly the case where the scheme is intended to be for the benefit not of the employees of a single company, but of a group of companies".
He says that it is unlikely that Millett J was proposing a general principle of construction and was not seeking to construe an extant provision. Furthermore, if he were doing so his approach is contrary to subsequent Court of Appeal authority: Stevens v Bell (Airways Pension Scheme) [2002] EWCA Civ 672 , per Arden LJ at [31].
Mr Spink goes on to say that if the power is not construed narrowly, a term limiting its scope in order to prohibit retrospective amendments should be implied. He says that this would avoid the uncertainty that would otherwise arise in the context of a document which governs the rights of members who have given consideration for those rights and governs the obligations of Participating Employers who owe duties and bear a significant financial burden to contribute. Thirdly, he says that there is no basis upon which to conclude that there was any intention to permit a retrospective amendment to be made to the Scheme.
In relation to the application of the principles in Hole v Garnsey , Mr Spink accepts that they are not a separate rule of interpretation but one aspect of the unified approach to interpretation. As Lewison J (as he then was) stated in Trustee Solutions v Dubery [2006] PLR 177 at [17]:
"The rules of a pension scheme must be interpreted in a practical and purposive way. The fiscal background is also of importance. The ultimate question is what the words of the Scheme would mean to a reasonable reader with the background knowledge of the parties."
Mr Spink says that reading the express words of the power of amendment in a practical and purposive way strongly militates against the power being sufficiently broad to permit a retrospective amendment.
Mr Green on behalf of Stena Line challenges Mr Spink's approach. He says that both Briggs J in the 2009 Proceedings and the 2011 Court of Appeal Decision made clear that the 2001 Regime was not and is not irrevocable whether in its express terms or by virtue of some implied limitation, there being no express limitation upon the amendment power. Furthermore, Briggs J confirmed that nothing in the 2001 Proceedings or the lead up to them could be said to give rise to an estoppel or as the Court of Appeal confirmed, an implied limitation on what might thereafter be done by the Trustee in the exercise of the power of amendment.
Mr Green says that in any event there is no question here of exercising a discretion retrospectively. He says that the Trustee is exercising its discretion now going forward in a manner which brings into account and gives credit for past contributions. Future contributions are to be calculated with reference to what has already been paid. Mr Tennet supports this view and referred me to the definition of retrospectivity in the context of pension scheme amendments in s 71 Pensions Act 1995. In that section the exercise of a power to modify the scheme "retrospectively" is defined as meaning "with effect from a date before that on which the power is exercised
". He says that this is not the case here.
Mr Green also submits that contributions already made and their investment return remain assets of the Scheme. There is no intention to re-apportion liabilities due in 2001 and subsequent years by reference to the MFR deficit in those years and thereafter by reference to the Technical Provisions. Mr Green submits that that would be a retrospective exercise of the power but that that is not what is contemplated. He adds that unless no reasonable trustee taking all relevant and no irrelevant factors into account could have exercised the power in such a way, it is not for P&O Ferries, Sealion or Mr Brown to complain.
(ii) Re-writing history
If the construction arguments are not accepted, Mr Spink submits that the proposed retrospectivity is objectionable because it is an attempt to re-write history. In this regard, he referred me to a passage in the judgment of Arnold J in HR Trustees Ltd v German & Ors [2009] EWHC 2785 (Ch) (the "IMG Judgment") in which Arnold J considered retrospective amendment and quoted the speech of Lord Walker of Gestingthorpe in the Privy Council in Bank of New Zealand v Board of Management of the Bank of New Zealand Officers' Provident Association [2003] UKPC 58 , [2003] OPLR 281 at [26]. The passage in the IMG Judgment is at [145] [148]:
"145 The starting point is that clause 7(i) of the 1977 Deed neither expressly permits nor expressly prohibits amendments with retrospective effect. The question therefore is whether clause 7(i) should be interpreted as permitting the amendments made by the 1992 Deed with effect from an earlier date.
146 It is common ground that the correct approach to answering this question is that laid down by Lord Walker of Gestingthorpe giving the judgment of the Privy Council in Bank of New Zealand v Board of Management of the Bank of New Zealand Officers' Provident Association [2003] UKPC 59 , [2003] OPLR 281 at [26]:
"In the courts below the Board of Management's power to make a retrospective amendment was dealt with as a separate topic. But before their Lordships it was rightly conceded that this topic is merely a reflection of, or another (and possibly less helpful) way of putting, what is essentially the same point as to the scope of the power of amendment. Modern authority (as reviewed and summarised by Lord Mustill in L'Office Cherifien des Phosphates v Yamashita-Shinnihon Steamship Co Ltd [1994] 1 AC 486, 524525) has recognised that when the law raises a presumption against the retrospective operation of an enactment or a disposition (including a rule change), it is concerned with fairness in the circumstances of the particular case, rather than with the application of some general formula. In the amendment of pension scheme rules, back-dating (that is, deeming a change of the rules to have been made at a date earlier than the date of the actual change) cannot be used as a device so as to rewrite history or validate an amendment which would otherwise be beyond the scope of the power of amendment. But if the substance of what is proposed is within the power, back-dating will not by itself lead to invalidity (whether it will be more or less helpful, simply as a matter of drafting technique, will depend on the circumstances)." 147 The Employers contend that the touchstone identified by Lord Walker is that of fairness, and that there is nothing unfair about the 1992 Deed having effect from 1 January 1992 since that is what all concerned expected to happen and thought had happened, and it was only a result of an administrative delay in executing the documents that the 1992 Deed was not executed until after 1 January 1992.
148 While I have some sympathy with that argument, I find myself unable to accept it. It is clear from Lord Walker's reasoning that the mere fact that an amendment is back-dated is not objectionable. In the present case, however, the amendment is not merely back-dated, it has truly retrospective effect. Thus the active members' defined benefit rights which accrued between 1 January 1992 and 3 March 1992 were not even converted into defined contribution rights. Instead the Plan proceeded as if the members' entitlement during that period had accrued on a defined contribution basis. In my judgment that is outside the power conferred by clause 7(i) for two reasons. First, it amounts to an attempt to re-write history. Secondly, it is barred by the Fetter."
In addition, Mr Spink submits that it is difficult to see to whom the proposed retrospection could be considered to be fair, other than Stena Line and possibly other Current Employers. However, he says that it was inherent in the 2001 Regime that the Current Employers would be responsible financially for taking the Scheme forward, and that this would involve them taking responsibility for liabilities relating to service with past Employers. Otherwise, he says that it is difficult to see from the Trustee's perspective what benefit retrospection offers. He also points out that the 2001 Regime was entered into after detailed legal and actuarial advice had been obtained and was approved by the Court. He says therefore, that what the Trustee is seeking to do is here is akin to the operation of the old Hastings-Bass principle. As Park J observed in Breadner v Granville-Grossman [2001] Ch 523 , at [61], a passage cited with approval by Lord Walker in the Supreme Court in Futter v HMRC [2013] UKSC 26 at [35]:
"There must surely be some limits. It cannot be right that whenever trustees do something which they later regret and think that they ought not to have done, they can say that they never did it in the first place."
In any event, Mr Spink says that it is not for the Trustee to assert that any particular amendment is fair or unfair unless it is the members' interests that the Trustee is seeking to promote. Finally, Mr Spink submits that it is telling that the effect of retrospective apportionment on the covenant is to weaken it.
In addition, in this regard, Mr Spink points to the Trustee's approach to Re-apportionment at the October 2012 meeting at which pointed out that it could be said to be "undoing or re-doing" the 2001 Regime. Mayer Brown had advised that the Trustee needed a good reason to undo the 2001 Regime. However, neither the Minute of the meeting nor Mr Brookes' evidence suggests proper consideration was given to the matter. It was merely decided as a matter of principle and the lack of proper consideration and the balancing of the undoing of the 2001 regime against other factors is a fundamental flaw in decision making. Further, he says that the legal advice on retrospection was not considered. In addition, he says that the decision was irrational because no account was taken of the fact that the 2001 regime had been approved by the Court. He also attacks the decision as irrational because it was taken in principle but was not revisited once the full details of the Implementation Methodology were available. Further, he says that it weakens the overall covenant and reduces the security of benefits in the cause of preferring one class of Employers over another. It gains the Scheme nothing.
He raises four additional areas in which he says that there has been a failure of due process. The first relates to the Employer Consultation. Accordingly, he says that the consultation was defective and as a result, the Trustee was not in a position to take into consideration all relevant factors. Secondly, he says that the Trustee had insufficient information as to the level of administrative cost and complexity of the proposed regime. Not only were no quantified costs available by the time of the October 2012 meeting but there was no attempt to cost alternative regimes such as adoption of Augmentation only or different versions of Partial Augmentation. Cost was not readdressed in January 2014 and the Ensign paper in July 2014 amounted to too little too late. Furthermore, he reiterates that Mr Brookes received material information about the ability of P&O Ferries to meet future contribution liabilities and referred it only to Lincoln and not to the Trustee. In addition, he relies upon the matter raised in Mr Murphy's report that the issue of a Deficit Share Notice without the issue of an invoice would have a deleterious effect upon a very weak Employer.
(iii) Lack of relevant information
Under this head, Mr Spink repeats all that he said under Issue 1 in relation to the failure to obtain sufficient evidence about full pool augmentation and the alternatives. He adds that, because retrospective apportionment back to 2001 would load even more of the Scheme's liabilities onto Participating Employers with weaker covenants than would full pool augmentation alone the concerns are even more pertinent.
In response, Mr Green submits not only that the proposed exercise of the amendment power is not retrospective but also that it is not a re-writing of history. He emphasises the passage in the judgment of Lord Walker in the New Zealand case to the effect that if the substance is within the power then backdating is not objectionable. He says that that case was concerned with seeking to confer a benefit on a member whose benefits had already crystallised in the past whereas the intention here is to calculate contributions due now and in the future. He also points out that the IMG case was concerned with seeking to take away vested rights which is not the case here. In any event, he says that it is not necessary to decide the retrospection issue. Mr Green is supported by Mr Tennet who also reminds me that in his judgment Briggs J rejected the estoppel argument raised by the Historic Employers. He says that the argument in relation to re-writing history is an attempt to resurrect it by the back door.
Conclusions:
(i) Retrospectivity and (ii) Re-writing history
I agree with Mr Green that for the purposes of this case it is unnecessary to construe the amendment power in order to determine whether it can be exercised retrospectively. I have come to this conclusion because in my judgment the proposed exercise designed to give credit for contributions already paid is not retrospective at all. As Mr Green and Mr Tennet submit, it is a present exercise of the power with prospective effect. Although not directly relevant, I agree with Mr Tennet that the description of retrospectivity contained in section 71 Pensions Act 1995 is helpful by way of analogy. In this case, the intention to give credit for past contributions when determining future liabilities, in my judgment is not an exercise of a power in order to put something in place "with effect from a date before that on which the power is exercised
". In my judgment, this is not a case as Lord Walker put it, of "deeming a change of the rules to have been made at a date earlier than the date of the actual change." There is no intention to impose nor in practice is there an actual imposition of a change in Rules or liabilities for the past. It all relates to the future.
Does the proposed course of action nevertheless fall foul of the "re-writing history" principle? In this regard, I take note that Lord Walker also made clear that "if the substance of what is proposed is within the power, back-dating will not by itself lead to invalidity." In this case, in fact, it is not proposed that there should be any backdating at all. The proposed exercise is entirely prospective. Further, the proposed course of action does not divest the Scheme of sums already contributed or treat liabilities which have crystallised as if they had not arisen. This was the effect of the changes in the IMG case. Benefits which had already accrued on one basis were to be treated retrospectively as if they had accrued on another.
As I have already mentioned the exercise in this case is purely prospective. The contributions for which credit is to be given were payable in respect of a different deficit calculated on the MFR basis from that with which the Trustee is now concerned. It is not intended to turn the clock back. I come to that conclusion despite the proposal that the Current Employers not only be given credit for past contributions against present and future contributions but are also to be credited with interest in respect of the payments made. I do not consider the fact that credit is to be given in relation to the present value of the contributions already made gives rise to the conclusion that the clock is turned back or that previous liabilities are erased in a way which would be similar to the circumstances under consideration in IMG . The contributions as made remain part of the funds of the scheme together with the investment return upon them which may be more or less than the interest for which credit is being given.
I also reject Mr Spink's submissions based on an analogy with the old Hastings-Bass principle. This is not a case of the Trustee regretting something which it did in the past which it thinks it ought not to have done and seeking to say that it did not do it in the first place. In fact, the Trustee does not resile from the 2001 Regime or suggest either that it wishes it had not done it in the first place. On the contrary, the Trustee contends that the 2001 Regime was appropriate in the circumstances which arose at that stage. The circumstances with which the Trustee is faced now include a large deficit calculated on more stringent lines and the decisions in the 2009 Proceedings and the subsequent 2011 Court of Appeal decision. Briggs J made clear in his judgment in the 2009 Proceedings at [104] that the 2001 Regime was not "irrevocable" and dismissed Mr Spink's arguments based on estoppel. As I have already mentioned, in doing so he implied that credit could be given for past contributions made by Current Employers. His conclusions were affirmed in the Court of Appeal. It seems to me that by means of the re-writing history argument it is sought either to elevate the 2001 Regime to a status which it does not deserve and which is contrary to the 2011 Court of Appeal decision or to resurrect a quasi estoppel type argument. There is no room for either the latter or the former and in addition, the former is not borne out on the facts. As both the Court of Appeal and Briggs J noted the 2001 Regime itself contained the amendment power which it was clear might be used in relation to a future deficit.
It is unnecessary therefore, to consider whether the amendment power is sufficiently wide to be exercised retrospectively.
(iii) Lack of relevant information
To the extent that I have not already dealt with the more general criticisms of the decision making process raised by Mr Spink whether under Issue 1 or under the submissions themselves under this Issue 4, I turn to them now.
It seems to me that Mr Spink's submission that the Trustee's decision in relation to re-apportionment was fatally flawed because it gave no real consideration to the fact that the mechanism requires a re-writing of history falls by the wayside, first because I do not consider that it amounted to a true "re-writing" in any event and secondly because in my judgment the issue was properly addressed by the Trustee, having received legal advice. In my judgment it is clear that the issue was raised in the Mayer Brown paper prepared for the Third Meeting and in cross examination, Mr Brookes confirmed that at the meeting, one of the factors put in that paper was that reapportionment might be considered to be "re-writing history". Further, the minutes of the meeting reveal that the Board considered cross-subsidy figures, the fact that pensions were deferred pay, the fact that the 2001 Regime had been approved by the Court and the "un-doing" /"re-doing" point. It made its decision accordingly and therefore, in my judgment their decision cannot be impugned on this basis.
Lastly, I have already dealt with the submission that the Trustee was driven by the desire to eradicate all cross-subsidy, even in the past which was an improper purpose. I have found that the evidence which I accept, shows that the Trustee acted in order to further the purposes of the Scheme in returning it to solvency and securing the benefits and it was entitled on the basis of the advice received in relation to the prospects of achieving that goal, to determine an appropriate mechanism by which to do so which included Re-apportionment.
In my judgment, therefore, the question raised in Issue 4 should be answered in the affirmative.
Issue 5 If the answer to Issue 4 is "yes" whether it would be proper for credit to be given under the New Regime for all such deficit contributions paid from 31 May 2001 onwards (and in the case of section 75 payments, paid at any time)?
This issue arises only where the answer to Issue 4 is that it is proper to give credit for deficit contributions paid under the 2001 Regime. The question here is if account is to be taken of payments made since the introduction of the 2001 Regime whether it would be proper to take account of all payments since 2001 as the Trustee proposed or only those since a more recent date. Mr Evans on behalf of Sealion approached this issue under two headings, the first of which was the impact of retrospective credit upon the Scheme as a whole. He says that the further back credit is given, the more of the deficit which is shifted onto weaker Employers, the greater the detrimental effect upon the overall employer covenant and the greater the reliance upon the Implementation Methodology in order to make good the distortion. However, the Implementation Methodology is not guaranteed to work. He says that the need for the reliance on the very complex Implementation Methodology demonstrates that the Trustee's decision to do so is so unreasonable as to be perverse.
Mr Evans produced a schedule based upon figures produced by Mr Murphy and those in the papers produced for the Trustee by its covenant adviser, Lincoln. It shows that under the 2001 Regime, 79% of the Scheme liabilities are borne by stronger Employers and 21% by those which are weaker. With both Augmentation and re-apportionment to 2001 the burden is shifted so that approximately 73% of the liabilities are borne by weaker Employers. If credit is given for payments since 2007, the percentage is 70% and if retrospective credit were only given for payments after 2010, the percentage borne by weaker Employers is 52%. I should add that Augmentation alone has the effect of shifting the liabilities so that 45% is borne by weaker Employers. Although Mr Evans accepts that Orphan Loading ameliorates the shift of the burden he describes, nevertheless, he says that the end result of the Trustee's New Regime would be to reduce the stronger Employers' share of the liabilities from 79% to 36%.
Mr Green questions the way in which the schedule has been put together and the conclusions which Mr Evans extrapolates from it. He points out that the data which has been included in relation to 2001, 2007 and 2010 takes no account of the impact of the Implementation Methodology nor to some extent of Orphan Loading. He also says that it is of no assistance in relation to the strength of the covenant in 2012. He concludes therefore, that it does not demonstrate that the Trustee's decision to go back to 2001 was unreasonable.
Mr Evans says that it is clear from the Towers Watson reports of March and April 2012 and 1 and 8 October 2012 that the Trustee approached the issue of retrospection principally from the perspective of the different categories of Employer rather than by reference to the impact on Employer groups by reference to the covenant rating applicable to each group albeit that he accepts that this did form part of the Trustee's thinking. He says that this arose from the Trustee's desire to address the issue of historic cross-subsidy between those Participating Employers who had been contributing towards the deficit under the 2001 Regime and those who had not.
In addition, he says that it is also clear that, although the covenant impact paper prepared by Lincoln in October 2012 addressed the impact of re-apportionment (from 2010, 2007 or 2001) by reference to covenant ratings, the focus of the report and its conclusion concerned the impact on the overall rating of the covenant support for the Scheme. Although Lincoln's conclusion was that re-apportionment would adversely affect the overall covenant support for the Scheme before application of the Implementation Methodology, the extent to which the length of the reapportionment period shifts the burden and adversely affects the covenant was not focussed on. Mr Evans says that this is equally true of the Mayer Brown paper of 1 October 2012 which was considered at the Third Meeting. He says that although a number of different potential re-apportionment periods were identified the implications were not addressed in terms of the extent of the shift of liabilities to the weaker Employers. He says therefore, that the Trustee's decision (subject to Court approval) to adopt full retrospection, taken at the Third Meeting, was by reference to the impact on Participating Employers by type and not by covenant rating, the emphasis being upon the elimination of cross-subsidy.
In this regard, Mr Tennet says that it is for the Trustee to determine the weight to be given to the effect upon cross-subsidy compared with the shifting of liabilities of the amount of retrospection applied. Second, he says that Mr Evans offers no explanation for why it is outside the bounds of reasonableness to regard the fact that if one re-apportions back to the date which Voluntary Employers stopped paying but no further they obtain no credit for their contributions, as one which outweighs the increased liability shifting caused by more retrospection. Thirdly, he points out that there is no evidence to support the proposition that after the operation of the Implementation Methodology, the further back one goes the worse it gets. The only post Implementation Methodology information relates to re-apportionment to 2001 and shows that the position is better than under the present regime. Lastly, he points out that by saying the Implementation Methodology is only necessary because of Re-apportionment, Mr Evans flies in the face of the advice given by Lincoln. Lincoln advised that Implementation Methodology would be necessary even if Augmentation were adopted without Re-apportionment. In relation to Mr Evans' Schedule, Mr Tennet points out that the inability of small Employers to pay should not be overestimated. Sealion itself has the benefit of an indemnity from its parent company.
Mr Evans' second heading was fairness to Employers. He says that the premise that it is fair to increase the liability of Historic Employers on the basis that other than Voluntary Employers, they have not contributed since 2001 is flawed because they did not contribute because they were not liable to do so, they had no involvement with the Scheme, including its investment policy over that period and they may have been entirely unaware of the issues surrounding the Scheme. Retrospection back to 2001 is described as so unreasonable as to be perverse. This amounts to a challenge on the basis that no reasonable trustee could rationally have reached such a decision.
Mr Evans says that it is apparent from the Trustee's own assumptions in relation to Orphan Liabilities (that 33% of the Very Weak Employers could not pay the amounts which may be demanded of them) that many Historic Employers will become insolvent if the proposed liabilities are imposed on them. Mr Evans submits that the greater the amount of retrospection, the more unfair the impact on Historic Employers and hence the more unreasonable. He says therefore, that if retrospection is permissible 21 November 2012 is the most reasonable date. This is the date on which Historic Employers were informed by letter of the Trustee's proposal to make them liable to pay deficit contributions, on the basis of Augmentation and re-apportionment.
Mr Evans says that the next most reasonable date would be 13 July 2012. This is the date on which Historic Employers were informed by letter that the Trustee was working on the design of a new funding regime that was likely to require them to contribute to the deficit. Nevertheless, at this stage, Employers, such as Sealion, would have had no inkling of the magnitude of their eventual proposed liability.
Thirdly, and in reverse order of preference, Mr Evans points to 27 July 2010. This is the date of Briggs J's decision in the 2009 Proceedings. Although Historic Employers were not informed directly by the Trustee about the Stena proceedings, some Historic Employers were aware of it as a result of a circular sent by P&O Ferries' solicitors.
Lastly, Mr Evans points to 31 March 2007. This is when most ex gratia payments under the 2001 Regime stopped. From around this time, it would have been clear to the Trustee that the 2001 Regime had not succeeded in its objective of restoring the Scheme to solvency by April 2006. Mr Evans submits that it would be unfair to Historic Employers and as a result unreasonable for the Trustee to give credit for those payments, reducing the present and future obligations of the Participating Employers who made them and correspondingly to increase the present and future obligations of those Historic Employers who were under no liability and did not do so.
Mr Evans goes on to disagree with the advice of Mr Nugee given to the Trustee in July and September 2012. He advised that taking into consideration the fairness of the impact on Historic Employers, any of the potential retrospection dates considered by the Trustee would be rational and therefore proper. Mr Evans says first that the unfairness to Historic Employers of calculating their liability by reference to payments made by others at a time when they were not liable to make such payments and were unaware that such a liability might be imposed on them, is so unreasonable as to be perverse. Secondly, he says that the advice focussed only on the question of fairness to the Historic Employers rather than also taking account of the consequences for the Scheme. The combined effect of the two factors is such as to render a decision in favour of full retrospectivity so unreasonable as to be perverse.
As to fairness, Mr Tennet accepts that November 2012 was the date on which indications of deficit share were sent to Historic Employers. However, he says that there is no rational link between the date of notification and liability. As to the shock as a result of the likely liability which Mr Evans described, Mr Tennet says that it takes no account of affordability driven payment plans. He adds that the quantum of the demand cannot impose rationality constraints upon the date for re-apportionment. In support, Mr Green adds that liability is not a function of notification. All Historic Employers had originally signed up to the Scheme and therefore, are contractually bound to abide by its terms including amendments to those terms.
Conclusion:
In my judgment, there is nothing to suggest that the decision of the Trustee in this regard is perverse or to put the matter another way is other than reasonable. It was up to the Trustee having taken proper professional advice to balance the effects of retrospectivity against cross-subsidy and the consequent shift of the burden of liabilities and having done so, to determine the appropriate date for such retrospection. It seems to me that there is no basis for concluding that its decision is unreasonable or that it failed to take into consideration all relevant and no irrelevant factors. I share Mr Green's reservations as to the utility of Mr Evans' schedule which he produced with the assistance of his instructing solicitors and the conclusions he seeks to draw from it. In any event, given the detail of the professional advice taken by the Trustee, the fact that I consider that the balance of the relevant factors was a matter for the Trustee alone and that there is no expert evidence to suggest that the conclusion reached was a perverse or unreasonable one, in my judgment, Mr Evans' schedule takes the matter no further.
In any event, I also agree with Mr Tennet that there is no evidence to support the proposition that after the operation of Implementation Methodology, the further back one goes the "worse it gets". The only post Implementation Methodology information relates to re-apportionment to 2001 and shows that the position is better than under the present regime. I have already found that the evidence does not support the contention that the Implementation Methodology would be unnecessary if Re-apportionment was not adopted. This is contrary to Lincoln's advice.
I also agree with Mr Tennet and Mr Green in relation to Mr Evans's argument based on fairness. First, in my judgment, it is relevant that all Historic Employers were originally contractually bound to abide by the terms of the Scheme including amendments to those terms. It seems to me that the Historic Employers ought at least to have been aware of the possibility of further amendments to the Scheme in order to bring them in to the pool of contributing Employers and in particular, are likely to have been aware since the decision in the MNOPF case. In any event, I agree that there is no necessary link between notification or awareness and liability and that the surprise factor if any, has been properly and reasonably addressed by means of the payment plans on offer. Further, as I have already mentioned, in my judgment it is for the Trustee to determine the weight to be given to the effect upon cross-subsidy compared with the shifting of liabilities of the amount of retrospection applied. There is nothing to suggest that the way in which they have reached that conclusion is unreasonable. It was not raised as an issue by the expert witnesses.
In my judgment therefore, Issue 5 must be answered in the affirmative.
Issue 6 Whether if a Participating Employer has a credit in respect of previous deficit contributions, it would be proper for the New Regime to give the Trustee discretion to use that credit to reduce the contributions payable by another Participating Employer as provided in proposed Rule 5.2(iv)(f)(V)?
If its principal arguments in relation to partial augmentationand Re-Apportionment fail, but for the points to which I shall refer, Mr Spink on behalf of P&O Ferries concedes all of the points he has made upon Issues 6 -12. In relation to this Issue 6, P&O Ferries says that it does not oppose the provision for offsetting credits on the footing that the power would not be exercised unless requested to do so by the Employer to which the credit is attributable. Mr Tennet confirmed that the Trustee cannot envisage the exercise of the power in circumstances in which the Employer to which it is attributable does not wish the offset to take place.
Issue 7 Whether it would be proper for the New Regime to give the Trustee discretion to increase a Participating Employer's deficit contributions to reflect a proportionate share of anticipated orphan liabilities within the Scheme as provided in proposed Rule 5.2(iv)(f)(III) and (IV)?
As I have already mentioned, Mr Spink no longer suggests that it would not be proper for the Trustee to have the discretion to increase a Participating Employer's deficit contributions to reflect a proportionate share of anticipated orphan liabilities within the Scheme. In his skeleton argument he had suggested that it would be improper to require a Participating Employer to pay a greater share of liabilities over and above those which reflected the percentage attributable to pensionable service of Members whilst employed by that Participating Employer in advance of it being first established that the Participating Employer to which such liability is truly referable could not pay.
Issue 8 Whether it would be proper for the New Regime to give the Trustee discretion (subject to the advice of the Actuary) to adjust a Participating Employer's contributions, including in circumstances where there is a risk of an Insolvency Event or of contributions being irrecoverable, as provided in proposed Rule 5.2(iv)(f)(I)(II) and (VI)?
Mr Spink no longer opposes the Trustee's application in this regard. He had sought to argue that this was another example of a "bootstrap" provision and an unnecessary weight in favour of the Trustee.
Issue 9 - Whether it would be proper for the New Regime to require the Trustee to prepare an Individual Payment Plan for each Participating Employer, in which the required contribution will be payable by a specified date or where the Trustee agrees to instalments, with the power to charge interest for late payment as provided in proposed Rule 5.2(ii), (iii), (v) (vi) (vii) and (ix)?
In the case of this Issue, Mr Spink made clear in his Skeleton Argument that P&O Ferries does not oppose this element of the New Regime. P&O Ferries recognises that it is necessary for the Trustee to have the power to manage the payment arrangements for each one of those Participating Employers that is actually able to pay any form of contribution. It accepts that the concept of the Individual Payment Plan is reasonable.
Issue 10 - Whether it would be proper for the New Regime to give the Trustee discretion to make two or more Participating Employers jointly and severally liable in respect of each other's contributions to the Scheme as provided in proposed Rule 5.2(viii)?
Issue 11 Whether it would be proper for the New Regime to give the Trustee discretion to make one or more Participating Employers jointly and severally liable with an Insolvent Employer for some or all of a Scheme Debt?
As I have already mentioned, these Issues 10 and 11 are conceded by Mr Spink on behalf of P&O Ferries subject to one narrow point. Mr Spink says that it would be preferable if it were written into the Rules that the power could only be exercised where there has "actually been some sharing of benefit, for which it would make it right for that company to be made jointly and severally liable." Mr Tennet explained that the Trustee has considered the advice of Mr Nugee and the paper on the subject provided by Mayer Brown and has come to its decision accordingly. He also indicated that it was intended that the power be exercised in the manner suggested by Mr Spink. It seems to me therefore, that there is nothing left in this point and that Issue 11 should also be answered affirmatively.
Issue 12 - Whether it would be proper for the New Regime to give the Trustees discretion on the determination of the Scheme to obtain from any Participating Employer an Exit Amount or Amounts which is or are in aggregate greater than that Participating Employer's section 75 debt, whether in circumstances in which the Trustee has not been able to recover from each Participating Employer the entirety of its Exit Amount or at all?
Once again, Mr Spink on behalf of P&O Ferries does not pursue his opposition to this aspect of the New Regime.
To conclude before turning to the "Open/Frozen" issues, I am happy to approve the proposed exercise of the power of amendment in the form which has been put before the Court and which has become known as the New Regime. The details of the proposed amendments are set out in a schedule to this judgment. It seems to me that the Trustee dealt with this matter in a meticulous manner and sought all relevant and proper advice upon which it quite properly relied. Furthermore, in my judgment there is nothing to show either that it proposes to exercise the power of amendment in a way which exceeds its scope or that decisions have been made at which a reasonable trustee could not have arrived and I am satisfied that all relevant and no irrelevant matters have been taken into consideration. The wide ranging criticism which it has suffered is unfortunate but perhaps inevitable in the light of the commercial rivalry between the Employers concerned and the amounts involved.
B. IS THE SCHEME OPEN OR FROZEN?
In addition to the Propriety Issues a number of further issues have arisen which are relevant to Current Employers. They have been dubbed the "Open/Frozen issues". They arise from the fact that as a result of a combination of Rule 4 and the definitions of "Average Revalued Pensionable Salary", "Full Revaluation" and "Revaluation" in Rule 3 of the 2001 Rules and the current version of the Rules, certain Ratings, including those employed by a Current Employer at the date on which the Scheme was closed on 31 May 2001 are entitled to revaluation of their benefits at a higher rate whilst they remain within that category, than if they cease to be so. In these proceedings, the Members falling within the categories set out in Rule 4 have been called "Specified Members" and I adopt that nomenclature.
This situation gives rise to the question of whether, in fact, since 31 May 2001 when the 2001 Regime took effect and the Scheme was closed to new members and future accrual of years of service, it became a "frozen scheme" for the purposes of Occupational Pension Schemes (Deficiency on Winding Up etc) Regulations 1996, SI 1996/3128 (the "1996 Deficiency Regulations") and Occupational Pension Schemes (Employer Debt) Regulations 2005, SI 2005/678, as in force from 6 April 2005 and in their amended form after 2008, (the "2005 Debt Regulations").
If since 31 May 2001, the Scheme has been frozen then the Current Employers who were "statutory" Employers immediately before the closure would potentially remain "statutory" Employers for the purposes of section 75 Pensions Act 1995 whether or not they ceased to employ Specified Members. This affects how section 75 debts are calculated for other "statutory" Employers and creates a situation in which C2 Employers could be liable as "statutory" Employers if section 75 debts were triggered on a future winding up of the Scheme. Furthermore, if the Scheme became a frozen scheme on 31 May 2001, the "statutory" Employers immediately before that event are deemed to remain "statutory" Employers for the purposes of ongoing funding liabilities under the Scheme Specific Funding regime of the Pensions Act 2004.
If, in fact, the Scheme did not become a frozen scheme on 31 May 2001 then it is argued that in certain circumstances, ceasing to employ a Specified Member could amount to an "employment cessation event" (an "ECE") for the purposes of regulation 6(1)(d) and 6(4) of the Debt Regulations in their 2005 version and regulations 2(1) and 6(1)(d) in their 2008 version. In the 2005 version of the Debt Regulations operative from 6 April 2005 until 5 April 2008 and at all relevant times before 2005, an ECE was defined as occurring when the Employer:
"
ceases to be a person employing persons in the description of employment to which the scheme relates at a time when at least one other person continues to employ such persons, immediately before he so ceases . . "
From 6 April 2008 onwards it was defined as an event where:
"(a) an employer has ceased to employ at least one person who is an active member of the scheme, and (b) at least one other employer who is not a defined contribution employer continues to employ at least one active member of the scheme".
In addition, from 6 April 2008, "frozen scheme" was defined in regulation 2 of the 2005 Debt Regulations as "a scheme which has ceased to have active members."
International Marine argues that the Scheme is not frozen and that it underwent an ECE in 2003 at a time when the Scheme was in MFR balance and as a result, its section 75 liability was nil. International Marine goes on to contend that as a result and upon a true construction of the Rules and as a result of having served a notice dated 15 June 2010 under Rule 30.3 of the Current Rules, it and Esso Petroleum Company Ltd can withdraw from the Scheme with no further liability and are not subject to the detailed withdrawal provisions contained in Rule 30.3 of the Trust Deed and Rules.
For the purposes of the Open/Frozen issues it is intended that International Marine should represent those Current Employers who ceased or claim to have ceased to employ Members who were or who were deemed under Rule 4 to be in seagoing employment after 31 May 2001 whether like International Marine itself they have served notice under Rule 30.3(i) to withdraw from the Scheme or have not done so. There are thought to be fifteen Current Employers in the latter category. On their behalf, International Marine argues that the Deed of Variation dated 13 December 2012 by which the Trustee amended Rule 30.3(i) by the insertion of a provision to the effect that notice to withdraw could not be given by a Current Employer after 13 December 2012 is invalid and that such Current Employers should now be allowed a reasonable time to serve a notice and withdraw from the Scheme in the same way as the ExxonMobil companies.
All other Current Employers which either continue to employ Members who are in seagoing employment or who otherwise fall within Rule 4 or which ceased to employ such Members between 31 October 1999 and 31 May 2001 are intended to be represented by Stena Line. It is in their interests to argue that the Scheme is frozen and if that is not the case, first that the Rules cannot be construed in the way for which International Marine contends and if that is wrong, that the amendment to Rule 30.3(i) preventing a Current Employer from giving notice to withdraw after 13 December 2012 is valid.
In fact, the Trustee points out that as a result of the fact that under Rule 4.4(ii) Specified Members could be employed by Historic Employers as well as Current Employers, if International Marine's argument is correct, it is possible that Voluntary or Historic Employers became or could become statutory Employers for the purposes of the Scheme Specific Funding regime and the s75 debt regime and incur liabilities accordingly, if they employed Specified Members or do so in the future.
The Trustee has administered the Scheme on the basis that it became a frozen scheme on 31 May 2001 and accordingly, it has proceeded on the basis that no section 75 debts have arisen when Current Employers ceased to employ Specified Members and no such debts have been recovered.
As I have already mentioned, those falling within the categories set out in Rule 4 have become known as "Specified Members". Not only is it argued that the cessation of employment of such a person in specified circumstances, brings about an ECE but the definition of the category of Members and the rights attaching to that category are relevant to the question of whether the Scheme is "frozen". Accordingly, I will set out the provision. I have used the 2001 Rules which do not differ materially from the current 2007 version. The relevant parts of Rule 4 are as follows:
"4.1 No person may become a Member on or after the Closure Date
4.2 A Member shall be an Active Member on the Closure Date if he is either:
(i) employed as a Rating by a Current Employer; or (ii) treated as having left Service under Previous Rule 12.1; or (iii) treated as continuing in Service under Previous Rule 12.2; or (iv) paying contributions with the consent of the Trustees under Previous Rule 5.5 4.3 An Active Member who becomes a Member of MNRPP (or a defined contribution retirement benefits scheme of a Current Employer which the Trustees after consulting the Actuary consider to be overall as good as MNRPP) on 1 June 2001 shall have the option, exercisable before such date as the Trustees shall decide, to elect that 7% Revaluation should apply to him instead of Full Revaluation during his Active Membership (as determined under Rule 4.4) after the Closure Date.
4.4 Active Membership shall, subject to Rule 4.5, continue whilst the Member falls within any of the following categories:
(i) he is in seagoing employment with a Current Employer, whether that employment started before, on or after the Closure Date, or (ii) he is in seagoing employment with a Participating Employer who is not a Current Employer being an employment which started after the Closure Date, or (iii) where Previous Rule 12.1(ii) applied to the Member on the Closure Date, he shall be in this category during the balance of the 12 months or the 3 years (as appropriate) referred to in that Rule if during that balance period he is unemployed or in seagoing employment with an employer which is not a Participating Employer, or (iv) where Previous Rule 12.2 applied to the Member on the Closure Date, he shall be in this category so long as he shall remain a contributing member of the Private Scheme concerned or of the MNOPF, or (v) where Previous Rule 5.5 applied to the Member on the Closure Date, he shall be in this category until the third anniversary of the date on which he ceased paying contributions under Previous Rule 5.1. 4.5 An Active Member shall cease to be an Active Member on the earliest of the following dates:
(i) the first date on which he is in none of the categories set out in Rule 4.4, or (ii) unless Rule 4.4(iv) applies to him, the date he enters non-seagoing employment, or (iii) the date he becomes a Pensioner, or (iv) the date of his death."
In summary therefore, those falling within Rule 4.2 were either employed by a Current Employer as a Rating, were treated as not having left service during a period of three years without having paid contributions, were treated as not having left service but had joined the MNOPF (the pension scheme then available to Merchant Navy officers) or a private scheme of a non-Participating Employer before 1988 or were paying contributions in respect of a period of unemployment or temporary absence not exceeding three years pursuant to rule 5.5 in its 1994 form.
Issues 1 and 2
The first two issues are matters of statutory construction. Issue 1 addresses the question of whether the Scheme has been a "frozen scheme" since 31 May 2001 and Issue 2 is focussed on whether nevertheless, a Rule 4 cessation was an ECE prior to 6 April 2008. The declarations which are sought in are the following form:
(1) a declaration as to whether the MNRPF has since 31 May 2001 been "a scheme which has no active members" or a "frozen scheme" within the meaning of the Deficiency and Debt Regulations...such that the Current Employers (including any C2 Employers) were and remained "employers" for the purposes of the Deficiency and Debt Regulations notwithstanding a Rule 4 Cessation;
and
(2) a declaration as to whether the occurrence of a Rule 4 Cessation was an event in which an "employer... ceases to be a person employing persons in the description or category of employment to which the scheme relates at a time when at least one other person continues to employ such persons" or an "employment-cessation event" [an "ECE"] within the meaning of the Deficiency and Debt Regulations...such that the Rule 4 Cessation was capable of triggering a debt under section 75 of the Pensions Act 1995.
Issues 3, 4 and 5
Obviously, these issues arise only where I have decided that the Scheme is not frozen and/or that a Rule 4 Cessation would trigger a debt under section 75 Pensions Act 1995. In summary, these issues are concerned with whether the effect of an ECE upon a true construction of the Rules results in the reduction of that Employer's "Current Employers Percentage" to zero for the purposes of that Employer's contribution liabilities under Rule 5 and whether such a reduction or extinction also has the same effect upon the "Withdrawing Employer's Percentage", which is relevant to the terms upon which a Current Employer may withdraw from the Scheme pursuant to Rule 30.
In particular, Issue 3 is a pure question of construction of the Rules. It goes to whether a Rule 4 Cessation could ever be within Rule 5.5. Mr Green on behalf of Stena Line argues that the reference in Rule 5.5 to Section 75 or 75A in relation to any given employer is a reference to insolvency events only and would not include a Rule 4 cessation. Mr Simmonds on behalf of International Marine contends that there is no reason to distinguish a Rule 4 cessation from any other events which serve as triggers to a section 75 or 75A debt.
Issue 4 arises if Issue 3 is answered in the affirmative so that a Rule 4 Cessation falls within Rule 5.5. In such circumstances, upon a true construction of the Rules, does the Current Employer's Percentage automatically fall to zero for the purposes of the liability to contribute under Rule 5.2? Mr Green on behalf of Stena Line says that Rule 5.5 is a scheme apportionment Rule for the purposes of section 75 and 75A only and it has no impact upon Rule 5.2 and the Schedule of Contributions. On the other hand, Mr Simmonds says that if the Current Employer's Percentage reduces to zero it does so automatically for the purposes of Rule 5.2.
Once again, Issue 5 only arises if Issue 4 is answered in the affirmative. If a Rule 4 Cessation falls within Rule 5.5 and has the effect of reducing the Current Employer's Percentage to zero under Rule 5.2 for the purposes of contributions, does it also reduce the "Withdrawing Employers Percentage" to zero for the purposes of Rule 30.3? In summary, Mr Green says that the Withdrawing Employer's Percentage is only subject to modification under Rule 30.8 and not Rule 5.5 whereas Mr Simmonds submits that it has that knock-on effect.
The Declaration sought is:
"
whether, if the occurrence of a Rule 4 Cessation triggered a section 75 debt (or would have triggered such a debt but for there being no deficit in the MNRPF on the applicable valuation basis), the "Current Employer's Percentage" of the affected C2 Employer falls to be re-allocated amongst the remaining Current Employers under Rule 5.5 of the Current Rules or the 2001 Rules with the result that the C2 Employer has a zero percentage for the purposes of Rules 5.2 and 30 of those Rules"
Issues 8 and 9
It is most convenient to mention Issues 8 and 9 out of turn. Issue 8(i) is concerned with whether the Trustee can require a premium to be paid by C2 Employers (including the ExxonMobil companies) under the withdrawal and transfer out provisions in Rule 30, even though (as is assumed as a result of the answer to previous issues) the C2 Employer's Current Employer's Percentage and Withdrawing Employer's Percentage have become zero as a result of its having occasioned an ECE, and Rule 5.5 having had a general application for the purposes of the Rules. This issue applies to the ExxonMobil companies, and (if they were to be entitled to require that they be given a further opportunity to withdraw under Rules 30.3 to 30.8) all other C2 Employers.
Issue 9 asks whether, in the case of a C2 Employer which, by virtue of its having succeeded on all previous issues, cannot be asked for either a premium or provision of a successor scheme in accordance with the withdrawal and transfer out Rules, because its Current Employer's Percentage and Withdrawing Employer's Percentage have become zero, Rules 30.3 to 30.8 can apply at all.
In summary, Mr Green says that even if the Current Employer's Percentage has been reduced to zero for the purposes of contributions under Rule 5.2 of the Rules and for the purposes of the Withdrawing Employer's Percentage under Rules 30.3 to 30.8 of the Rules the premium provisions contained in Rule 30.3(v) and 30.4 are not dis-applied. He says that there is no reason to do so. In relation to Issue 9, Mr Green submits that if in fact, the effect of an ECE at a time when the Scheme was in balance on the MFR basis has the effect of a reduction of the Current Employer's Percentage to zero and as a result, the reduction of the Withdrawing Employer's Percentage to zero (which he does not accept) and if as a further consequence such an employer cannot be required to pay a premium or comply with the transfer of liabilities provisions and successor scheme provisions, then Rules 30.3 to 30.8 cannot operate in relation to such an employer and it cannot withdraw at all. Mr Simmonds submits that this is the case.
Issues 6 and 7
Issues 6 and 7 are concerned with the extent to which the Trustee may now exercise its power of amendment in such a way as to re-impose positive percentages upon C2 Employers in respect of which (as a result of the hypothesis on which Issues 6 and 7 are predicated) the Current Employer's Percentages and Withdrawing Employer's Percentages have reduced to zero by reason of the prior Rule 4 Cessation. These two issues focus respectively upon the scope of the Trustee's power of amendment and the propriety of an exercise of it in such a manner.
The Declarations sought in relation to Issues 6, 7, 8 and 9 are framed in the following way:
"
if the "Current Employer's Percentage" of the C2 Employer did fall to be so re-allocated and thus resulted in it having a zero percentage for the purposes of Rules 5.2 and 30 of those Rules:
i) a declaration that the C2 Employer nevertheless can and may be included within the new contribution regime referred to at paragraph 1 above thereby increasing its percentage from zero; ii) a declaration as to whether the C2 Employer may (subject to the suspension currently in place) withdraw from the MNRPF under Rule 30 of the Current Rules, and if so on what terms as to the premium, transfer payment and transfer of liabilities under Rules 30.3 to 30.7." The Relevant Rules
As I have already mentioned reference was made during the hearing to the 2001 version of the Rules and in fact in relation to the provisions relevant to the issues in this case, there is no difference between the 2001 version and the current 2007 edition of the Rules save for the definition of "Schedule of Contributions" and the insertion of a new Rule 5.6. They are in the following form:
""Schedule of Contribution" means the schedule decided from time to time by the Trustees after taking advice from the Actuary and consulting the Current Employers, setting out the rates of contributions required to be paid by the Current Employers."
. . . . .
"Rule 5.6
Current Employer's Percentage unlikely to be recoverable
5.6 If the Trustees (with the approval of the majority of the full number of the Participating Employers' representatives and also a majority of the full number of the Members' representatives serving as Trustees or as Directors of the Board of any Corporate Trustee) are satisfied that any future amounts likely to fall due under the Schedule of Contributions from a Current Employer are unlikely to be recoverable without incurring disproportionate cost or within a reasonable time, the Trustees may re-allocate part or all of that Current Employer's Percentage amongst the remaining Current Employers in proportion to their Current Employer's Percentages as in force immediately before the reallocation."
I refer to the 2001 version unless otherwise specified. Other than Rule 4 to which I have already referred, I will set out each of the Rules when they become relevant.
(1) Is the Scheme a "frozen scheme"? (2) Even if the Scheme is frozen can Rule 4 Cessations have been an employment cessation event prior to 6 April 2008?
As I have already mentioned, these issues arise from the fact that the International Marine and the numerous other C2 Employers which it represents, contend that they have suffered an ECE for the purposes of the section 75 regime. It is necessary therefore, to consider that regime, at least in outline. Section 75 Pensions Act 1995 came into force on 6 April 1997. It together with associated regulations to which I refer together as "the s.75 regime" provides for statutory debts to be payable by specified employers which have been referred to as "statutory employers". Statutory employers for the purposes of the s75 regime are and have always been defined as "employers of persons in the description or category of employment to which the scheme in question relates ": s.124(1) Pensions Act 1995. In relation to ECEs, up to 1 September 2005 section 75 debts were calculated on the MFR basis and on and from 2 September 2005 the full buy-out basis has been applied.
In the case of a multi-statutory employer scheme such as the Scheme, the s75 regime imposes statutory debts in three circumstances namely (a) the winding-up of the scheme, (b) when the statutory employer suffers a relevant insolvency event, and (c) when the statutory employer undergoes an ECE. The definition of a relevant insolvency event for the purposes of the s.75 regime has changed over time. As at 31 May 2001 when the 2001 Rules were introduced it was confined to liquidation: s.75(4) PA 1995 (in its pre-6 April 2005 form). As at 1 August 2007 when the Current Rules were introduced it had been extended to include all insolvency events as set out in s.121 Pensions Act 2004 together with a solvent winding-up. As I have already mentioned, the definition of an ECE has also been changed.
Under multi-statutory employer schemes the section 75 debt fell to be shared between the statutory employers in accordance with the requirements of the s.75 regime including in so far as consistent with the s.75 regime for the time being in force, a sharing in proportions set by the scheme rules. As at 31 May 2001 when the 2001 Rules were introduced and on 1 August 2007 when the Current Rules came into force, s.75(1A) Pensions Act 1995 (as inserted by reg. 4(2) of the 1996 Regulations) provided that:
"(1A) In the case of a scheme in relation to which there is more than one employer, the amount of the debt due from each employer shall, unless the scheme provides for the total amount of the debt due under subsection (1) to be otherwise apportioned amongst the employers, be such proportion of that total amount as, in the opinion of the actuary after consultation with the trustees or managers, the amount of the scheme's liabilities attributable to employment with that employer bears to the total amount of the scheme's liabilities attributable to employment with any of the employers."
It is on this basis, that Mr Green on behalf of Stena Line submits that Rule 5.5 is a scheme apportionment rule for the purposes of the s75 regime. I should add that since 6 April 2008 there have been separate provisions known as Scheme Apportionment Arrangements.
The relevant provisions of section 124(1) Pensions Act 1995 are in the following form:
"124 Interpretation of Part 1
(1) In this Part-
"active member ", in relation to an occupational pension scheme, means a person who is in pensionable service under the scheme, . . . . . "deferred member ", in relation to an occupational pension scheme, means a person (other than an active or pensioner member) who has accrued rights under the scheme, "employer ", in relation to an occupational pension scheme, means the employer of persons in the description or category of employment to which the scheme in question relates (but see section 125(3)), . . . . . "pensionable service ", in relation to a member of an occupational pension scheme, means service in any description or category of employment to which the scheme relates which qualifies the member (on the assumption that it continues for the appropriate period) for pension or other benefits under the scheme, "pensioner member ", in relation to an occupational pension scheme, means a person who in respect of his pensionable service under the scheme or by reason of transfer credits, is entitled to the present payment of pension or other benefits, (2) For the purposes of this Part-
(a) the accrued rights of a member of an occupational pension scheme at any time are the rights which have accrued to or in respect of him at that time to future benefits under the scheme, and (b) at any time when the pensionable service of a member of an occupational pension scheme is continuing, his accrued rights are to be determined as if he had opted, immediately before that time, to terminate that service; and references to accrued pension or accrued benefits are to be interpreted accordingly.
. . . . . .
(3) In determining what is "pensionable service " for the purposes of this Part-
(a) service notionally attributable for any purpose of the scheme is to be disregarded, and (b) no account is to be taken of any rules of the scheme by which a period of service can be treated for any purpose as being longer or shorter than it actually is. but, in its application for the purposes of section 51 , paragraph (b) does not affect the operation of any rules of the scheme by virtue of which a period of service is to be rounded up or down by a period of less than a month."
In short, Mr Green says that the Scheme closed to new joiners and accrual on 31 May 2001 and therefore, since that date, a C2 Employer can only have ceased to be an "employer of persons in the description of employment to which the scheme relates " for the purposes of the ECE definition if after that date it employed Ratings in "pensionable service" and thereafter ceased to employ Ratings in "pensionable service" as that expression is defined in s.124(1) Pensions Act 1995. He goes on to say that to be in "pensionable service" for the purposes of s.124(1) Pensions Act 1995 individuals have to be accruing additional years of service but after 31 May 2001 when the Scheme was closed to further accrual, that was not possible.
However, the persons within Rule 4 were entitled to revaluation upon what Mr Green describes as their accrued benefits at a rate higher than that available to those who no longer satisfied those characteristics. Pensions in payment increased at the lesser of 5% and RPI ("5%RPI"); deferred pensions of Members no longer in, or deemed to be in, seagoing employment increased at 5%RPI; and Members in the Rule 4 category which included those in, or deemed to be in, continuing employment as Ratings, including in certain circumstances unemployed Members, had their benefits revalued in accordance with national average earnings under s.148 Social Security Administration Act 1982 ("Full Revaluation" or "s.148 Revaluation") or, if they preferred and had so elected, at the lesser of 7% and RPI ("7% Revaluation" or "7%RPI").
Mr Green says that being entitled to revaluation of benefits previously accrued by reason of years of service to 31 May 2001 is not enough. He says that this is clear from the provisions of the 1995 Act, as well as from predecessor legislation where the expression "pensionable service" was first used (the Social Security Act 1973, the Social Security Act 1985) and the Pension Schemes Act 1993 which continues to use the same expression alongside the Pensions Act 1995.
As a result, he says that ExxonMobil companies and the other C2 Employers cannot have undergone an ECE by reason of ceasing to employ Ratings in seagoing employment since 31 May 2001 and therefore, the remainder of their argument about their entitlement to exit the Scheme, their Percentages having fallen to zero, also falls away. Mr Green says that in the circumstances post 31 May 2001, neither International Marine nor any other C2 Employer could be an employer of "persons in the description of employment to which the scheme in question relates " only to which the scheme "had related". However, the statutory test of whether an employer is a statutory employer is in the present tense and not the past. Mr Green says that all employers whether Historic or Current Employers ceased on 31 May 2001 to have in their employment any Members accruing further years of service under the Scheme and therefore they cannot satisfy the requirements for an ECE after that date.
To put the matter another way, Mr Green also submits that the right to increases is an incident of benefits earned before 31 May 2001 which were benefits attributable to such Members having before 31 May 2001 been in the description of employment to which the scheme related at the time that such benefits accrued, not benefits attributable to being in the description of employment to which the scheme relates after 31 May 2001. He says that a right to s.148 revaluation or 7%RPI has nothing to do with being, for the time being, in the description of employment to which the scheme relates . Equally, he points out that Members for the time being employed by companies that are not even Participating Employers have s.148 revaluation or 7%RPI applied to their accrued benefits. He submits that this is a clear indicator that such rights have nothing to do with their being (present tense) in the description of employment to which the scheme relates .
Mr Green also referred me to the Proposal for the purposes of the 2001 Regime which contains references to s.148 revaluation and 7%RPI being applied to "accrued benefits " and the Scheme as being closed to future accrual with background papers referring to persons entitled to s.148 revaluation/7%RPI as "deferred members " with a right to "revaluation " of benefits "previously built up ". Further, the evidence shows that the retention of s.148 revaluation (with an option for Members to elect for 7%RPI instead) was considered necessary in order to comply with a Courage style proviso to the amendment power protecting benefits "already earned". Further, he points to the fact that the 2001 Regime provided for the accrual of benefits after 31 May 2001 to take place in the specially established Merchant Navy Ratings Pension Plan.
Mr Green also points out that the statutory definition of "Active Member" in section 124(1) as a person in "pensionable service" as a result incorporates that statutory definition which means "service in any description or category of employment to which the scheme relates which qualifies the member (on the assumption that it continues for the appropriate period) for pension or other benefits under the scheme" qualifying , and on the assumption that it continues qualifies the Member for benefits. He says that in this case, all that the Ratings within the Rule 4 categories have is service which qualified them for benefits in the past tense.
Mr Green also referred me to Pilots National Pension Fund Trust Company Ltd v Taylor [2010] PLR 261 which is a complex and lengthy case involving many aspects of Pensions law. One of the issues which Warren J was required to decide was a question as to which groups of employees other than active Members were covered by the description or category of employment phrase. He was not required to consider the precise point in issue here.
He decided that an employer did not suffer an ECE for as long as it employs (a) persons eligible to be members of the scheme and/or (b) persons who are in pensionable service under the scheme. In this case, the Scheme closed to new members on 31 May 2001 and therefore, there can be no question from that date onwards of an Employer being a statutory employer by reason of the employment of those eligible to be members of the Scheme.
The paragraphs at which Warren J considered the issue with which he was seized are as follows:
"534. The question then arises about precisely what groups of employees are covered by the key phrase other than active members who are clearly included on any view. I can put the question this way: is it enough to prevent an ECE occurring in relation to the Scheme that the employer employs a person who falls in one of the following descriptions, and if so which? The descriptions are: (a) a person eligible to become a member as of right; (b) a person who requires the consent of the Trustee to be a Member; (c) a deferred Member; (d) a pensioner Member; (e) a person whom the employer is intending to employ and who will, upon employment, be eligible to join the Scheme."
. . . . .
540 [Mr Tennet says]. . . .
a. The key phrase focuses on the nature of the employment rather than just the identity of the employer. This, he says, might be thought to connote at the very least a requirement that the employee in question be eligible to join the scheme so that (for example) employment once the scheme was closed to future accrual would not count and would no longer be 'employment to which the scheme relates', any more than employment with the same employer before the scheme was set up would be. He is probably right to say what he does about a scheme which is closed to further accrual. But it is not because there is no longer any employment to which the scheme relates (which is true but not relevant); rather it is because there is no longer any description of employment to which the scheme relates." . . . .
549. In my judgment, the issue is one of eligibility. If an employee has a present right, without the consent of the trustees, the employer or any other person, to join the scheme, his employment is one of a description to which the scheme relates
"
Warren J went on to hold that a present right subject to trustee consent would suffice for eligibility purposes also.
"560. Issue 26: Ceasing to employ an active Member prior to 6 April 2008 did not trigger an ECE if the ECHA in question employed at least one person eligible to become a Member with or without requiring the consent of the Trustee under ... the Rules. It was not enough to prevent an ECE occurring that the ECHA in question continued to employ at least one person who was either a deferred Member or a pensioner Member nor that it might, in the future, employ a person eligible to become a Member."
Peter Smith J had decided in favour of (a) to (d) (not (e)) in Cemex UK Marine Ltd v MNOPF Trustees Ltd [2009] EWHC 3258 . Warren J proceeded to find against (c) and (d) sufficing in PNPF.
Therefore, Mr Green says that it follows that, whether one is looking at Issue 1 which focuses on the definition of "pensionable service"; or Issue 2 which focuses on the introductory "description of employment to which the scheme relates" wording, one is concerned with the condition of being an employer of statutory active members. He says that it follows, correspondingly that in either case, after 31 May 2001 to trigger an ECE, on the facts of this Scheme where there are no Eligibles, a Current Employer needs to cease to employ statutory active members. However, there were no statutory active members after 31 May 2001. He says that despite being called "Active Members" in the Scheme definitions, all such Members were deferred Members, with accrued benefits, having the benefit of a generous basis of revaluation as of 31 May 2001 as an incident of those previously accrued benefits. Those benefits he says were "already earned" and had as one of their indefeasible incidents the right to CARE linkage whilst the Member in question remained (or was deemed to remain) in seagoing employment.
Mr Green emphasises that in a defined benefit scheme like the Scheme the benefit for which a member qualifies as a result of pensionable service is a multiple of years of accrual and final salary. He describes it as a single benefit with two elements. He says therefore that if there is no ability to accrue further years of service, there can be no further accrual of benefit to which the scheme relates. The benefit in this case, including the entitlement to a CARE link thereafter was earned by reference to service before 31 May 2001 and was accrued as at that date.
He illustrated this further by reference to the Long Service Benefit and Short Service Benefit for the purposes of the preservation regime. Long Service Benefit is calculated by reference to n/60ths of Service to Normal Pension Age multiplied by a final pensionable salary at Normal Pension Age. Short Service Benefit is calculated by reference to n/60ths based on service to cessation of years of accrual multiplied by final pensionable salary at cessation of years' accrual. However, Mr Green points out that n/60ths of service to cessation of years' accrual multiplied by final pensionable salary at Normal Pension Age, or whatever other date before Normal Pension Age one chooses to leave employment, is neither Long Service Benefit nor Short Service Benefit. Mr Green says that a moment's thought shows that if one were trying to define the pension benefit, being the benefit earned by reference to pensionable service, by reference to the final salary link only, rather than by reference to years of accrual, there would be an infinite variety of candidates for the definition of Long Service Benefit. Such a concept because of the flexibility of the final pensionable salary ingredient in the defined benefit calculation would be inherently flexible and uncertain which Mr Green says would be apt neither for a description of a Long Service Benefit nor for the description of a Short Service Benefit. As a result, he says that the whole concept of pensionable service is that the years of service are actually informing the benefit, multiplied by whatever it is that should actually be relevant by way of definition under the rules.
Furthermore, Mr Green referred me to section 51 Pensions Act 1995 which is in the same part of the Act as the definition of "pensionable service" and is referred to in section 124(3) which is concerned with determining what is "pensionable service" for the purposes of this Part of the Act. Section 51 is concerned with annual increases in the rate of pension and makes reference to "pension . . . attributable (i) to pensionable service . . .". It is not in dispute that for this purpose, "pensionable service" is being used only to refer to year-by-year accrual. Section 51 applies different increases to those components of the pension attributable to different periods of pensionable service. It is agreed that it is plainly not intended that (for example) a period of revaluation be treated as a period of pensionable service for these purposes (and therefore potentially to attract a different rate of pension increase). Mr Green describes this is a "killer point" in his favour whilst Mr Simmonds says nevertheless that section 51 is irrelevant for the purposes of determining the meaning of "pension or other benefits."
In any event, Mr Green sought to support the proposition by reference to Schedule 16 Social Security Act 1973 from which the definition of "pensionable service" was ultimately derived. Schedule 16 introduced the "preservation requirements" for the first time. "Pensionable service" was defined as "service in relevant employment which qualifies the member (on the assumption that it continues for the appropriate period) for "long service benefit" under the scheme; "long service benefit" being in turn defined as the benefit which the member would qualify for if he were to remain in "relevant employment" until normal pension age: Schedule 16 paras 3(1) and 2(b) SSA 1973. "Relevant employment" was defined as "any employment to which the scheme relates": Schedule 16 para 2(a).
Mr Green submits that the natural meaning of this is that in referring to service that qualifies one for a long service benefit, the provision is referring to accruing years of benefit. He says that "Long service benefit" is the product of multiplying years of service with the final salary or in this case, the CARE link. Mr Green emphasises that the concept is one of long "service" benefit and that it is not based on a member's years of service (to his date of early leaving) plus years when not accruing years of service but enjoying only a final salary (or CARE) link.
Lastly, in this regard, he took me to the Social Security Act 1990 which introduced "and continues to render service which qualifies him for benefits" after the words "relevant employment" in Schedule 16 paragraph 2(b) of the Social Security Act 1973 and "pensionable service" for "service in relevant employment" in paragraph 6. It provides therefore for the need to provide Short Service Benefit where pensionable service is terminated before Normal Pension Age. He also took me to Schedule 16 paragraph 10 which provides that Short Service Benefit must be computed on the same basis as Long Service Benefit. In this regard he referred to paragraph 12(1) which provides that:
"Where long-service benefit is related to a member's earnings at, or in a specified period before, the time when he attains normal pension age, short-service benefit must be related, in a corresponding manner to his earnings at, or in the same period before the time when his pensionable service is terminated."
Mr Green says that what this shows is that Long Service Benefit is n/60ths at Normal Pension Age multiplied by final pensionable salary at Normal Pension Age and that Short Service Benefit must be based on n/60ths at the date of cessation of accrual multiplied by final salary at the date of cessation of accrual. He says therefore, that the whole concept is based upon the fact that Short Service Benefit crystallises when years of accrual end. It is on this basis that he says one is able to calculate Short Service Benefit in a manner congruent with Long Service Benefit. He also referred me to paragraph 11 which provides that if paragraph 10 does not apply, Short Service Benefit is to be calculated on the basis of "uniform accrual" which is proportionate to one's pensionable service. Mr Green points out that in order for the accrual to be uniform, it has to be on the basis of years of accrual. There can be no uniformity if the accrual is partly made up of n/60ths and partly made up of a continuing final salary link. He adds that if pensionable service, in forming the Short Service Benefit, continues whilst the final salary link continues but whilst there is no continuing increase in the years of accrual, there is no uniformity to that which has been compared with the Long Service Benefit.
Mr Green also took me to the Social Security Act 1985 which introduced with effect from 1 January 1986 rights to a statutory baseline level of revaluation of deferred benefits and rights to transfer out the cash equivalent of deferred benefits and makes use of the Social Security Act 1973 definition of "pensionable service". Mr Green says that the point of the statutory baseline revaluation rate is to ensure that when a member ceases his year-by-year accrual, his benefits are increased in line with inflation, irrespective of whether the scheme provides for a measure of inflation-proofing. However, Mr Green says that that protection could be eroded or even circumvented if Mr Simmonds is right and pensionable service continues despite years of accrual having ceased. An employer would be able to provide, for example, revaluation at the rate of just 1% while the member remains in employment and on Mr Simmonds' argument, the member would still be in pensionable service and therefore, not subject to statutory revaluation as a deferred member and the protection would be circumvented. Mr Simmonds' answer to this is that if statutory revaluation is better, it is open to the member to opt out of pensionable service. Mr Green says this is cumbersome and puts an unrealistic onus upon the member. Interestingly, no one is suggesting in this Scheme that because of the continued CARE linkage that the Members are not entitled to a cross check against GMP revaluation.
Similarly, Mr Green notes that the purpose of the transfer-out provisions is to allow a member who has ceased year-on-year accrual to "port" his pension to another arrangement, such as a personal pension plan. However, he says that the effect of International Marine's submission would be that members would have no statutory right to take a transfer out while they remained in sea-going employment.
The real question therefore, as Mr Simmonds put it is whether for the purposes of the s75 regime, "pensionable service" means only years of accrual. As Mr Simmonds points out this is a pure matter of statutory construction in relation to which the belief of the Trustee as to whether the Scheme was open or frozen and the subjective reasons for the continuation of the CARE link after cessation of years of accrual are all irrelevant.
He also submits that it is irrelevant for this purpose that there is a statutory revaluation underpin and that there are various categories of member within the ambit of Rule 4. It is sufficient for his purposes that one of the categories within Rule 4 is those in seagoing employment. As a result they are provided with revaluation at a better rate than if they ceased such employment and became deferred members. In simple terms therefore, he says that it is seagoing employment which "qualifies" them for their CARE linkage and that is pensionable and amounts to an "other benefit" under the Scheme within the definition of "pensionable service" in section 124(1) Pensions Act 1995.
He referred me by way of analogy to section 151 Finance Act 2004. In that section, for the purposes of that Part of the Act, a person is an active member of a pension scheme "if there are presently arrangements made under the pension scheme for the accrual of benefits to or in respect" of them. He also took me to an extract from the Registered Pension Scheme Manual which is concerned with the annual allowance charge in respect of pensions saving. In particular, he referred to a passage which states that where an individual has left a pension scheme "but their future benefits are still linked to their final salary the individual is not a "deferred member" for the purposes of the tax rules." The reason given is that they are "still accruing benefits to the continued salary link." The Registered Pension Scheme Manual goes on to state, "If the individual's pension rights are still based on their current salary and so that benefits increase if they receive a pay rise (even though the amount of their pensionable service does not change) then they are not a deferred member." Mr Green says that Mr Simmonds' reliance upon the Registered Pension Scheme Manual and section 151 Finance Act 2004 is of no assistance to him. He points out that it is concerned with different legislation for a different purpose and also questions whether the Manual is correct.
Mr Simmonds also pointed to the content of correspondence between Hogan Lovells and Travers Smith in which attention was drawn to a passage in Mr Green's skeleton argument dated 24 June 2010 for the purposes of the 2009 Proceedings in which he stated that "benefits may be said to continue to accrue under the Scheme in relation to such ratings for so long as they continue in seagoing employment with a Participating Employer."
Mr Simmonds says that "pension or other benefits" is not a concept based solely upon accruing years of service. The terms are not defined but he says that it can be seen from the definition of "money purchase benefits" in section 181 Pension Schemes Act 1993 that "benefits" is used both in the defined benefit and in the defined contribution context. Accordingly he says, "pension or other benefits" in the definition of "pensionable service" in section 124 cannot be confined to accruing years of service. Apart from anything else, if Mr Green were right, there would be no need for the inclusion of "other benefits".
Mr Simmonds emphasises that the context with which I am concerned is that of the section 75 regime. Section 75 itself makes clear that it applies to occupational pension schemes which are not money purchase schemes, but it is not in dispute that it applies to schemes in which there is a mix of defined benefit and defined contribution benefits. Mr Simmonds reasons therefore, that the definition of "pensionable service" in section 124 Pensions Act 1995 includes the ability to qualify both for defined benefit and defined contribution benefits and therefore, the definition of "employer" in that section includes being an employer of persons who may be accruing a mixture of benefits. As a result, Mr Simmonds says that as an ECE occurs when ceasing to be a statutory employer, the definition is inconsistent with pensionable service being merely based upon the accrual of years of service. He also submits that given the definition of an ECE in regulation 2 of the 2005 Debt Regulations, it is possible for a "defined contribution employer" to undergo an ECE. This too, he says is inconsistent with the accrual of benefits being synonymous with the accrual of years service only.
Mr Simmonds also says that his is the better interpretation from a general policy perspective because Mr Green's construction gives rise to a situation in which the employer suffers an ECE and as a result ceases to be a statutory employer, pays its s75 debt and ceases to be liable as soon as years of accrual cease. If that is correct, it is necessary to base the s75 debt on assumptions about how long the CARE link may last. On Mr Simmonds' analysis, the s75 debt crystallises when the CARE link terminates and there is no need for any assumptions.
In relation to preservation, revaluation and cash equivalents, Mr Simmonds says it matters not whether Mr Green is right or wrong. The context is different. Nevertheless he made detailed submissions in relation to each context. In relation to preservation he pointed out that the regime applies to "any occupational pension scheme" and that a combination of the definition of "pensionable service" in section 70(2) and "long service benefit" and "benefits" in section 70(1) Pension Schemes Act 1993 is consistent with the inclusion of both defined benefit and defined contribution within the scope of the regime. Accordingly, he says that Mr Green cannot be correct. He makes the same point in relation to revaluation by reference to sections 83(1), 84(3) and Schedule 3 paragraph 5(1) Pension Schemes Act 1993 which provide for revaluation of money purchase benefits. In relation to cash equivalents, Mr Simmonds says that section 94(1)(a) Pension Schemes Act 1993 expressly states that it applies to "an occupational pension scheme other than a salary related scheme" but nevertheless uses the concept of the termination of "pensionable service." This too, he says is inconsistent with Mr Green's argument.
In this regard, in response, Mr Green says that Mr Simmonds' references to defined contributions are a distraction as they are not of relevance here. There are neither final salary linkage nor n/60ths accrual in defined contribution schemes. Furthermore, in relation to revaluation, section 84(3) and the money purchase method at paragraph 5(1) of Schedule 3 of the Pension Schemes Act 1993 Mr Green says that they refer to payments made by or on behalf of a member "in the manner in which they would have been applied if his pensionable service had not been terminated." This casts no light upon the meaning of the expression for the purposes of a defined benefit scheme which is dealt with by reference to the "average salary method" set out in paragraph 3 of Schedule 3 to the 1993 Act.
Lastly, in relation to Issue 1, Mr Simmonds referred me to the passage in the judgment of Millet J in In re Courage Group Pension Schemes [1986] 1 WLR 495 at 513A-B:
"There was some dispute whether "benefits already secured by past contributions" means the same thing, or includes the prospective entitlement to pensions based on final salary. In the absence of express definition, I see no reason to exclude any benefit to which a member is prospectively entitled if he continues in the same employment and which has been acquired by past contributions, and no reason to assume that he has retired from such employment on the date of the employer's secession when he has not. The contrary argument places a meaning on "secured" and "accrued" which is not justified."
In this case, Mr Simmonds says that the continued benefit being the CARE link is conditional upon remaining in seagoing employment after 31 May 2001 and that the terms of the proviso to the amendment power in clause 30(b) of the Trust Deed is neither here nor there.
I should add that both Mr Green and Mr Simmonds say that it is unnecessary to decide Issue 2 but Mr Tennet on behalf of the Trustee asks that I should make a separate decision on the point because it affects the administration of the Scheme and whether there are section 75 debts which ought to have been recovered. In any event, Mr Simmonds points out that Issue 2 only arises if he has lost on Issue 1. In other words the issue arises if Mr Green's narrow construction is correct.
Mr Simmonds points out that Warren J in the Pilots case was not concerned with the issue here. At [534] he was considering what categories of member were relevant to an ECE, other than actives. The scheme in that case was open to future accrual and as a result the question here was not under consideration. In relation to [540(a)], he says that it is ambiguous and appears in a passage in which Warren J was considering those who were not in fact members of the scheme at the time. In conclusion therefore, he says that the Scheme still "relates" to the Ratings in this case and that the quantum of their benefit is affected by the continuation of their employment.
Conclusion:
Issues 1 and 2
Despite the complexity of the statutory regime and the elaborate submissions on behalf of both the International Marine and Stena Line, this issue is relatively short albeit far from straightforward. After 31 May 2001, did the Current Employers or any of them continue to employ persons in the description of employment to which the Scheme relates and after 6 April 2008 did the Current Employers or any of them employ at least one person who was an active member of the Scheme in the statutory sense? If they did not do so, the Scheme was frozen and neither the International Marine nor any other C2 Employer could have suffered an ECE. In the circumstances of this case the question is whether years of accrual having ceased on 31 May 2001, the continued revaluation applied after that date at a preferential rate to n/60ths built up year on year in relation to those within the categories of Rule 4 is sufficient to mean that the C2 Employers continued to employ persons in the description of employment to which the scheme relates.
There is no doubt that an "active member" is defined as a person in "pensionable service under the scheme" and therefore after 6 April 2008 the question is whether there were persons in "pensionable service" under the Scheme whom an employer could cease to employ in order to fall within the definition of an ECE. Prior to 6 April 2008 it is the "employment of persons in the description of employment to which the scheme relates" which is relevant. However, the definition of "pensionable service" which is the backbone of the definition of "active member" uses the almost identical phrase, "description or category of employment to which the scheme relates which qualifies the member , . . . .for pension or other benefits under the scheme." In short therefore, in order to be in "pensionable service" is it necessary to continue to accrue years of service in relation to a scheme or is the continued entitlement to an enhanced rate of revaluation sufficient?
This question arises because under the 2001 Rules Members falling within Rule 4 are given a better rate of revaluation than those who do not fall within the categories set out in that rule, or who cease to satisfy those categories after 31 May 2001. For the purposes of the Scheme itself, those Members who fall within the categories in Rule 4, are in fact defined as "Active Members." However, the definition of Member makes clear that it is not possible to become a Member after the Closure Date which was 31 May 2001. The relevant definitions are contained in Rule 3 as follows:
"Active Member" means a Member who is an Active Member for the time being under Rule 4 and "Active Membership" shall be construed accordingly.
. . . . . .
"Deferred Pensioner" means a Member with an entitlement to benefits who is not a Pensioner or an Active Member
. . . . . .
"Member" means a person who has been admitted to Membership of the Scheme in accordance with the Rules and "Membership" shall be construed accordingly. No person shall become a Member on or after the Closure Date.
. . . . . . .
"Pensioner" means a Member in receipt of pension out of the Fund or who would have been in receipt of such a pension had he not commuted the whole of his pension for a lump sum."
It is not in dispute that the fact that those within the categories in Rule 4 are termed "Active Members" for the purposes of the Scheme is of no relevance for the purposes of the exercise of statutory construction which must be undertaken. Equally, although Mr Green explained the background to the provision of the favourable rate of revaluation for those within the categories in Rule 4, which stemmed from the perceived need to avoid breaching the provisos to the amendment clause in Rule 30, the subjective intention of the Trustee or the Trustee and the Employers is of no relevance to the exercise in hand. In fact, for this purpose, it seems to me that the provisions of the Proposal in relation to the 2001 Regime are also irrelevant. The Proposal may be relevant background when construing the Trust Deed and Rules. It is not relevant to the question of whether the circumstances of this case are within the statutory definition.
Despite the fact that Current Employers are required to make a contribution to the Scheme in respect of the s148 revaluation, the continued provision of that revaluation it seems to me that to those in the various categories set out in Rule 4 does not amount to "service in any description or category of employment to which the scheme relates which qualifies the member, ... for pension or other benefits under the scheme" in the present tense.
First, it seems to me that as Mr Green submits, the service to which the Scheme relates is all in the past. After 31 May 2001, the accrual of benefits takes place in the Merchant Navy Ratings Pension Plan. It is service to which the Scheme "related" in the past tense. The benefits accrued as at 31 May 2001 when they ceased to accrue years of service under the Scheme and the right to revaluation at a particular level is inherent in the accrued benefit as at that date. The continued entitlement to the preferential rate is conditional upon continuing in a status set out in Rule 4 but on the facts of this case, that status is no longer an employment to which the Scheme relates, even in the case of employment with a Current Employer. The right to the enhanced revaluation had already been earned by reference to service before 31 May 2001 and had accrued at that date.
In my judgment, it is an indicator in this case that the right to enhanced revaluation is not related to being in the description of employment to which the scheme relates that Members employed by employers who are not even Participating Employers are entitled to it. In fact, in order to have a right to the enhanced rate, it is not necessary to be in employment at all. I do not consider the fact that one of the categories is employment with a Current Employer assists.
Secondly, this conclusion is consistent with the way in which "pensionable service" is treated in section 51 Pensions Act 1995 which is in the same Part of that Act as the definitions with which I am concerned and is referred to in section 124 of that Act. Mr Simmonds concedes that section 51 only works if the reference to "pensionable service" contained in it is a reference to accrual of years. Otherwise, in a case such as this, the section would be providing for revaluation upon revaluation.
Thirdly, as Mr Green points out, it is also consistent with the way in which revaluation, preservation and cash equivalents work. I agree that if pensionable service does not relate to accrued years of service, it would be difficult if not impossible to calculate short service benefit with any certainty. The same is true in relation to the cash equivalent regime. I am less certain about his conclusion in relation to revaluation. In that regard, if Mr Simmonds were correct and pensionable service continued by virtue of the provision of a very low rate of revaluation, despite years of accrual having ceased, it would be open to the Member to opt out of pensionable service in order to gain the advantage of the statutory rate of revaluation.
I should add that I do not find Warren J's decision in the PNPF case particularly helpful here. He concluded that active members were within the key phrase on any view and went on at [540] to consider obiter that employment after a scheme is closed to future accrual would not count. He stated that that was "probably right" because there is no "description of employment to which the scheme relates." However, the circumstances in this case are different and were not within Warren J's contemplation. He was not asked to consider the situation in which there is an element in addition to the accrual of years of service for the purposes of an n/60ths calculation which element continues to apply whilst the member is employment despite the fact that the scheme in question is closed to future accrual.
I have to say that I also gain little assistance from section 151 Finance Act 2004 and the content of the Registered Pension Scheme Manual to which I was referred. They arise in different circumstances and are intended for a different purpose, namely taxation. Furthermore, the Manual is of little weight.
It follows therefore, that I consider that after 31 May 2001 there was no employment to which the scheme relates (present tense) and there were no active members in the statutory sense. There were no members in "pensionable service". Therefore, I consider that the Scheme is frozen and I answer Issue 1 in the affirmative. As a result of the change in the regulations, Issue 2 turns upon whether there are or were "persons in the description [or category] of employment to which the scheme relates" after the imposition of the 2001 Regime and before 2008. It follows from what I have already found that in my judgment there were no such persons in the statutory sense in the period in question and as a result, Issue 2 should be answered in the negative.
(3) As a matter of construction does a Rule 4 Cessation fall within Rule 5.5? (4) If it does, is the effect automatically to reduce the Current Employer's Percentage under Rule 5.2 to zero? (5) If it does, does this also have the effect of reducing automatically to zero the Withdrawing Employer's Percentage under Rule 30.5?
Rules 5.2 and 5.5 are in the following form:
" Contributions
. . . . . .
5.2 With effect from the Closure Date, the Current Employers shall contribute such amounts as are necessary to give effect to the Schedule of Contributions for the time being in force. Each Current Employer shall pay that Current Employer's Percentage of those contributions (disregarding contributions payable under Rule 5.3).
. . . .
Section 75 of the 1995 Act
5.5 Where section 75 of the 1995 Act applies to a Current Employer (including where the section applies to all Current Employers on termination of the Scheme under Rule 31), the Current Employer shall be liable under section 75 only for that Current Employer's Percentage of the total liabilities of the employers (if section 75 had applied to all employers) and that Current Employer's Percentage shall be re-allocated amongst the remaining Current Employers in proportion to their Current Employer's Percentages immediately before section 75 started to apply to that Current Employer."
A number of relevant definitions including "Schedule of Contributions", "Current Employer's Percentage" and "Current Employer" are set out in Rule 3 in the following way:
"Definitions"
3.0 In the Trust Deed and in these Rules the following expressions have the following meanings unless inconsistent with the context. Words importing the singular number import where the context requires or admits the plural number and vice versa. Words importing the masculine gender import where the context requires or admits the feminine gender. References to any legislative provision include any regulations made thereunder, any legislative modification or re-enactment of the provision and any equivalent Northern Ireland provision.
. . . . .
"Average Revalued Pensionable Salary" means the total of each payment of Pensionable Salary on or before the Closure Date as increased by Revaluation divided by the period of Service on or before the Closure Date
"Closure Date" means 31 May 2001
. . . . .
"Current Employer" means a Participating Employer named in Appendix I to the Rules or a company or organisation which has become a Current Employer in place of an existing Current Employer under Rule 30
"Current Employer's Percentage" means, in respect of a Current Employer, the Percentage specified against that Current Employer in the Schedule of Percentages adopted as at the Closure Date by the Trustee after consulting the Actuary or fixed under Rule 30.2 when it became a Current Employer but the Percentage may be modified under Rule 30.8. The Schedule adopted as at the Closure Date will specify a Percentage for each Current Employer based on the liabilities relating to benefits accrued by Members or former Members whilst in the service of that Current Employer up to 31 October 1999 expressed as a percentage of such liabilities for all Current Employers
. . . . .
"Participating Employer" means Current Employer and any company or organisation which was a Participating Employer under the Previous Rules.
In the case of a Participating Employer who is not resident for tax purposes in the UK, the Trustees may enter into such special arrangements with such Participating Employer as the Trustees in their absolute discretion may consider appropriate including variation in the calculation of contribution and benefit according to the particular circumstances of the participation.
. . . . .
"Rating" means a seafarer who is employed by a Participating Employer in a capacity other than a Master or Officer
"Revaluation" for an Active Member means, on or before the Closure Date, Full Revaluation and, after the Closure Date, 7% Revaluation (for an Active Member who has exercised the option under Rule 4.3) or Full Revaluation (in any other case).
"Full Revaluation" means revaluation by reference to the order made under section 148 of the Social Security Administration Act 1992 in the Pension Year in which Active Membership terminates.
"7% Revaluation" means revaluation for the period of Active Membership after the Closure Date in accordance with the final salary method specified in Schedule 3 to the 1993 Act as if the maximum rate was 7% not 5%.
. . . . . . .
"Schedule of Contributions" means the schedule agreed from time to time by the Trustees after taking advice from the Actuary, setting out the rates of contributions required to be paid by the Current Employers. The due dates and total amounts of contributions payable by the Current Employers (disregarding contributions under Rule 5.3) to be set out in the schedule in force as at the Closure Date shall be as set out in Appendix II. Thereafter, schedules shall be designed so as to meet the minimum funding requirements of the 1995 Act with increases in contributions being made only when required to meet those requirements and reductions in contributions being made only once the Scheme is 100% funded under those requirements. In the event that the minimum funding requirement (or section 75 of the 1995 Act) ceases to apply or is, in the opinion of the Trustees on the advice of the Actuary, substantially amended or otherwise significantly weakened as a funding standard, any new schedule shall require the Current Employers to pay such contributions as may be decided by the Trustees on the advice of the Actuary and after consulting the Current Employers
"Service" means all periods in respect of which contributions are paid to the Scheme on or before the Closure Date."
I should add that clause 1.0 of the Trust Deed states that "the marginal notes, index and headings to the Trust Deed and to the Rules shall not affect the construction hereof." Mr Green submitted nevertheless, that the headings to the Rules were a signpost as to the content. It seems to me that signposts they may be but in the light of clause 1.0 they can be of no assistance whatever to the construction of the content of the Rule itself. In other words, the signposts may or may not turn out to be accurate.
It is well established that a document must be given an objective interpretation and that the admissible background does not include any contractual negotiations as to its content. It is not in dispute however, that the Proposal in relation to the 2001 Regime which was placed before the Court and was the basis for the approval by the Court of the Trustee's decision to implement the 2001 Regime in the form of the 2001 Rules is admissible background for the purposes of construing the Rules. In fact, the detailed Proposal was annexed to the Order made by Blackburne J and was considered to be admissible background by Arden LJ in the 2011 Court of Appeal decision.
I was referred to the beginning of the Proposal document at which a summary of its contents is set out. In particular, reference is made to "the closure of the Fund to all future accruals of benefit", the continuance of "section 148 revaluation of accrued pension ... for all those members who would be entitled to it (either at or after the closure of the Fund) under the Fund's existing Rules and who so elect for the periods for which they would be so entitled", "an initial schedule of contributions" designed to restore funding to 100% on the MFR basis, "the establishment of the conditions under which individual Current Employers can withdraw from the closed Fund, normally in conjunction with a transfer of the relevant share of the Fund's assets and liabilities to another scheme nominated by that employer" and the ability of employers collectively to terminate the closed Fund.
I was also referred to the references under heading 2 "Closure of the Fund" and section 148 revaluation to "accrued benefits" and the choice to give up the benefit of future section 148 revaluation on such accrued benefits and instead to receive future revaluation on such "accrued benefits" at the rate of RPI capped at 7% per annum or to continue to benefit from section 148 revaluation as long as it would have been provided under the Rules with a reduction in both cases to revaluation at the rate of RPI capped at 5% per annum where a member ceases to be entitled to s148 revaluation, for example, upon ceasing seagoing employment. The details were set out in Appendix 3 to the Proposal.
The Proposal also contained detailed provisions about the Schedule of Contributions, the allocation of the MFR Shortfall, withdrawal from the Closed Fund, the calculation of the premium and the liabilities to be transferred. They were in the following form:
"3. Schedule of Contributions" "The objective of the initial schedule will be to set contributions at a rate in excess of that which the Actuary calculates on the so-called "equity-gilt" MFR basis and will be aimed at achieving 100% funding by a date one year earlier than would otherwise be required by the MFR legislation. The Current employers will agree to pay contributions to the Fund at least equal to those set out in the schedule of contributions. The contributions thus set will be adjusted upwards only if so required to comply with the MFR legislation and adjusted downwards only once 100% MFR funding is attained...
4. Allocation of the MFR Shortfall Financial responsibility for the shortfall on the MFR basis will be divided between the Current Employers, as follows:
(c) the resulting proportions will fix the percentage share of the closed Fund that each Current Employer will be responsible for
The contributions required of each Current Employer under the schedules of contributions will be apportioned between the Current Employers by reference to their share (as in (c) above) of the shortfall. The schedules of contributions will be reviewed each year, and adjusted if necessary in accordance with the MFR legislation.
The percentage share of the shortfall attributable to each Current Employer, and hence the share of contributions required from that employer, will not subsequently be recalculated (other than in the circumstances specified below in this Section). A Current Employer will not cease to be responsible for its share of the shortfall if it ceases to employ eligible Ratings. Its liability to contribute to the Fund would be reduced so as to allow for any payments made by it under section 75 of the Pensions Act 1995.
If a Current Employer goes into liquidation, that employer's share of the contributions (as reduced by any employer debt recovered from the employer to offset those contributions) will be reallocated amongst the remaining Current Employers in proportion to their respective proportions of the overall shortfall. The Fund's administrators will establish an effective system to monitor employers, so as to recover as far as possible any debt which might become due to the Fund in that event.
If a Current Employer withdraws from the closed Fund (as described below) the remaining Current Employers will have their percentage shares adjusted pro rata to reflect this withdrawal. Any debt arising by virtue of section 75 Pensions Act 1995 on the withdrawing Employer will be apportioned to it by the Fund's Rules using the same percentage share of the Fund's shortfall for which that Employer was responsible immediately prior to its withdrawal.
. . . .
6. Employer Withdrawal from the Closed Fund A Current Employer will be entitled to withdraw from the closed Fund in the manner described in this Section 6 or Section 7. After a Current Employer has withdrawn from the Fund, the Rules shall provide that its obligations to contribute to the Fund shall cease, and any MFR or other statutory contribution requirement shall be nil.
The Rules will be amended to permit a Current Employer to withdraw subject to the following conditions:
the Current Employer ("the Withdrawing Employer") must give notice in writing to the Trustee of its intention to withdraw from the Fund. Withdrawal may only take place immediately after close of business on 31 March in any year. The Withdrawing Employer's notice must be given no later than the 14 December preceding the intended date of withdrawal.
the Withdrawing Employer must have paid in full all contributions due from it prior to the date of withdrawal, including any interest due on late-contributions, and must also pay any debt arising by virtue of section 75 Pensions Act 1995;
the Withdrawing Employer must have paid to the Trustee, in addition to the amounts referred to above, a premium (if any) required of it by the Trustee, acting in its absolute discretion after receiving the advice of the Fund's Actuary, in accordance with the Rules. The purpose of the premium will be:
(a) to protect the interests of those Current Employers remaining in the Fund in the light of the reduced number of Current Employer "covenants" remaining after each withdrawal on the basis of which the closed Fund's remaining MFR deficiency has to be met, (b) to reflect the increased proportion of the costs of administering the Fund which would be borne by each of the remaining Current Employers. Those total costs will not be expected to reduce proportionately following an Employee withdrawal, (c) to protect the interests of beneficiaries, in particular the security of benefits for remaining beneficiaries. The principal factors which will be taken into account in the calculation of any such premium are set out under the heading of Calculation of Premium below.
the Withdrawing Employer has nominated a defined benefit occupational pension scheme ("the Receiving Scheme"), the trustees of which are able and willing to accept a transfer payment from the closed Fund, and in relation to which the Fund's Actuary is prepared to give a certificate in accordance with Regulation 12 of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 (as amended from time to time) in respect of the liabilities to be transferred from the closed Fund (see below);
the Trustee is satisfied that the transfer payment can be made consistently with the best interests both of the beneficiaries to be transferred and those whose benefits would remain in the closed Fund. If the Trustee is not so satisfied, it will give the Current Employer in question a full written explanation of the reasons why the Trustee does not consider the proposed transfer payment to be in the interests of beneficiaries, and no withdrawal by that Current Employer will take place.
Calculation of Premium The following principal factors are likely to be relevant to the Trustee in determining the premium:
(a) the costs of administration of the closed Fund; (b) an element reflecting the strength of the "covenant" represented by the Withdrawing Employer; (c) fairness to the Withdrawing Employer and the remaining employers; (d) consistency of treatment between Withdrawing Employers (whilst recognising that circumstances may change over time); and (e) the interests of beneficiaries. Liabilities to be transferred The amount of the liabilities which are to be transferred to the Receiving Scheme will be equal to the Withdrawing Employer's share of the closed Fund's total liabilities on the MFR basis as at the date of withdrawal (calculated by reference to the shares determined at the date of the Fund's closure, as described in 4, above).
. . . . .
The intention would be to cover the liabilities in (i) and sufficient other liabilities so that the Fund was relieved of a proportion of its liabilities which was the same as the proportion of the Fund's shortfall for which the Withdrawing Employer had previously been liable under Section 4.
. . . .
9. Abolition or substantial amendment of the MFR The Current Employers will comply with the MFR, or any other statutory funding requirement which may apply to them from to time in relation to the closed Fund. In the event that the MFR ceases to apply or is, in the opinion of the Trustee on the advice of the Actuary, substantially amended or otherwise significantly weakened as a funding standard, the Current Employers shall (following notification from the Trustee) pay such contributions to the closed Fund as may be decided by the Trustee on the advice of the Actuary and after consulting the Current Employers. This is subject to the ability of Current Employers to withdraw from the closed Fund, or to terminate it, in the manner described above. Provision for employer contributions to be paid on this basis will be incorporated into the Rules of the closed Fund. For this purpose, amendments to the debt provisions in Section 75 of the Pensions Act will be treated in the same way as amendments to the MFR."
Mr Green drew particular attention to the sentence stating that a Current Employer would not cease to be liable upon ceasing to employ Ratings and the statement that liabilities would be "reduced" as opposed to extinguished by a section 75 debt. That statement is not replicated directly in the Rules. Mr Green says nevertheless, that if a Rule 4 Cessation triggers a section 75 debt the sentence is support for the construction of Rules 5.5 and 5.2 so as to give credit for the payment of that debt, not for the contribution obligation to be extinguished by it. In addition, Mr Green points out that the Proposal is consistent with Rule 5.5 being construed as an apportionment rule under which the s75 debt is apportioned in accordance with the Current Employer's Percentage.
He also says that the withdrawal mechanism is set out at length and in detail and does not support International Marine's position. It is both stated that withdrawal shall be in the manner described which includes payment of a premium and transfer of liabilities to a substitute scheme upon which the Current Employer would be relieved of liability and cease to contribute. This is consistent with the explanation of the premium set out at [35] in the judgment of Blackburne J in the 2001 proceedings.
Further, Mr Green says that if Mr Simmonds is right the four main pillars of the 2001 Regime are undermined. They are (i) the provisions in Rules 30.3 30.8 which require the payment of a premium and the transfer of liabilities on withdrawal; (ii) Rules 30.1 and 30.2 which set out the means by which a Current Employer can withdraw by substituting another Employer or Employers with the consent of the Trustee; (iii) the requirement of at least six years of contributions; and (iv) the prescribed circumstances in which Employers can force a winding up under Rule 31.
Mr Simmonds drew attention to four aspects of the Proposal. The first was the move from the situation under the 1994 Rules where ceasing to employ Ratings brought about a cessation of the liability to contribute to the Scheme to one in which the Current Employers were liable to pay their percentage of the pro rata share of liabilities accrued by reference to service with that Current Employer as at October 1999 irrespective of whether they continued to employ Ratings or not. The second was that the funding target was modest. It was 100% on the MFR basis by April 2006, one year before the end of the prescribed statutory period. He says that this is reflected in the definition of "Schedule of Contributions" in the 2001 Rules which refers to meeting the MFR requirements with increases in contributions "only when required to meet those requirements" and thereafter, limits the circumstances in which the Schedule of Contributions could be changed. Thirdly, he says that the Proposal made clear that section 75 debt payments made by an individual Current Employer which would reduce the overall amount of the MFR deficit, would operate to reduce the liability share of that Current Employer. Lastly, he draws attention to the right for Current Employers to withdraw from the Fund on terms.
He says that it follows that the Proposal proceeded on the basis that it makes commercial sense that there would be credit given for the payment of a section 75 debt and that it would be given against the liability to pay contributions which is controlled by the Current Employer's Percentage. If no re-allocation takes place then the remaining Current Employers do not continue to bear 100% of the liabilities after an ECE has taken place resulting in a section 75 debt having been triggered and the exit of a Current Employer. Mr Simmonds says that this is reflected in the following passage from the Proposal:
"A Current Employer will not cease to be responsible for its share of the shortfall if it ceases to employ eligible Ratings. Its liability to contribute to the Fund would be reduced so as to allow for any payments made by it under section 75 of the Pensions Act 1995"
and:
"If a Current Employer withdraws from the closed Fund (as described below), the remaining Current Employers will have their percentage shares adjusted pro rata to reflect the withdrawal."
Therefore, Mr Simmonds says that the first sentence of the first extract from the Proposal merely emphasises that, under the 2001 Regime in contrast to the position under Rule 5.2 of the 1994 Rules, the Current Employer's contractual liability does not reduce to zero merely by reason of ceasing to employ Ratings. He says that the only mechanism for achieving what is set out in the second sentence of the extract is to reduce (and re-allocate) its Current Employer's Percentage and that this is reflected in terms of the 2007 Rules, in Rule 5.5 in the following way:
"Where section 75 or section 75A of the 1995 Act applies to a Current Employer...that Current Employer's Percentage shall be re-allocated amongst the remaining Current Employers in proportion to their Current Employer's Percentages immediately before section 75 or section 75A started to apply to that Current Employer"
and in Rule 30.8 in relation to Withdrawal:
"...the Withdrawing Employer's Percentage shall be re-allocated amongst the remaining Current Employers in proportion to their Current Employer's Percentages immediately before the withdrawal of that Withdrawing Employer."
Mr Simmonds submits therefore, that the first half of Rule 5.5 is a scheme apportionment rule for the purposes of section 75 but that the second part must be construed as a reallocation mechanism and that although the word used is "reduced", upon an ECE, the Current Employer's Percentage can be reduced to zero by virtue of that mechanism. He says that this is consistent with the Proposal and with the commercial purpose of giving credit for the lump sum paid by way of a section 75 debt.
Before turning to Mr Green's submissions, I should mention that it is not in dispute that the legislative background of the section 75 regime to which I have already referred, is also relevant to the proper construction of the Rules.
In relation to Rule 5.5 itself, Mr Green's submission is that it is a true scheme apportionment rule for the purposes of section 75(1A) Pensions Act 1995 (which was in force at the time the 2001 Rules were promulgated) and nothing more. He says that the wording of the Rule itself makes clear that it is only dealing with section 75. He says that it provides that where section 75 applies to a Current Employer its section 75 liability share should be its "Current Employer's Percentage" of the s.75 debt, and that its "Current Employer's Percentage" "shall [then] be re-allocated [for future s.75 purposes] amongst the remaining Current Employers in proportion to their Current Employer's Percentages".
Mr Green says therefore, that when Rule 5.5 refers to the re-allocation of "that Current Employer's Percentage" that is simply a reference back to the immediately preceding wording "the Current Employer shall be liable under section 75 only for that Current Employer's Percentage of the total liabilities of Employers (if section 75 or 75A had applied to all employers)", and this preceding wording is dealing only with the Current Employer's Percentage in the context of section 75. He says that if Rule 5.5 had been intended to apply other than in relation to section 75 it would have been drafted entirely differently. Mr Green says that if and in so far as such a construction does not reflect the entirety of the Proposal, it is a matter for rectification and not imaginative construction of Rule 5.5.
In relation to Mr Simmonds' submission that on Stena Line's construction Rule 5.5 does not provide for the situation in which there is an insolvency because there is no mechanism to change the Current Employer's Percentage in such circumstances unless Rule 5.5 is construed widely, Mr Green says that one should not seek to distort Rule 5.5 ostensibly to encompass insolvency, in fact in an effort to find room within it for the circumstances arising on a Rule 4 Cessation.
In any event, he says that if an Employer "went down" the liabilities would be picked up pro rata and/or Rule 5.2 can be construed to include such "orphan liabilities" within the obligation to contribute what is necessary to give effect to the Schedule of Contributions, the Schedule of Contributions being defined as something which is agreed by the Trustee from time to time after having taken the advice of the Actuary. If that is wrong, he says that it would be open to the Trustee to introduce a new Schedule and that in any event, the Trustee has the power to amend in order to change the Current Employer's Percentage. Mr Simmonds disputes this. He says that if one Employer "goes down" and Mr Green is right, there is nothing to enable the Current Employer's Percentage of each remaining Employer to be re-calibrated in order to bring the total back to 100%. On the contrary, each Current Employer's Percentage is fixed. He also disputes that such an outcome could be achieved under the Schedule of Contributions and points out that reliance upon the amendment power is no gauge to the present meaning of Rule 5.5.
Mr Green submits therefore, that the statement in the Proposal which is not expressly replicated in the 2001 Rules, namely "i[f] a Current Employer goes into liquidation, that Employer's share of the contributions (as reduced by any Employer debt recovered from that Employer to offset those contributions) will be reallocated amongst the remaining Current Employers in proportion to their respective proportions of the overall shortfall" is insufficient to require one to construe Rule 5.5 to include an automatic re-allocation for all purposes. He reminded me that it is the Rules that one is construing and it is their language that is the safest guide to their meaning.
In the alternative, he says that if Rule 5.5 must reflect the precise wording of the Proposal, the only way to ensure a perfect fit including a reflection of the statement in the Proposal that "[a] Current Employer will not cease to be responsible for its share of the shortfall if it ceases to employ eligible Ratings" is to construe Rule 5.5 as applying to two of the three section 75 triggering events (Employer insolvency and Scheme wind up) but not to the third section 75 triggering event (ECEs). He accepts that this is not a natural reading of Rule 5.5. He concludes therefore, that in the light of the admissible background, Rule 5.5 can be read as follows:
"Where section 75 or 75A applies to a Current Employer (including where the section applies to all Current Employers on termination of the Scheme under Rule 31 but not including where a Current Employer ceases to employ any Active Members "
Mr Green says that were the Court to feel driven to construe Rule 5.5 as cohering perfectly with the terms of the Proposal in this regard, it would in light of the admissible background, be clear that (a) something has gone wrong with the language and (b) what that something is. Therefore, the Court should read the Rules as containing the insertion that was clearly intended, Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 paras 22 to 25 making clear that this is part of the orthodox construction exercise of ascertaining what a reasonable person would have understood the parties to have meant. What one should not do is to read r.5.5 as automatically reallocating periodic contributions on insolvency (to cohere with one element of the Proposal) but equally reallocating periodic contributions on ECEs (thereby clashing directly with an important aspect of the Proposal).
Mr Simmonds says that that is far from a natural reading and that it is unnecessary to engineer a situation in which something appears to have gone wrong. He says that there is no need to exclude one of the trigger events for the purposes of section 75, namely an ECE, and to do so would make no commercial sense. He points to the express inclusion in brackets in Rule 5.5 and says that if it had been intended that there be an exclusion, that too would have been set out. He also says that the 2007 version of Rule 5.5 which includes express reference to section 75A is a minor indicator that all trigger events should be construed to be included. He says that it would be odd to have referred to section 75A expressly but to intend to exclude ECEs.
In further support of a narrow construction of Rule 5.5, Mr Green referred me to the definition "Current Employer's Percentage" in Rule 3 which as a matter of definition provides that the percentage itself may only be modified following withdrawal and therefore, as a consequence of that withdrawal pursuant to Rule 30.8. He also draws attention to the obligation to pay deficit repair contributions contained in Rule 5.2 which took effect for the initial period of six years from 2001 irrespective of whether the Current Employer employed Ratings and makes no reference or allowance for a collateral liability such as a debt under section 75 arising by virtue of an ECE, as a result of ceasing to employ Ratings in the meantime. He also draws attention to the fact that it was no part of the 2001 Regime that Current Employers might cease to be liable to fund the Scheme simply because 100% funding on the MFR basis was achieved.
Further, Mr Green says that Rule 5.5 does not have the primacy for all purposes of the 2001 Regime which International Marine seeks to accord to it. Rule 5.5 uses the "Current Employer's Percentage" for apportionment of section 75 debts, and having done so re-allocates the percentage between Current Employers for that purpose accordingly. It does not exonerate Current Employers from their responsibilities under their express employers' contributions covenant under Rule 5.2 (being the absolutely fundamental ingredient of the 2001 Regime), nor does it exonerate Current Employers from the obligation to provide a Receiving Scheme to receive its due share of liabilities as a condition of being allowed to withdraw which as was recognised by Blackburne J in the 2001 Proceedings and is borne out by the 2001 Proposal was central to the 2001 Regime.
He adds that the true construction of Rule 5.5 is unaffected by the insertion of the new Rule 5.6 in the 2007 version of the Rules. That Rule enables a pro-rata re-allocation of Current Employer's Percentages where the Trustee is satisfied that "any future amounts likely to fall due under the Schedule of Contributions from a Current Employer are unlikely to be recoverable." Mr Green submits that the new Rule does not affect the meaning of "Current Employer's Percentage" for general purposes and it is of note that the expression itself was not and did not need to be amended at the time, any more than did the definition of "Current Employer's Percentage" under the 2001 Rules and the Current Rules include a reference to r.5.5. On the other hand, Mr Simmonds submits that the new Rule 5.6 allows for permanent re-allocation and suggests that such a construction of Rule 5.5 in its 2001 form is also correct.
Further, in relation to the construction of Rule 5.5 in the context of the Rules as a whole, Mr Green's submissions for the most part centred upon the terms of Rule 30 which is in the following form:
"Withdrawal of a Current Employer
30.0 This Rule sets out the only circumstances in which a Current Employer can cease to be a Current Employer.
Substitution of new Current Employer
30.1 A Current Employer may, with the consent of the Trustees arrange for one or more other companies to assume the responsibilities of that Current Employer under the Scheme (including its obligations to pay contributions under Rule 5). The Trustees shall have an absolute discretion as to whether or not they agree to such a request. If the company or companies are not already Participating Employers, they must become Participating Employers in accordance with Clause 6.0 of the Trust Deed.
30.2 Where a Current Employer is permitted to withdraw from the Scheme under Rule 30.1, it shall cease to have any liabilities under the Scheme apart from any liabilities which arise under section 75 the 1995 Act as a result of its withdrawal. If only one company is substituted for the Current Employer that Current Employer's Percentage shall thereafter be the responsibility of that company. If more than one company is substituted, that Current Employer's Percentage shall be divided between those companies in a manner agreed between those companies and the Trustees. The liability of that company or companies to contribute to the Scheme under Rule 5.2 shall be reduced so as to allow for any payments made to the Scheme under Section 75 of the 1995 Act by the withdrawing Current Employer."
Withdrawal with transfer-out
30.3 A Current Employer (the "Withdrawing Employer) may withdraw from the Scheme subject to .ne following conditions:
(i) The Current Employer must give notice in writing to the Trustees of its desire to withdraw from the Scheme. Withdrawal may only take place after close of business on 31 March at the end of a Pension Year and the Current Employer's notice must be given no later than the 14 December in that Pension Year. (ii) Where a Current Employer gives notice under (i) the Trustees will, no later than the 14 January following that notice, notify all other Current Employers that such notice has been given and that they may also give notice of withdrawal under (iii) below. (iii) On receipt of the notification referred to in (iii) above any Current Employer wishing to withdraw from the Scheme at the end of that Pension Year shall give the Trustees notice of its desire to withdraw by no later than 14 February in that Pension Year. That Current Employer will then (subject to fulfilment of the other condition in this Rule 30.3) become a Withdrawing Employer and withdraw from the Scheme at close of business on 31 March at the end of that Pension Year. (iv) The Withdrawing Employer must have paid in full all contributions due from it to the Scheme prior to the date of the transfer payment under Rules 30.5 30.7 being paid, including any interest due on late contributions and any debt arising on its withdrawal under section 75 of the 1995 Act. (v) The Withdrawing Employer must also have paid to the Trustees the premium (if any) required of it by the Trustees under Rule 30.4 (vi) The Withdrawing Employer must have nominated a defined benefit occupational pension scheme in which the Withdrawing Employer participates (the "Receiving Scheme"), the trustees of which are able and willing to accept a transfer payment from the Scheme under Rules 30.5 30.7 and in relation to which the Actuary is prepared to give a certificate in accordance with Regulation 12 of the Occupational Pension Schemes (Preservation of Benefits) Regulations 1991 in respect of all the liabilities to be transferred from the Scheme under Rule 30.6. (vii) The Trustees are satisfied that the transfer payment to the Receiving Scheme under Rules 30.5 - 30.7 can be made consistently with the best interests both of the beneficiaries to be transferred and of the beneficiaries who would remain beneficiaries of the Scheme. If the Trustees are not satisfied, they will give the Current Employer concerned a full written explanation of the reasons why they do not consider the proposed transfer payment to be in the interests of those beneficiaries and no withdrawal by that Current Employer will take place. (viii) The Trustees have agreed with the trustees of the Receiving Scheme such terms of transfer as they consider necessary or desirable in order to protect the interests of the beneficiaries being transferred and the composition of the transfer payment to be made to the Receiving Scheme in accordance with Rule 30.7. (ix) The Trustees are satisfied that all the requirements of Rule 30.5 are met in relation to the proposed transfer (x) The Trustees have approved in advance all communications in relation to the proposed transfer to be issued by the Withdrawing Employer to the beneficiaries who are to be transferred to the Receiving Scheme. 30.4 The Trustees shall determine the amount of the premium (if any) to be paid by the Withdrawing Employer under Rule 30.3(v) in their absolute discretion after receiving the advice of the Actuary. The purpose of the premium will be:
(i) to protect the interests of beneficiaries of the Scheme remaining after the withdrawal of the Withdrawing Employer and, in particular, the security of the benefits of those remaining beneficiaries, and (ii) to protect the interests of the remaining Current Employers having regard to the reduction in the number of Current Employers due to the withdrawal of the Withdrawing Employer, and (iii) to reflect the increase proportion of the costs of administering the Scheme which would be borne by each of the remaining Current Employers. 30.5 The intention of the transfer to the Receiving Scheme is that there should be transferred to the Receiving Scheme liabilities with a value (determined by the Actuary) equal to the Current Employer's Percentage of the Withdrawing Employer (the "Withdrawing Employer's Percentage") of the total liabilities of the Scheme at the date of withdrawal and that the Receiving Scheme should therefore receive a transfer payment which, subject to Rule 30.7, is equal to the Withdrawing Employer's Percentage of the total assets of the Scheme as at the date of withdrawal. The Trustees shall comply with the requirements of Rule 10.3 in relation to the transfer.
30.6 With a view to achieving the objective set out in Rule 30.5, the specific liabilities to be transferred to the Receiving Scheme will be determined by the Actuary in the following order:
(i) Liabilities in respect of Active Members employed by the Withdrawing Employer at the date of withdrawal; (ii) Liabilities in respect of Deferred Pensioners or Pensioners who accrued more than 50% of their pension benefit under the Scheme whilst in the employment of the Withdrawing Employer, ranked as to the amount of their pension benefit which accrued whilst in the employment of the Withdrawing Employer (starting with the highest amount); (iii) Liabilities in respect of Deferred Pensioners or Pensioners who accrued some, but not more than 50% of their pension benefit under the Scheme whilst in the employment of the Withdrawing Employer, ranked as to the amount of their pension benefit which accrued whilst in the employment of the Withdrawing Employer (starting with the highest amount): (iv) Liabilities in respect of other Members selected by the Trustees who have no period of employment with the Withdrawing Employer. The transfer to the Receiving Scheme will cover the liabilities in (i) and sufficient other liabilities, taking (ii) before (iii) and (iii) before (iv), so that the transfer comprises liabilities of a value equal to the Withdrawing Employer's Percentage of the total liabilities of the Scheme as at the date of withdrawal. The Trustees may determine that any Active Member (apart from an Active Member employed by the Withdrawing Employer) shall not be one of the Members in respect of whom liabilities are transferred under (ii) or (iii).
30.7 The amount of the transfer payment to be made to the Receiving Scheme will be equal in value to the Withdrawing Employer's Percentage of the assets of the Scheme as at the date of withdrawal (or the amount of the cash equivalents under the 1993 Act of the Members referred to in Rule 30.6 (i), if greater). For this purpose, the assets of the Scheme as at the date of withdrawal will exclude any debt due from the Withdrawing Employer under section 75 of the 1995 Act and any premium required from the Withdrawing Employer under Rule 30.4 but the amount of the section 75 debt paid by the Withdrawing Employer shall be added to the transfer payment The Trustees will determine the assets of the Scheme which are to be included in the transfer payment in consultation with the Withdrawing Employer and the trustees of the Receiving Scheme. The Trustees will transfer a proportionate part of each of the Schemes assets, unless to do so would, in the opinion of the Trustees, be impracticable or likely to have an adverse effect on the value of the asset concerned. Where cash is paid to the Receiving Scheme by he Trustees in lieu of the transfer of any non-cash assets, the amount of the cash paid will be equal to the net proceeds of the assets which would have been realised following a sale of the assets concerned, after deducting the costs of converting those assets into cash.
30.8 Where a Current Employer has been permitted to withdraw from the Scheme under Rule 30.3, the Withdrawing Employer's Percentage shall be re-allocated amongst the remaining Current Employers in proportion to their Current Employer's Percentages immediately before the withdrawal of that Withdrawing Employer."
First, Mr Green noted the terms of Rule 30.0 which states that the "only" circumstances in which a Current Employer can cease to be a Current Employer are set out within Rule 30. Mr Green says that this could not be clearer. The only circumstances in which the Current Employer's obligations under the Rules and hence its Current Employer's Percentage can be eradicated or reduced to zero for the purposes of the Rules as a whole are contained in Rule 30 and specifically Rule 30.8. This, he says is entirely contrary to Mr Simmonds' argument. In this regard, Mr Simmonds submits that a Current Employer whose Current Employer's Percentage has been reduced to zero nevertheless remains a Current Employer and is subject to any proper exercise of the amendment power, subject to the following caveat. He says that the ExxonMobil companies are not subject to that amendment power because they have already given notice under Rule 30.3 but that the remaining C2 Employers are subject to that power subject to the questions raised in Issues 6 and 7.
Mr Green drew attention to Rule 30.2 which is concerned with the circumstances in which a Current Employer obtains the consent of the Trustee for one or other companies to take over its responsibilities as a Current Employer under the Scheme and therefore, is permitted to withdraw under Rule 30.1. In particular, he referred me to the final sentence of Rule 30.2. He says that in such circumstances it is not envisaged that the liability of the incoming substitute companies under Rule 5.2 is extinguished but only reduced to allow for any payment made of a section 75 debt by the withdrawing Current Employer. Mr Green says therefore, that it is intended that credit should be given for such debt payments against a positive Current Employer's Percentage and that this is inconsistent with Mr Simmonds' argument. Mr Simmonds on the other hand, says that the last sentence of Rule 30.2 is inconsistent with Mr Green's construction of Rule 5.5 because it is another example of circumstances other than those in Rule 30.8 when liability is reduced by reason of a section 75 payment despite not being mentioned in the definition of Current Employer's Percentage.
He also says that the imperative nature of Rule 30.3(v) (payment of a premium, if any) and (vi) nomination of a defined benefit scheme in which the Withdrawing Employer participates to which the liabilities can be transferred together with the use of "will" in Rule 30.6 ("The transfer to the Receiving Scheme will cover the liabilities . . ." ) are all inconsistent with Rule 5.5 having the wider meaning for which Mr Simmonds contends. He says that they are predicated upon the basis that the Current Employer's Percentage and therefore, the Withdrawing Employer's Percentage can only be modified pursuant to Rule 30.8 after the withdrawal has taken place.
In addition, he submits that Rule 30.5 which provides for the transfer of liabilities with a value equal to the Withdrawing Employer's Percentage of the total liabilities of the Scheme at the date of withdrawal leaves no room for Mr Simmonds' argument. He says that if that argument is right, if the Current Employer seeking to withdraw did not like the terms imposed under the Rule 30 withdrawal mechanism, at that stage, it would merely transfer its seagoing Ratings to a sister company in order to reduce its percentage to zero and avoid the consequences of the withdrawal mechanism altogether. He notes that the idea that a Current Employer who continues to employ Ratings who are members of the Scheme and gives notice of withdrawal (taking effect at the Scheme's next year end) is fully subject to the withdrawal provisions, but a Current Employer who takes the precaution of ceasing to employ such persons immediately before giving such notice, or between giving such notice and withdrawal at the Scheme's year end, is able to leave free of their requirements, is as unattractive as it is implausible, and clashes directly with the express statement in the Proposal that "[a] Current Employer will not cease to be responsible for its share of the shortfall if it ceases to employ eligible Ratings".
In this regard, he also drew attention to the fact that whilst the ExxonMobil companies ceased to employ Ratings who were Members of the Scheme in 2003, they continued to pay their full "Current Employer's Percentage" to the Scheme in accordance with the 2001 Regime until 2010 when they gave notice under r.30.3. Furthermore, he says that the implausibility is increased by the fact that, if Mr Simmonds is right, a cohort of Current Employers (the 19992001 Current Employers) who had ceased to employ Ratings who were Members of the Scheme between 31 October 1999 and 31 May 2001 and who would have suffered ECEs at that time would be treated differently and less favourably under the Rules than the position for which International Marine contends. All 1999-2001 Current Employers will have suffered ECEs by definition, but because that will have preceded 31 May 2001, their "Current Employer's Percentage" and "Withdrawing Employer's Percentage" under the Scheme will be unaffected, with the result that their withdrawal will be fully subject to (a) the premium requirements and (b) the transfer of liabilities to a successor scheme requirements of Rule 30.3. Mr Green says that there is nothing in the Proposal which would justify such a distinction. On the contrary, he points out that the Proposal clearly proceeds on the basis that ceasing to employ Ratings who are Members of the Scheme after 31 May 2001 is not to affect the "Current Employer's Percentage" of a Current Employer.
In summary, therefore, Mr Green says that the consequences of International Marine's construction means that it cannot be right. He lists the consequences as an ability to avoid the balance of costs covenant going forwards under Rule 5.2, avoidance of the mandatory provisions for withdrawal in Rule 30.3 - 30.8, alternatively, the ability to withdraw without complying with Rules 30.1 and 30.2 and lastly, the ability to avoid the need to meet the criteria for winding up set out in Rule 31.0(ii). That Rule is as follows:
"Winding up
31.0 The trusts hereby constituted shall continue unless and until
(i) determined by a resolution to determine the Scheme passed by the Trustees in accordance with the Trust Deed, or (ii) determined by written notice to the Trustees given either by (1) Current Employers or (2) not less than five Current Employers between them representing not less than five separate corporate groups, which together contain Current Employers whose Current Employer's Percentages total at least 30% Provided that the effective date of such a notice may not be before the earliest of (a) 31 March 2006 (b) the date on which the Fund attains 100% funding on an "equity/gilt" basis under the minimum funding requirement contained in section 56 of the 1995 Act and (c) the date on which the aggregate annual contributions required from Current Employers under the Schedule of Contributions exceeds £16 million (increased in line with the increase in the Index of Retail Prices since 31 March 2000). The £16 million figure will be adjusted in the event of any Current Employer withdrawing under Rule 30.3. For this purpose, a corporate group means a company ("the parent") and any other company or firm which is either a group undertaking (as defined in section 259(5) of the Companies Act 1985) or an associated undertaking (as described in paragraph 20 of Schedule 4A of that Act) in relation to the parent. Where a Current Employer would otherwise fall within more than one corporate group, it shall be treated as being within the corporate group with whose parent it is more closely connected in the opinion of the Trustees.
Where a Member's Additional Voluntary Contributions are being used to provide benefits on a money purchase basis and where there are separately identifiable assets attributable to those Additional Voluntary Contributions, Rule 31.1 - 31.3 shall apply in relation to those separately identifiable assets as if they were a separate Fund of the Scheme."
Mr Simmonds on the other hand says that as a result of the construction he places upon Rule 5.5, upon the ECE his clients' Current Employer's Percentage was reduced to zero and as a result, it had the same effect on the Withdrawing Employer's Percentage. He accepts that one should look at the Rules as a whole and at Rule 5.5 in the context of Rule 30. He says that the fact that the two Percentages must be equal is clear from Rule 30.5 under which the Receiving Scheme is to receive a transfer of liabilities "with a value . . . equal to the Current Employer's Percentage of the Withdrawing Employer (the "Withdrawing Employer's Percentage") of the total liabilities of the Scheme at the date of withdrawal" and that therefore, the Receiving Scheme should receive a transfer payment "equal to the Withdrawing Employer's Percentage of the total assets of the scheme" as at that date.
He also draws attention to the use of "normally" at (6) in the summary of the Proposal and submits that it includes the circumstances in which the Current Employer's Percentage and as a result the Withdrawing Employer's Percentage is zero and should not be confined to the substitution of the Current Employers dealt with in Rules 30.1 and 30.2. Lastly, he referred me to Rule 30.7 which is concerned in part with the situation in which a section 75 debt arises on ceasing to employ Ratings upon withdrawal from the Scheme. In that case, the entire s75 debt payment is added to the outgoing Employer's share of the assets so that it gets full credit for it. He says therefore, that this coheres with his construction of Rule 5.5 and that it would be unfair if the same full credit were not available where a section 75 debt arises as a result of an ECE which occurs before the withdrawal. In this regard, Mr Green retorts that Rule 30.7 is not consistent with Mr Simmonds' approach to construction because on withdrawal under Rule 30.7 a transfer of liabilities occurs and a transfer payment is made whereas under Mr Simmonds' scenario, no liabilities at all are transferred.
Conclusions:
Issue 3
There is no dispute that the Rules of the Scheme must be construed as a whole and in a practical and purposive way against the relevant background which includes the Proposal and the legislative overlay. Taking those matters into account, and taking care to construe the Rules and not the Proposal as if it were the Rules, it seems to me that Rule 5.5 does not include an ECE. I come to this conclusion despite the reference to section 75 in Rule 5.5 and the reference to both sections 75 and 75A in the 2007 version of that Rule. It seems to me that an amendment in 2007 without more, is of little assistance in determining the construction to be placed on the 2001 version of the Rule. If anything, it may suggest that the 2001 version should be construed more narrowly.
In any event, it seems to me that to construe Rule 5.5 to cover an ECE would be inconsistent with the Rules as a whole and in particular, with Rule 5.2 and the detailed provisions contained in Rule 30 read against the background of the Proposal. The Proposal makes clear that the obligation to contribute is not intended to come to an end upon ceasing to employ Ratings. Although what Mr Simmonds says about the relevant passage from the Proposal is true, namely that the 2001 Regime moved over to an obligation to fund the shortfall in the Scheme on the basis of the Scheme's liabilities as at 31 October 1999 in respect of Members of the Scheme whilst in service with that Employer rather than based upon current service, in my judgment, this does not affect the meaning and effect of the passage itself. It follows immediately on from a statement that the "percentage share of the shortfall attributable to each Current Employer . . . will not subsequently be recalculated . . . " and is in the present tense. This is consistent with the inclusion in the Proposal under section 2 in outline and at Appendix 3 of the Proposal in some detail, of the section 148 revaluation to be offered. These are the provisions which are reflected in Rule 4 itself. It seems to me that this is all consistent with Rule 5.2 and a construction of Rule 5.5 read against that background which excludes an ECE.
Furthermore, were Rule 5.5 construed in a way which included an ECE in my judgment it would be inconsistent with the inclusion of the detailed withdrawal provisions contained in Rule 30 which are stated to be exclusive and which assume that upon withdrawal, the liabilities attributable to the outgoing Employer will be transferred out to a new scheme. It seems to me that this is also consistent with the fact that the Current Employer's Percentage is defined in a way which only makes reference to its modification under Rule 30.8 upon such a withdrawal. It seems to me therefore, that the narrow construction of Rule 5.5 is consistent with the framework of the Rules as a whole and with the passage from the Proposal to which I have referred. This conclusion is not inconsistent with the sentence of the Proposal which follows immediately after the passage which I have already quoted. It is consistent with Rule 5.5 being a scheme apportionment rule.
I agree that this construction does not on its face, include a mechanism to deal with re-allocation upon an insolvency. I am unsure and it is unnecessary to decide whether Mr Green is right about whether there is sufficient latitude in the remainder of the Rules and definitions to allow any "orphan liability" arising on an insolvency to be picked up. Suffice it to say for these purposes that I do not consider that the apparent omission leads to the conclusion that Rule 5.5 should be construed to include an ECE.
Accordingly in my judgment, Issue 3 should be answered in the negative.
Issues 4 and 5
If I am wrong about this, it is necessary to consider Issues 4 and 5. If an ECE is included within the terms of Rule 5.5, is the effect to reduce the Current Employer's Percentage to zero and as a further result to reduce the Withdrawing Employer's Percentage to zero? In this regard, I agree with Mr Green. First, in my judgment, the natural meaning of Rule 5.5 relates to section 75 only. It seems to me that in the light of the Rules as a whole that Rule 5.5 is concerned solely with section 75 debts which is to be contrasted with Rule 5.2 which is concerned with contributions pursuant to the Schedule of Contributions. In fact, there is little or no dispute in relation to this, at least as far as the first part of Rule 5.5 is concerned. It is the second part which Mr Simmonds characterises as a re-apportionment rule for all purposes. However, I agree with Mr Green that the reference to "that Current Employer's Percentage" in the second part of Rule 5.5 is a reference back to the immediately preceding wording which deals with the Current Employer's Percentage for the purposes of section 75. In my judgment, therefore, the natural meaning of Rule 5.5 is that of a section 75 debt apportionment rule which was permitted under the legislation in force at the date on which the 2001 Rules were executed.
This conclusion is supported by the structure of the Rules as a whole. The definition of Current Employer's Percentage for example, states expressly that the Percentage may be modified under Rule 30.8. It seems to me that if it had been intended that Rule 5.5 operate in the way for which Mr Simmonds contends, reference would have been made not only to Rule 30.8 but also to Rule 5.5 in the definition itself. Equally, there is no cross reference to Rule 5.5 and the potential for re-allocation and consequential change in Current Employer's Percentage as a result, in Rule 5.2.
As I have already mentioned, the fact that such a construction does not deal with the circumstances which arise upon an insolvency is insufficient in my judgment, to affect the proper construction of the second half of Rule 5.5. I come to this conclusion despite the passage in Section 3 of the Proposal which refers to re-allocation upon insolvency and which otherwise does not appear to be given effect in the 2001 Rules. As Mr Green says, rather than seek to contort the wording of Rule 5.5, this may be something to be dealt with by way of rectification.
Mr Green also draws attention to the fact that Rule 30.0 states unequivocally that the only means by which a Current Employer can cease to be so is by complying with the requirements of Rule 30. Mr Simmonds' construction is also inconsistent with the entire and detailed withdrawal regime. In my judgment therefore, the Current Employer's Percentage is unaffected by Rule 5.5. As that definition and Rule 30.8 make clear the Current Employer's Percentage is only altered once a withdrawal has taken place. I come to this conclusion despite the last sentence of Rule 30.2 which envisages that the liability to contribute of a company or companies which with the consent of the Trustee is or are substituted for a company which is allowed to withdraw, is reduced by any payments made by the Withdrawing Current Employer. I agree with Mr Green that it is couched in terms of credit being given and not in terms of a change in the Current Employer's Percentage. It seems to me that this is consistent with the "second sentence" in the Proposal which also refers to liabilities being "reduced" by a section 75 debt rather than extinguished.
What then of the Withdrawing Employer's Percentage? It seems to me that this inevitably follows the Current Employer's Percentage. If the Current Employer's Percentage cannot be altered except by the means set out in Rule 30.8 then the same is true of the Withdrawing Employer's Percentage. That percentage is described in Rule 30.5 as the Current Employer's Percentage of the total liabilities of the Scheme as at the date of withdrawal. Therefore, one is defined in terms of the other. I agree with Mr Green that if Mr Simmonds were correct, an outgoing Employer could evade the detailed withdrawal provisions which were foreshadowed in the Proposal by engineering an ECE if it disliked the terms being imposed under Rule 30. This is an implausible construction and is contrary to express statements in the Proposal about the effect upon the obligation to contribute of ceasing to employ Ratings.
This construction is further supported by the further anomaly which Mr Green drew to my attention. Mr Simmonds' construction would lead to a situation in which Current Employers who ceased to employ Ratings between 31 October 1999 and 31 May 2001 would be treated less favourably than those like ExxonMobil companies which allegedly suffered an ECE after 31 May 2001. As he points out, it would also enable a C2 Employer in effect, to sidestep the provisions for winding up the Scheme contained in Rule 31.
In my judgment, therefore, if I am wrong about the answer to Issue 3, I consider that both Issues 4 and 5 should also be answered in the negative.
(8) If the Withdrawing Employer's Percentage has become zero other than by virtue of Rule 30.8 can the Trustee nevertheless and without the need for amendment require the C2 Employer as a condition of withdrawal under Rules 30.3-30.7 to pay a premium and/or nominate a receiving scheme? (9) If such a premium and the nomination of a receiving scheme cannot be required, can the C2 Employer nevertheless withdraw under Rules 30.3 30.7 at all or otherwise?
Mr Green submits that even if apportionment under Rule 5.5 affects the Current Employer's Percentage which he says it does not, nevertheless, it would have no bearing upon the provisions under which a premium can be required in Rules 30.3(v) and 30.4. Mr Green points out that those provisions make no reference either to the Current Employer's Percentage or the Withdrawing Employer's Percentage. He says that Rule 30.4 makes clear that the obligation to pay a premium is a function of (amongst other things) the loss to the Scheme of the value of the outgoing Employer's covenant and that the purpose is to protect the interests of the Members.
He says that Mr Simmonds' submission that there is no value in an employer covenant where the Current Employer's Percentage and the Withdrawing Employer's Percentage are nil is incorrect. He says that the wording of Rule 30.4 does not support such a contention. First, the imposition of a premium is stated to be in the "absolute discretion" of the Trustee. Secondly, he says that Rule 30.4(i) is looking to the security of benefits in the future and therefore, the fact that a Withdrawing Employer's Percentage may be nil at a particular time is nothing to the point. To put the matter another way, he says that the strength of the covenant does not rest upon the level of contributions currently demanded but relates to the whole life of the scheme and as the Scheme has a last man standing provision, the premium reflects the fact that there will be one less man. Thirdly, he refers to the fact that Rule 30.4(ii) requires the Trustee to have regard to the impact of the withdrawal on remaining Employers. In this case, the ExxonMobil companies are strong employers. He points out that all of the Historic Employers contributing under the New Regime will have ceased to employ persons in seagoing employment (and some of the Current Employers will have too), so that there is no reason why ceasing to employ persons in seagoing employment and then going through the withdrawal mechanism should be allowed to place the ExxonMobil companies in a better position than those other companies by being able to bring to an end without cost its contribution obligations.
It is conceded that where the Withdrawing Employer's Percentage is zero then zero liabilities fall to be transferred and that therefore, there is no need to nominate a receiving scheme for the purposes of Rules 30.5(vi) and 30.6. However, Mr Green points out that it cannot be correct that service of a notice under Rule 30.3 prevents the premium mechanism from taking effect. If one reads the Rule as a whole, he says it is clear that it is the very service of the notice which triggers the further provisions of Rule 30 relating to the premium.
In relation to Issue 9 Mr Green submits that if a zero Withdrawing Employer's Percentage leads both to no transferring scheme and no premium payable, the withdrawal provisions in Rule 30 do not apply and the Employer cannot withdraw. He points out that Rule 30.3 states that that Rule "sets out the only circumstances in which a Current Employer can cease to be a Current Employer" (emphasis added). He says that Rule 30.3 envisages that a Current Employer may only withdraw where there is a transfer of its Members under r 30.3(v) to (x) and the Trustee is able to consider whether to demand a premium. He says that reading the withdrawal mechanism as International Marine would have it, would be to allow a certain class of Current Employers being those who happened to cease to employ persons in seagoing employment on a date after 31 May 2001 uniquely to exit at zero cost leaving their Members behind to have their benefits funded by others. Lastly, he says that in such circumstances, the requirements of Rule 30.3(vii) and (ix) the terms of which are in the imperative, are not capable of satisfaction and therefore, the provisions are not engaged. In particular, in relation to Rule 30.3(vii) he points out that the Trustee must be satisfied that the transfer is in the interests both of the transferring beneficiaries and those who remain. He submits that therefore it cannot be in the interests of all of the beneficiaries in this case, all of whom remain in the Scheme, that there is no transfer.
He also says that Rule 30.5 leaves no room for International Marine's argument. It operates on the basis that liabilities equal to and with the value of the Withdrawing Employer's Percentage of the total liabilities of the Scheme "at the date of withdrawal" be transferred. The same is true of Rule 30.7. He accepts that these are not his best points.
Mr Simmonds agrees that Rule 30.4 is concerned with compensation for the loss of covenant strength. However, he emphasises the reference to "amount of premium (if any)" in Rule 30.4 and asks rhetorically, if Stena Line is right, when could the premium ever amount to nil? He says that when determining the value of the covenant of an Employer one must take into account both the ability to pay contributions and the legal liability to do so. He submits that the liability to contribute depends upon the Current Employer's Percentage which once it has reached zero can never be increased by means of re-allocation and therefore, ExxonMobil group of companies has no liability. As a result, the value of its covenant is also nil.
Mr Simmonds also submits that once notice has been given under Rule 30.3 the Employer in question is no longer subject to the amendment power and therefore, its Current Employer's Percentage cannot subsequently be amended in order to increase it from zero.
In addition, Mr Simmonds submits that despite the Withdrawing Employer's Percentage being zero, the withdrawal mechanism in Rule 30 can operate nevertheless. He points out that there is no sensible basis for allowing withdrawal in circumstances where the Withdrawing Employer's Percentage is 0.1% but not where the percentage is zero. He says that if an Employer's percentage has reduced to zero, it has contributed in full its share of the MFR deficit and, accordingly, there is no good reason why it should not be allowed to withdraw.
Lastly, Mr Simmonds submits that Mr Green's concession that there is no need for a receiving scheme, leaves it in a position which makes no logical sense. He says that it seems that the reason why it is said that Rule 30 cannot apply where there is a zero percentage is the combination of there being no Receiving Scheme and no premium payable, the corollary being that if Rule 30 made no mention of premiums but did include the references to the Receiving Scheme a zero percentage would not prevent its operation.
Conclusion:
Issue 8
In this regard, I agree with Mr Green, at least in part. It seems to me that even if the relevant Percentages are zero it is still possible to seek a premium pursuant to Rule 30.3(v). However, as the very premise of a zero Withdrawing Employer's Percentage is that there are no liabilities to transfer, it seems to me that it is not necessary to nominate a transfer scheme. In fact, Mr Green concedes that this is the case.
First in relation to the premium, if Rule 30.3 is read as a whole, it seems to me that it is the giving of notice under Rule 30.3(i) which activates the remainder of that sub-rule, compliance with which enables the Current Employer which gave the notice to be permitted to withdraw. A construction based upon the premise that giving notice under Rule 30.3(iii) de-activates rather than activates the premium provision in Rule 30.3(v) is unsustainable.
Secondly, I agree with both Mr Green and Mr Simmonds that Rule 30.4 and therefore, the premium itself is concerned with covenant strength in the widest sense. It seems to me that Rule 30.4 makes clear that the purpose of the premium is to compensate for the extra strain upon the Scheme caused by the withdrawal of an Employer. That strain may take the form of the effect upon the security of benefits and/or the strain on the remaining Employers caused by the reduction in their number: (i) and (ii). It seems to me that this is a way of recognising the effect upon the overall covenant from a last man standing point of view. In addition, Rule 30.4(iii) makes clear that account may also be taken of the extra strain on remaining Employers as a result of there being one less Employer to bear the costs of administration of the Scheme. It seems to me that that is not necessarily another aspect of the covenant from a last man standing point of view as much as on an ongoing basis and arises from general fairness. This is entirely consistent with that part of the Proposal which appears under the heading "Calculation of Premium."
I also agree with Mr Green that Rule 30.4 also makes clear that the imposition of a premium if any, is in the absolute discretion of the Trustee having taken the advice of the Actuary. It seems to me that such a discretion, albeit one which must be exercised properly in accordance with fiduciary duties, is inconsistent with an argument that at the stage at which it is imposed, the Employer must be under a legal obligation to contribute to the Scheme. The premium provisions make no reference whatever to the Current Employer's Percentage or the Withdrawing Employer's Percentage, nor to any need for either of those percentages to be positive rather than zero. In my judgment, the premium provisions are separate from the Percentage provisions and stand alone.
In my judgment, therefore, it does not follow that because the Withdrawing Employer's Percentage is zero, the effect of its departure on the overall scheme covenant is also zero. I come to this conclusion precisely because I do accept Mr Simmonds' submission that when considering the relevant matters under Rule 30.4, the Trustee will need to consider the effect upon the Scheme of the loss of the Employer gauged against the ability of that outgoing Employer to meet its liability or its former liability together with the liability on a last man standing basis under the Scheme as well as its ability to meet the costs of the Scheme. Even if the present Percentage is zero, there may be an additional strain upon the Scheme on a last man standing basis and as to costs for which the premium is intended to compensate. If the Withdrawing Employer had no ability to meet such liabilities, then of course, it would be likely that as a result the premium would be nil. The answer to Mr Simmonds' rhetorical question therefore, is that in the absolute discretion of the Trustee, the premium could amount to nil where the ability of the withdrawing Employer to meet the extra strain on the Scheme was nil or was so weak that there was no real effect upon the Scheme as a whole as to the strain placed upon the remaining Employers or security of the benefits as a result of the exit.
Therefore, in my judgment, Issue 8 should be answered in the affirmative as to the premium and in the negative as to the need to nominate a transferring scheme in the circumstances of this case. The difference in approach arises not only from Mr Green's concession in this regard. The concession arises from the terms of Rules 30.5, 30.6 and 30.7 all of which when dealing with the value of the transfer, make express reference to "a value equal to" the Current Employer's Percentage of the total liabilities of the Scheme at the date of withdrawal. This as I have already mentioned is in contrast to the provisions in relation to premium which make no reference at all to the percentages.
Issue 9
I also agree with Mr Green that without payment of a premium if one is demanded upon a proper exercise of the discretion in Rule 30.3(v) and Rule 30.4, the Withdrawing Employer is unable to withdraw. Rule 30.0 makes it plain that the only circumstances in which a Current Employer can cease to be so are set out in the body of that Rule. As Rules 30.1 and 30.2 are concerned with the substitution of a new or a number of new Employers in place of the Withdrawing Employer they do not apply here. Accordingly, in my judgment, it is clear that the only other way to withdraw is to comply with the remainder of the Rule to the extent that it is applicable. Accordingly, if a premium is properly demanded it must be paid. However, if it is not demanded, it seems to me that the terms of Rule 30.3(v) are such that the withdrawal mechanism is not precluded from operation as a result. Although Rule 30.3(v) is imperative, it makes express reference to a premium "(if any)". It would not be practical and purposive to construe Rule 30 and Rule 30.3 in particular, to mean that where in the exercise of its discretion the Trustee decides not to demand a premium in so doing it prevents the Employer from withdrawing.
As I have already mentioned, if such a premium is demanded and paid, it seems to me that in the circumstances of this case, the failure to nominate a transfer scheme does not affect the operation of the Withdrawal mechanism. As a result of the different wording, it seems to me that the transfer provisions do not bite where the percentage is zero. The requirements in Rule 30.3(vi) (vii) (viii) and (ix) are governed by and make express reference to Rules 30.5- 30.7 which turn upon the value of the Withdrawing Employer's Percentage. To put the matter another way, it seems to me that the requirement to nominate a scheme set out in Rule 30.3(vi) is dependent upon there being a transfer payment calculated pursuant to Rules 30.5-30.7. I consider that it would be perverse to construe Rule 30 in a way which requires the nomination of a transfer scheme where the transfer value is nil or in a way which would allow the withdrawal mechanism to operate where there is a Withdrawing Employer's Percentage of 0.001% but not where it is nil.
I do not consider that this puts Mr Green in a strange position. It seems to me that the withdrawal mechanism works. In the circumstances of this case, it is for the Trustee to determine whether a premium is payable. If it is, it must be paid. As the value of the Withdrawing Employer's Percentage is nil, there is no purpose in nominating a transferring scheme. However, once the premium (if any) has been demanded and paid, the Employer can be permitted to withdraw.
Accordingly, it seems to me that Issue 9 as posed does not arise. However, if and to the extent that in the absolute discretion of the Trustee, a premium is not demanded and in addition, the question of the nomination of a transfer scheme does not arise for the reasons already considered, in my judgment, if all other requirements were met, the withdrawal mechanism would operate.
(6) Are C2 employers within the scope of the amendment power under clause 30 and Rule 32 of the Scheme even if the Current Employer's Percentage and the Withdrawing Employer's Percentage is zero? (7) If they are within its scope, would it be proper for the Trustee to bring such a C2 Employer into the new contribution regime or if it thought fit, to amend Rule 30 in relation to them?
These issues arise because the Trustee has suspended the withdrawal mechanism under Rule 30 in order to protect the Scheme from other C2 Employers seeking to follow the ExxonMobil companies example and exit the Scheme before the introduction of the New Regime, such C2 Employers having failed to give notice under Rule 30.3 before its suspension. Mr Simmonds says that the deed of amendment is invalid and that such C2 Employers should be given a reasonable period in which to give notice under Rule 30.3 and exit the Scheme.
Mr Green submits that the 2009/11 Proceedings confirmed the breadth of the amendment power, and that it is amply wide enough to impose a New Regime including a different withdrawal process applicable to all Participating Employers whether Historic Employers or Current Employers who did not previously avail themselves of the earlier withdrawal regime. He says that to suggest that C2 Employers can escape as a result of their Percentages amounting to zero makes no sense.
He also points out that all C2 Employers were free to give notice under Rules 30.3 to 30.8 at any time after 31 May 2001 whether or not they had ceased employing Ratings who were Members of the Scheme. Furthermore, they all received notice in or about 12 January 2011 of the fact that the ExxonMobil companies had given notice under Rule 30.3 and pursuant to Rules 30.3(ii) and (iii) were given a specific period to the following 14 February 2011 under the Rules also to withdraw in the same Scheme Year if they thought fit. However, none of them did so, or subsequently elected to withdraw in the Scheme Years 31 March 2012 or 31 March 2013.
Furthermore, Mr Green drew attention to paragraphs [104] [106] and paragraph [165] of the judgment of Briggs J in the 2009 Proceedings which he says make clear that the 2001 Regime was not irrevocable so that the Trustee retained its full power of amendment and that power of amendment was broad enough to alter the 2001 Regime. He points out that Briggs J's decision was affirmed in the Court of Appeal. The passages from Briggs J's judgment are as follows:
"104. The 2001 Deed and Rules did create a deficit repair regime which imposed no contractual obligations on the Specified Employers, so that for as long as it endured un-amended, they were not subjected to any contractual deficit repair liability. But the 2001 Regime was not irrevocable. I consider that the Trustee retained its full power of amendment pursuant to clause 30 of the 2001 Deed, and that power remained broad enough, at least in principle, to permit the Trustee to introduce thereafter a different deficit repair regime, with contractual obligations capable of being imposed on the Specified Employers. My reasons follow.
105. The starting point lies in a legitimate predisposition to confer a broad interpretation on a power of amendment when contained in a pension scheme designed to last over many years, through unpredictable changes in circumstances, and changes in statutory structures. That approach requires a case that an amending power has been cut down, without any change in its own language, to be closely examined, all the more so where Rule 29.1 of the 2001 Rules expressly contemplates that further deficit repair measures might have to be taken after March 2006, including by way of further amendment of the Deed and Rules. That provision expressly recognises the possibilities (a) that the 2001 Regime might not in fact remedy the deficit within the contemplated timeframe (i.e. by 2006) and (b) that it might do so, but that a further deficit might arise thereafter. Mr Spink submitted that deficits existing after March 2006 could simply be repaired by Schedules of increased Contributions on the Current Employers, without any amendment. So they could, at least in theory, but 2001 Rule 29.1 expressly contemplates that amendment might be necessary.
106. It is not difficult to envisage a scenario under which, after March 2006, the burden of ongoing deficit repair contributions on Current Employers might become so grave that they, or a sufficient minority of them, were minded to call for a winding up under 2001 Rule 31.0(ii) where recourse by the Trustee to Specified Employers by a further amendment could provide sufficient additional funding to avoid winding up. Although it has not been suggested that this was the reason for the present application, for the purposes of interpretation the question is what possible future events might justify an amendment of the Deed and Rules, viewed as at 2001, looking forward.
165. At stage 1, it will be apparent that my answer to Issue l(b)(i) is yes. The power of amendment in clause 30 of the 2007 Deed is broad enough in scope to accommodate an amendment of the Scheme which would require Specified Employers (as well as Current Employers) to contribute to the Scheme generally, by reference to liabilities in the Scheme attributable to pensionable service of members whilst in the service of the Participating Employer in question."
Mr Simmonds accepts that the Trustee can introduce a new contribution regime, but contends that unless and until it does so, it cannot suspend some elements of the 2001 Regime and not others. Mr Green submits that the proposition that the Trustee was entitled at any time after 2006 to replace the 2001 Regime as a whole but was not entitled to do so in two steps, the first designed to protect the Scheme from a flight of C2 Employers to the detriment of any new regime which the Trustee wished to place before the Court for authorisation, is unsustainable.
Mr Green says that the exercise of the power of amendment in order to "close the gate" was both within the scope of the power and was a proper exercise of it which was in the interests of Members generally, as well as other Current Employers and all Participating Employers in light of the fact that the Trustee was in the process of devising a new regime widening the pool to include Historic Employers, as Briggs J and the Court of Appeal had confirmed it to be entitled to do. He says that to argue that there is a limitation on the power of amendment in these circumstances is to reprise a similar argument to that which was rejected in the 2011 Court of Appeal decision, in particular at [53].
In conclusion, Mr Green says that even if C2 Employers generally had undergone ECEs such that their Current Employer's Percentages are zero for purposes going beyond the section 75 regime, the suspension of that regime is valid, and C2 Employers are as subject to an amendment widening the pool of contributing Employers, and introducing a new withdrawal machinery appropriate to that new regime, as any other Current Employer or any Historic Employer.
In response, Mr Simmonds says that the right to withdraw was fundamental to the Proposal and after 2001, the Trustee retained the power of amendment but it could not be used in a way which was contrary to the Proposal because the Proposal itself was contractual, there was an implied term that the package contained in the Proposal would not be interfered with and the Trustee was subject to an obligation of full and frank disclosure before Blackburne J when the Proposal was approved. In this regard, Mr Simmonds drew attention to Rule 30.0(ii) in its pre-2001 form which provided that the Scheme should continue unless and until "there be a deficiency . . . with no agreed measures acceptable to the Participating Employers and approved by the Actuary for overcoming the deficiency." Mr Simmonds submits that the only "agreed measures" were contained in the Proposal and it was on that basis alone that the Scheme was not wound up. Accordingly, he says it is not open to the Trustee to amend the 2001 Regime piecemeal.
In relation the right of withdrawal being fundamental to the 2001 Regime and the contractual nature of the Proposal, he referred me to the letter of 8 May 2000 sent to Employers, setting out the Proposal for "acceptance" and paragraphs [21] and [35] of the judgment of Blackburne J in the 2001 case which are as follows:
"[21]
Even if a measure of fine-tuning of the proposal were possible, I accept that, after so many months of negotiation, the proposal represents the best arrangement which the participating employers will agree and therefore that, realistically, the choice is between implementing the proposal and a winding up. . .
[35] I was told that the reason why the proposal does not call for a withdrawing employer to make a premium payment sufficient to make good the imbalance is simply because the employers will not accept that withdrawal should be on that basis: the premium would be unacceptably large. If therefore employers are to be free to withdraw, as it is an essential part of the proposal that they should be, the deal that has been struck is that they must take with them a proportionate share of the overall liabilities."
Mr Simmonds says that the Current Employers were only "on the hook" for the MFR deficit and section 9 of the Proposal makes clear that any liability over and above that was subject to the ability to withdraw from the Scheme.
Therefore, Mr Simmonds submits that if necessary a term must be implied. In accordance with the judgment of the Board of the Privy Council given by Lord Hoffmann in AG of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 , Mr Simmonds says that the question for the Court is whether such an implied term would spell out in express words what the instrument read against the relevant background would reasonably be understood to mean. He says that that is an ability to withdraw having made good the MFR requirement without the further exercise of the amendment power to prevent such an exit. In the circumstances, and as a result of the duty of full and frank disclosure before Blackburne J, Mr Simmonds says that the Trustee having obtained the approval of the Court to the Proposal was not in a position on 1 June 2001 to amend the Scheme in order to change the circumstances in which an Employer could withdraw and the Trustee was in no better position in 2012 when it sought to prevent further use of the Rule 30.3 notice mechanism. He says therefore that the Trustee cannot pick and choose how to amend whilst the 2001 regime is in force, although it can be replaced entirely. He says that this is consistent with the decision of Briggs J and the Court of Appeal because it was recognised the 2001 regime itself contemplated further deficit repair if necessary, after 31 March 2006. It was for this reason he says, that the Historic Employers were held to be within the compass of the amendment power.
Further, Mr Simmonds says that this is not a case of doing in two steps what could be done in one. In fact, the proposal before the Court contemplates that the notice provision will be replaced once the new regime is in force. He also submits that the other C2 Employers did not have all the time from 2001 to 2012 to decide to withdraw. He points out that the first consultation letter was only received on 21 November 2012, some three weeks before the amendment deed was executed.
Lastly, he says that despite having made no complaint at the time of the use of the amendment power to insert the new Rule 5.6, it is potentially invalid. He says therefore, that until a new regime is approved by the Court, the amendment power can only be exercised in a way which would be within the scope of the 2001 Proposal or is otherwise agreed by all of the Employers.
In response, Mr Green says that Mr Simmonds' argument is hopeless. He points out that the amendment power was always part of the Proposal which itself was implemented in the 2001 Rules which also contain an amendment power. Furthermore, as intended, the 2001 Rules contained Rule 29.1 which envisaged the possibility of amendment after 31 March 2006 in order to deal with a deficit in any way. He also emphasises that it is the Rules which are to be construed and not the Proposal and points out that although Mr Simmonds is forced for this purpose to submit that the new Rule 5.6 may be invalid, he had relied upon it as part of his earlier argument in relation to Rule 5.5.
Mr Green also says that Mr Simmonds' analysis of the 2011 Court of Appeal decision is incorrect. He points out that the basis for Arden LJ's decision was the terms of clause 30 itself and not Rule 29. Paragraph [55] of her judgment is as follows:
"I made the point above that, when a clause is simply repeated with no change or virtually no change, that may well suggest that in truth its meaning has not changed. In this case, that inference is underscored by the fact that clause 30 contains a number of restrictions and exceptions, and the restriction for which the appellant submits does not form one of them. Moreover, the structure of clause 30 suggests strongly that this list was intended to be an exhaustive list and that no other implied limitation was to be found from any other part of the trust deed or rules, let alone any implied limitation by virtue of something that had since ceased to form part of the trust deed. Mr Spink submits that clause 30 was not materially different prior to 2001 and that it was possible that the new proviso was not adopted because the existing clause was simply renewed, but in my judgment there was clearly an opportunity to amend clause 30 in 2001 and the question of protection for the Specified Employers was not obscured from view as the 2001 scheme involved the removal of OR 31.0(ii). In those circumstances clause 30 as readopted in 2001 cannot reasonably be interpreted as subject to the implied restriction for which the appellant contends."
Mr Green submits therefore, that after the Court of Appeal decision there can be no question as to the scope of the amendment power. In relation to the propriety of amending the 2001 Rules immediately after the Proposal was approved by the Court, he accepts that as a matter of realpolitik it may have been practically impossible to gain the necessary majority to effect an amendment and that furthermore, having so recently obtained Court approval it would be necessary to show a good reason for such an exercise of the power.
As to the argument based upon contract, he says that there was no contract and that it is the Rules and not the Proposal which govern.
Conclusion:
Issue 6 - Scope
The general principles of interpretation and the way in which they are applied in pension schemes were not in dispute. The principles considered by Warren J in the PNPF case were built upon by Arden LJ at [29] [31] of her judgment in the 2011 Court of Appeal Decision which I respectfully adopt. Taking into account those matters, it seems to me that the amendment power is not restricted as Mr Simmonds suggests and it is not necessary to imply a term in order to limit the scope of the amendment power in this case, in the way which by Mr Simmonds describes.
I agree with Mr Green that the full scope of the amendment power was considered in the Stena litigation and that both Briggs J and the Court of Appeal held that the power was sufficiently wide to encompass Historic Employers. I concur entirely with paragraphs [104] [106] of the judgment of Briggs J and the conclusion of the Court of Appeal at paragraph [55] of the judgment of Arden LJ. It seems to me that those paragraphs made clear in general terms that the amendment power is of wide application and did not rely upon reasoning based upon Rule 29 alone.
Further, in that case, Arden LJ considered the effect of the decision of the Privy Council in AG of Belize v Belize Telecom Ltd upon which Mr Simmonds relies. At [36] of her judgment, she noted that the Privy Council had decided that implication of terms is in essence an exercise of interpretation and at [39] quoted from Lord Hoffmann's opinion in which he stated that whether a provision is to be implied in an instrument is a question of whether "such a provision would spell out in express words what the instrument, read against the relevant background would reasonably be understood to mean." She also made clear at [48] that "a power of amendment should be interpreted precisely in accordance with its terms, neither more nor less."
When considering the question of implication here, I bear in mind that the Proposal is a part of the admissible background, that it is necessary to give the 2001 Rules an objective practical and purposive interpretation and that a provision such as the amendment power in this case which has been re-introduced in different iterations of the Rules should be interpreted in the light of circumstances subsequent to its first introduction.
Taking these matters into consideration, it seems to me that an implication of the kind which Mr Simmonds proposes, namely, that the amendment power can only be used to amend the entirety of the 2001 regime by its replacement, is not such that would spell out in express words what the instrument, read against the relevant background would reasonably be understood to mean. First, there is nothing in the relevant background in the form of the Proposal which suggests that such a limitation should be placed upon clause 30 whether as a matter of interpretation or implication. That background includes the fact that it was itself part of the Proposal which was implemented in the 2001 Rules and that both the Proposal and in turn Rule 29 of the 2001 Rules envisaged the possibility of amendment after 31 March 2006. Furthermore, as pointed out in the 2009 Proceedings, clause 30 contains express provisos. If it had been intended that its use be limited in the way which is now suggested, there would have been nothing to prevent the introduction of express terms to that effect. On the contrary, clause 30 was re-adopted in a form which does not include the kind of limitation which is now put forward. In this regard, I do accept that it may be said that the failure to do so is the very reason for the need for implication in the first place.
In any event, in my judgment, there is no room for Mr Simmonds' argument that although the 2001 Rules can be amended by replacing the 2001 regime with a new entire and complete regime, the amendment power cannot be exercised in order to amend the 2001 regime in what he describes as a piecemeal fashion. In my judgment, that is not how Clause 30 would reasonably be understood against the background of the Proposal.
Mr Simmonds also relies upon the duty of full and frank disclosure before Blackburne J. Although there can be no doubt that such a duty exists, I cannot see how this helps him. As I have already mentioned, the Proposal which was attached to Blackburne J's Order included reference to the amendment power within it and contained nothing to the effect that henceforth the operative regime could only be amended as a whole.
I also reject Mr Simmonds' argument based upon the submission that the Proposal was contractual and that a fundamental part included the ability to withdraw. Of course it is not in dispute that the Proposal was the subject of lengthy negotiation between the Trustee and at least some of the Employers and as Blackburne J put it, represented "the best arrangement which the participating Employers will agree and therefore that realistically, the choice is between implementing the proposal and a winding up." Nor is it in dispute that a withdrawal mechanism was intended. However, the inevitable consequence of Mr Simmonds' submission is that the 2001 Rules and in particular the amendment power should be construed against the background of the Proposal to mean that the Trustee is unable to amend the Scheme in any way unless all of the Employers accept that the amendment is within the four corners of the Proposal, they all otherwise agree to the amendment or the Court's approval for the amendment is obtained. It seems to me that such an implication fails Lord Hoffmann's test.
As a further test of such a proposition, it seems to me that such an implication gives neither practical nor purposive effect to the Scheme. It would prevent the Trustee from taking practical and necessary steps from time to time in order to enable the Scheme to adapt to the constantly changing background in the way described by Millet J in Re Courage Group Pension Scheme [1987] 1 WLR 495 at 505. It seems to me that the need for such flexibility is not confined to circumstances arising whilst a scheme is open. As Arden LJ pointed out in the British Airways Pension Trustee Ltd v British Airways plc [2002] EWCA Civ 672 , "it is necessary to test competing permissible constructions of a pension scheme against the consequences they produce in practice". The consequence of the proposed implication especially in the light of the large number of Employers who now fall within the category of Participating Employers would be to restrict the proper functioning of the Scheme to an extent which would be wholly impractical.
The fact that Mr Simmonds is driven to say that the introduction of Rule 5.6 may well be invalid, despite the fact that he relied upon it in another part of his argument in relation to Issues 3, 4 and 5 and the fact that no point was taken in relation to it when it was first introduced, is another indicator that his argument cannot be correct.
I come to this conclusion despite the reference in Blackburne J's judgment and in the Proposal to withdrawal by the Employers. In this regard, Mr Simmonds relied upon section 9 of the Proposal. It seems to me that to suggest that it is not possible to use the amendment power to render an Employer which has not chosen to withdraw in accordance with the Rules, liable for more than its liabilities on an MFR basis, the regime for the collection of which was envisaged only to last until 2006 and which in any event was subject throughout to Rule 29 and clause 30, is unsustainable.
As I have indicated above, it is Mr Simmonds' case on behalf of the class of Employers whom he represents, that the Deed of Amendment is invalid. In my judgment, the scope of the power of amendment was sufficiently wide to include the amendments which it contains.
Issue 7 - Exercise
It follows from what I have already said that in my judgment, there is nothing which prevents the Trustee from bringing C2 Employers within the scope of the new contribution regime or amending Rule 30 in relation to them. In this regard, I agree with Mr Green that as the 2009 Proceedings establish that the power of amendment is wide enough to apply to Historic Employers it makes no sense to suggest that C2 Employers are outwith it, even if their Current Employer's Percentage and/or their Withdrawing Employer's Percentage is zero.
I accept that it would have been strange had the Trustee, having obtained the approval of the Court for the exercise of the amendment power, decided in June 2001 further to amend the 2001 Rules. As Mr Green says, the fact that they did not do so arises from the realities of the situation and not from any limitation upon the power itself or necessarily any lack of propriety. Having just obtained the approval of the Court for a particular package of amendments, no doubt, the Trustee would have been called upon to show good reason for the further exercise of the power, in order to show that the exercise had been proper and not capricious. Further, in such circumstances, it seems unlikely that the requisite majority consent to the exercise of the power would have been available. This sheds no light upon the propriety of the exercise of the power in appropriate circumstances, whether in June 2001 or in 2012.
It seems to me that Mr Simmonds seeks to elevate the Proposal, a document which is open to many interpretations, into a prescriptive manual to be construed and interpreted rather than the Rules themselves and further to elevate the status of the 2001 Rules as a result of the approval granted by Blackburne J. It was made clear by Briggs J that the 2001 Regime was not irrevocable. Further, it must be borne in mind that the Trustee is not required to seek and obtain the approval of the Court before an exercise of the power of amendment however momentous. There is no further implied restriction upon the amendment power which requires the approval of the Court for its exercise whether to amend the Scheme in a way considered by the Employers to be consistent with their interpretation of the Proposal or in a way which they consider to be contrary to it.
Lastly, although it is strictly unnecessary, I should add that I consider that there is nothing in the point that the C2 Employers should be given adequate time to serve notice under Rule 30.3 and to withdraw from the Scheme despite the Deed of Amendment. It seems to me that the C2 Employers other than the ExxonMobil companies, had plenty of time to use the withdrawal mechanism had they wished to do so, whether one measures that time from 2001, from 2006 when the envisaged MFR regime came to an end, since the process of formulating a new regime began or since they received notice of the ExxonMobil notice in pursuance of Rule 30.3. Even if as Mr Simmonds says there were only three weeks from notification to the execution of the Deed of Variation, I cannot see that such a period would be insufficient if in fact, the company wanted to make what it considered to be a momentous decision.
It follows therefore, that I answer Issues 6 and 7 in the affirmative.
A HTML version of this file isn't available below click here to view the pdf version : SCHEDULE
