England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANF 97/1254/3

Royal Courts of Justice

Strand, London WC2

Monday, 27th July 1998

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE ALDOUS and

LORD JUSTICE MAY

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DEPARTMENT OF HEALTH Appellant

-v-

(1) THE PENSIONS OMBUDSMAN (JULIAN FARRAND)

(2) JOHN WALLIS MOSS Respondents

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Handed Down Judgment

Smith Bernal Reporting Limited

180 Fleet Street London EC4A 2HD

Tel: 0171 421 4040 Fax: 0171 831 8838

(Official Shorthand Writers to the Court)

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MR C NUGEE QC and MR J CROW (instructed by the Treasury Solicitor, London SW1) appeared on behalf of the Appellant.

MR J MANNING (Miss R Walters 27.7.98) (instructed by John Yolland, London SW15) appeared on behalf of the First Respondent.

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J U D G M E N T

(As Approved by the Court)

Crown Copyright

Monday, 27th July 1998

LORD JUSTICE NOURSE:

John Wallis Moss was born on 21st September 1929. From 1957 until 1989 he worked as a general practitioner in the National Health Service which (together with earlier hospital service and service in the Royal Air Force) qualified him for pension benefits under the National Health Service (Superannuation) Regulations 1980 ("the NHS Regulations"). On his 60th birthday, 21st September 1989, he became entitled to an immediate occupational pension under those regulations. The initial annual amount of his pension was £22,743.43.

On his 65th birthday, 21st September 1994, Dr Moss became entitled to his state pension. That triggered the operation of reg 56(3)(c) of the NHS Regulations, whose effect was to reduce the annual amount of his occupational pension by £1.70 for each year of contributing service between 5th July 1948 ("the appointed day") and 1st April 1980 (the date on which the NHS Regulations came into operation). Dr Moss had had 27 years of contributing service before the latter date. So the amount of the reduction in his case was £45.90.

Had the NHS Regulations stood alone, there would have been no difficulty. But in 1971 Parliament, recognising the erosive effect of inflation on fixed-rate pensions, had enacted the Pensions (Increase) Act of that year ("the 1971 Act"), which, as subsequently amended and through the medium of annual Pensions Increase (Review) Orders has instituted an index-linking of "official" pensions in order to protect their real value. Like most public-sector occupational pensions, Dr Moss's pension is an official pension for this purpose. Accordingly, in April of each year between 1990 and 1994, a compound percentage increase at the rate prescribed by the review order for that year was added to Dr Moss's initial pension of £22,743.43. The increases were 6.97%, 10.9%, 4.1%, 3.6% and 1.8% respectively. Immediately before his 65th birthday, 21st September 1994, the annual amount of Dr Moss's pension was £29,621.55.

There is no dispute as to the figure of £29,621.55. Nor is it disputed that on Dr Moss's 65th birthday reg 56(3)(c) caused it to be reduced. What is in dispute is the basis on which the reduction is to be calculated. Dr Moss, supported by the Pensions Ombudsman, contends that it is a simple matter of subtracting the £45.90 from £29,621.55 (the initial pension plus the annual percentage increases), leaving a balance of £29,575.65. The Department of Health contends that the £45.90 must be subtracted from the initial pension of £22,743.43, leaving a balance of £22,697.53, to which the annual percentage increases are then added. The product of the latter calculation is a figure of £29,561.77, or £13.88 less than that for which Dr Moss contends.

While Dr Moss has throughout accepted that the amount involved is small, he naturally wants to be sure that he has received or will receive his full entitlement. Even more significantly, we have been told by Mr Jonathan Crow, on instructions from the Department, that the calculation adopted in Dr Moss's case has been applied for many years not only in the National Health Service but in other public services as well. It is thought that, if Dr Moss's contention is correct, about 1.25m current pensioners could be affected and that there could also be implications for about 500,000 surviving spouses of deceased pensioners and for the estates of, perhaps, 250,000 deceased pensioners.

The Department having made it clear that its view would be maintained, on 18th July 1995 Dr Moss brought a complaint of maladministration to the Pensions Ombudsman under section 146 of the Pension Schemes Act 1993. On 10th January 1997 the Ombudsman made a determination upholding the complaint and directing Dr Moss's pension to be recalculated on the basis that it was only reduced at age 65 by £45.90. The Department appealed to the High Court. The appeal came before Mr Justice Robert Walker who, on 30th July 1997, dismissed it. With the leave of the judge, the Department brings a further appeal to this court. Counsel for the Ombudsman having argued in support of his determination, Dr Moss, although a respondent to the appeal, has not appeared or been represented either here or below.

The outcome of the dispute depends on the interaction between the NHS Regulations on the one hand and the 1971 Act as amended on the other. Reg 56 of the NHS Regulations provides:

"(3) As from the date on which an officer becomes entitled to a pension under these regulations, or, if on becoming entitled to such pension he has not reached pensionable age within the meaning of the National Insurance Act 1946, as from the date on which he reaches that age, the pension shall be reduced in respect of service before 1st April 1980 -

(a) [Inapplicable];

(b) [Inapplicable]; and

(c) in any other case, by the sum of £1.70 per annum for each year of contributing service on and after the appointed day . . ."

The first question is what is the "pension" that is required to be reduced by that provision? That word is defined by reg 3 to mean a pension payable under reg 8, which describes the circumstances in which an ex-officer is entitled to receive an annual pension. The rates of pension are prescribed by reg 9, in the case of service as a practitioner by reference to reg 71(2). Both regs 9 and 71(2) refer to pensions calculated by reference to remuneration and thus, it appears, to initial and not to increased pensions. Moreover, reg 40, which provides for a reduction of pension in certain cases, refers, in paragraphs (2) and (3), to an "uprated pension", an expression defined in paragraph (4)(d) to mean:

"The aggregate amount of all pensions payable for the quarter specified in paragraph (2), or the aggregate of all pensions payable at the date specified in paragraph (3), together (in either case) with any increases thereon payable under the Pensions (Increase) Act 1971 " (emphasis added).

That expression and its definition must be contrasted with references, eg in reg 56(3)(c), to "pension" simpliciter. It must be emphasised that the NHS Regulations do not themselves contain any provision for increases.

In my view it is clear from these other provisions of the NHS Regulations that the pension referred to in reg 56(3) is the initial pension and not that pension as increased under the 1971 Act. Moreover, when we come to the 1971 Act that is confirmed by section 7(4), which, subject to immaterial exceptions, provides:

"an increase of a pension under this Act shall not be treated as part of the pension for the purposes of any provision made by or under any enactment."

Reg 56(3)(c) of the NHS Regulations is a provision made under an enactment. So the increases in Dr Moss's initial pension made under the 1971 Act are not to be treated as part of that pension for the purposes of reg 56(3)(c).

The other material provisions of the 1971 Act are these. As originally enacted, section 1 provided for increases of pensions already in payment and section 2 for future reviews and increases. Section 2 was repealed by the Social Security Pensions Act 1975 and replaced by section 59 of that Act. Section 59(1) provides for orders to be made authorising increases in official pensions by the same percentage increases as are directed for social security benefits. Section 59(5) provides:

"The increases in the rate of a pension that may be provided for by an order under this section are to be calculated by reference to the basic rate of the pension as authorised to be increased by section 1 of the said Act of 1971 or by any order under section 2 of that Act or this section . . ."

Section 59(7) provides that that section shall have effect as if it were contained in the 1971 Act. Section 17(1) of the 1971 Act defines the expression "basic rate" to mean:

"The annual rate of a pension apart from any increase under or by reference to this Act . . ."

The effect of the material provisions of the NHS Regulations and the 1971 Act as amended is as follows. The pension which is required to be reduced by reg 56(3)(c) is the initial pension. The increases for which provision may be made under section 59(5) are to be calculated by reference to the "basic rate" of the pension, by which is meant its annual rate apart from any increase under or by reference to the 1971 Act. Clearly, unless and until reg 56(3)(c) operates, the calculations are to be made by reference to the annual rate of the initial pension. The second and decisive question is whether, from and after the operation of reg 56(3)(c), they are to continue to be made by reference to that rate or to the reduced rate.

The answer to that question is to be found in section 59(5) as illuminated by the definition of "basic rate" in section 17(1). The success of Dr Moss's contention depends upon "the annual rate of a pension apart from any increase under or by reference to this Act" being a constant determined once and for all by the rate of the initial pension. I see no reason for restricting the effect of those words in that way. Suppose, for example, that section 59(5) had provided simply for increases calculated by reference to "the annual rate of a pension." It could hardly have been suggested that they were not to be calculated by reference to its annual rate from time to time. Similarly, since the only exceptions provided for by the definition in section 17(1) are increases under or by reference to the 1971 Act, there is no ground for excluding any other variations in the annual rate, for example by reason of a reduction made under reg 56(3)(c).

For these reasons, I am of the opinion that on Dr Moss's 65th birthday, 21st September 1994, the basic rate of his pension for the purposes of section 59(5) ceased to be £22,743.43 and became £22,697.53, and that the increases authorised by that provision were thereafter to be calculated by reference to the latter figure and not the former.

Mr Justice Robert Walker was of the contrary opinion. He said:

"Section 59(5) of the 1975 Act (which is the key provision) does not in terms provide for any sort of recalculation of any past figures. If section 59, and the review orders made under it, do prescribe recalculation, they must do so by necessary implication. To my mind the strongest way of putting the Department's case . . . is that all the annual increases in Dr Moss's pension under successive review orders have been expressed as percentage increases on the basic rate of pension (or on the basic rate of pension as already increased) so that any alteration in the basic rate must necessarily alter every increase, for the past as well as for the future.

Nevertheless I have come to the conclusion that the construction contended for by the Department is not correct. Just as inflation can be a vicious spiral, so the benefit of indexation is a cumulative benefit, akin to compound interest but at a varying annual rate of interest. Although past increases were expressed as percentages, those percentages were translated into specific sums of money actually paid to Dr Moss. To recalculate past increases in the way urged by the Department does seem to me to have some element of divestment about it. It is something that needs to be justified by clear words. Section 59(5) seems to assume, as I have noted, that every pensioner will have a single basic rate of pension."

In my view the construction of section 59(5) for which the Department contends neither requires an implication nor carries with it any element of divestment. It certainly requires a recalculation, but for the future not for the past. The recalculation does not deprive the pensioner of anything to which he has already become entitled. It simply quantifies the lesser amount he will receive in the future. It seems that the judge's construction was founded on his view that section 59(5) assumes that every pensioner will have a single basic rate of pension. Had it not been for the definition of "basic rate" imported by section 17(1), there might have been more to be said for that view. But for the reasons I have given I do not think that the expression as defined can be construed thus rigidly.

I would allow this appeal.

LORD JUSTICE ALDOUS:

I agree.

LORD JUSTICE MAY:

I also agree.

Order: appeal allowed; paragraph 1 of Robert Walker J's order discharged; determination of the Pensions Ombudsman of 10.1.97 set aside; by agreement, the appellant to pay the Pensions Ombudsman's costs of the appeal, to be taxed if not agreed.