England and Wales Court of Appeal (Civil Division) Decisions

Stevens & Ors v Bell & Ors [2002] EWCA Civ 672 (20th May, 2002)

IN THE SUPREME COURT OF JUDICATURE A3/2001/0722
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE (CHANCERY DIVISION) (THE HON.
MR JUSTICE LLOYD)

		Strand, London, WC2A 2LL
		20 May 2002

Lady Justice Arden :

Introduction

1. This is an appeal from the order of Lloyd J dated 16 February 2001 and concerns the interpretation of the trustees’ powers with respect to surplus under the Airways Pension Scheme (“APS”). British Airways plc (“BA”) is now the principal employer for the purposes of APS. The trusts are set out in a trust deed dated 8 October 1948 between (1) British Overseas Airways Corporation (“BOAC”) and others (2) Grahame Temple Meller and others and (3) Airways Corporations Joint Pension Fund Trustees Limited and rules scheduled thereto, as from time to time amended by subsequent deeds or resolutions (“APS Trust Deed”). The scheme has been closed to new members since the privatisation of BA in 1987.
2. APS is an occupational pension scheme providing for benefits for employees of BA (and certain associated companies) and their dependants on leaving their employment or on death. The scheme is a balance of cost defined benefit scheme. In other words, employees receive earnings-related benefits to which they contribute out of their pensionable earnings. The benefits are based on a fraction of final salary for each year of service. The employing company undertakes to pay during the life of the scheme whatever sum is required to make up the deficiency. On winding up, the surplus assets must be applied in purchasing additional benefits for members and non-commutable annuities for pensioners up to Revenue limits. Any remaining balance belongs to the employers.
3. The Part 8 claim in this case sought the answers to a formidable number of questions as to the true construction of the APS Trust Deed, which the judge gave in the order now under appeal. I set out the list of questions and answers in full below. The issues have now narrowed and not all the answers which the judge gave are challenged. However, as a result of the appellants’ notice, served by representative beneficiaries of the scheme, and the respondent’s notice served by BA, the answers to questions 3, 4, 5, 6, 7, 8(i)(a) and (d) and 9 are in issue. The most important issues are, however, in substance:

i) the permissible scope of a scheme for disposing of surplus under clause 11(b) of the APS Trust Deed;

ii) whether this clause permits the trustees to create reserves; and

iii) whether this clause permits refunds to be made to BA.

Representation

4. Mr Nigel Inglis-Jones QC appears for the first two defendants, who were appointed by the court to represent active members and deferred pensioners of APS respectively. Miss Elizabeth Gloster QC appears for all the trustees. The first fifteen respondents in these proceedings are the current managing trustees of APS. The sixteenth respondent is the custodian trustee. Mr Brian Green QC appears for BA. Mr Kenneth Post appears in person. He is a management trustee but he does not agree to be represented by the trustees’ legal representatives. Mr Post has made it clear that while he has objections to certain steps taken by BA in relation to APS, he does not wish to make representations on the issues of construction. I do not propose to set out Mr Post’s objections to BA’s actions as they are not relevant to this appeal.

Background

5. APS was set up pursuant to section 20 of the Civil Aviation Act 1948. Originally there were three separate corporations: The British European Airways Corporation, BOAC and the British South American Airways Corporation. Under the original provisions of APS, it was the Minister of Civil Aviation who had to confirm by regulation any alterations under clause 18; to adjudicate under clause 11 in the role now occupied by an independent actuary; and to consent to any notice to wind up APS under clause 19. I set out these clauses below.
6. APS was originally set up for general staff, not for flight staff. Originally, members’ contributions and benefits were defined by a table prescribing ‘building blocks’ – fixed contributions generating an entitlement to a fixed amount of pension. If the ‘building block’ contributions were insufficient to fund the fixed benefits prescribed by the table, the Corporations paid the balance of the cost of those benefits. In 1951, Part II of APS was created for pilots. In 1953, Part III of APS was created for radio, navigating and engineer officers. In 1971, cabin crew were permitted to join APS.
7. In 1973, Part VI of APS was created. By this time APS was a more conventional ‘final salary’ scheme (as a result of progressive changes since 1956), with benefits being provided by reference to a member’s years of service and final salary, rather than by reference to a ‘building blocks’ table prescribing a member’s contributions and corresponding benefit. In 1983, provisions were inserted into the Rules to permit BA to augment the benefits of existing members on early retirement.
8. In 1984, APS was closed to new members, because it was considered unsuitable for privatisation, which took place in 1987. The potential liabilities of APS for employers were considered too great for private investors. A new pension scheme (“NAPS”) was created and 17,007 members of APS transferred into NAPS in return for compensatory benefit increases within NAPS or compensatory lump sum cash payments.
9. In 1986, BA’s augmentation power (introduced in 1983) was replaced by a wider power which enables BA to direct new benefits for existing or new members without the consent of the Trustees and without any payment to cover the cost of such augmentations, unless the actuary certifies that payment was necessary. This power is now contained in clause 24 of APS. Mr Inglis-Jones submits that with the exception of clause 24, the terms of APS are more favourable to the beneficiaries of APS than the employing companies.
10. Valuations of the fund took place in 1989, 1992, 1995 and 1998. The substantial surplus shown by the 1989 valuation was applied by the trustees in granting BA a thirty year contribution holiday. With effect from 1 December 1989 BA gave active members benefit improvements at a cost of £136 million. No improvements were given to pensioners or deferred pensioners.
11. In 1999, BA proposed a merger of APS and NAPS. The proposal was supported by the actuary and by the trustees, who distributed an information pack to members in August 1999. The merger proposal was opposed by the membership of both schemes.
12. In January 2000, the trustees issued the original proceedings seeking the Court’s approval to the proposed merger of APS and NAPS.
13. On 20 October 2000 the preliminary results of the valuations of APS and NAPS as at 31 March 2000 showed APS to have a very substantial surplus of £820 million (out of assets with a market value of £6.7 billion), whereas NAPS was shown to have a deficit of £281 million (over assets with a market value of £3.75 billion). The trustees abandoned the merger proposals. Out of the £820 million surplus in APS, a disposable surplus of £150 million was certified, stated to be enough for a four year contribution holiday for BA.
14. In the course of the proceedings various questions were raised about the interpretation of clauses 11 and 24. The Part 8 claim form was amended to its current form, to seek to resolve those questions, by order of Master Moncaster dated 12 January 2001.
15. In January 2001, Lloyd J heard argument on those questions, giving judgment (and permission for Mr Bell and Mr Palmer to appeal questions 4, 6 and 8 and permission for BA to appeal questions 3, 5 and 9) on 16 February 2001.
16. On 30 March 2001, Mr Alexander, the actuary for the purposes of APS, signed his valuation of APS as at 31 March 2000, retaining certain reserves within APS.
17. BA used clause 24 to provide augmentations for active members to the extent of £16.5 million in the two years to 31 March 2000 and to the extent of a further £3.48 million in the year to 31 March 2001. The actuary advised that no payment by BA to the fund was necessary.
18. From privatisation up to 31 March 2002, the raw contributions made by BA have amounted to £82.2 million, whereas the raw contributions made by members have amounted to £222.5 million. (From the inception of APS to 31 March 2002, the employer contributions amount to £807 million and the member contributions amount to £505 million). Inclusive of interest to 31 March 2002, the value of BA’s contribution holidays since 1989 amounts to £754 million.
19. The scheme now has about 26,000 pensioners, 4,000 active members and about 5,500 deferred pensioners.

The APS Trust Deed

20. The APS Trust Deed defines the “Employer” as such one of the specified companies, including BA, as is the employer of the member concerned, but the points of construction arising on this appeal have been argued as if BA were the sole Employer for the purposes of the APS Trust Deed. The critical provisions of the APS Trust Deed are clauses 2, 3, 11, 18, 19 and 24 and rule 5(b) which provide as follows:-

Main Object

“2. The main object of the Scheme is to provide pension benefits on retirement and a subsidiary object is to provide benefits in cases of injury or death for the staff of the Employers in accordance with the rules. The Scheme is not in any sense a benevolent scheme or no benevolent or compassionate payments can be made therefrom.”

Payment of contributions

3. Each Employer severally covenants with the Management Trustees that it will pay or cause to be paid to the Management Trustees all contributions to be contributed by it and by members in its employment in accordance with the Rules.

...

Actuary

“11. The duties of the Actuary shall be:-

a) At or as soon as practicable after the date of the coming into force of the Scheme and thereafter at the end of such periods not exceeding three years (with the exception of the valuation following the one made as at 30 September 1985 which will be made as at 31 March 1989) as the Management Trustees shall from time to time determine the condition of the Fund shall be submitted to the Actuary who shall consider the same and shall make an actuarial valuation of the assets and liabilities of the Fund and shall report on the financial position thereof to the Management Trustees who shall forthwith transmit a copy thereof to each Employer together with any recommendations they may wish to make in regard thereto.

b) In conjunction with each valuation made in accordance with sub-clause (a) of this clause the Actuary shall make a separate actuarial valuation of the assets and liabilities of the Fund attributable to each Employer and if the Actuary certifies that a deficiency or disposable surplus as the case may be is attributable to an Employer he shall certify the amount thereof and the Management Trustees shall within three months after receiving such certificate make a scheme for making good the deficiency or as the case may require disposing of the disposable surplus PROVIDED THAT any such scheme shall be subject to the agreement of the Employer to which it applies or in default of agreement shall be referred to a Fellow of the Institute of Actuaries to be appointed in default of agreement on the application of either the Employer or the Management Trustees by the President for the time being of the Institute of Actuaries and shall come into force subject to such amendments (if any) as that Actuary may direct.

c) If the Actuary certifies that there is a deficiency attributable to an Employer the scheme referred to in paragraph (b) above shall provide that that Employer shall contribute to the Fund in addition to any existing deficiency contribution payable under this clause and to the contributions prescribed by the Rules an equal annual deficiency contribution calculated to make good the deficiency over a period not exceeding forty years from the date of the valuation PROVIDED THAT an Employer may at any time or times pay to the Fund such monies as the Employer shall think fit in or towards satisfaction of any deficiency contributions which it would otherwise have been liable to provide on any subsequent date or dates.

d) If the Actuary certifies that there is a disposable surplus attributable to an Employer the scheme referred to in paragraph (b) above shall provide that:-

i) the amount or outstanding term of any existing annual deficiency contribution shall be reduced to such extent as the disposable surplus will permit.

ii) If after having extinguished as aforesaid all outstanding annual deficiency contributions of an Employer a balance of disposable surplus still remains the contributions of the Employer shall be reduced to an extent required to dispose of such balance by annual amounts over such a period not exceeding 30 years from the date of the valuation as the Actuary shall advise.

e) Where on such valuation the Actuary certifies that in order to maintain an equality of value in relation to persons becoming members subsequent to three months from the date of the report on the valuation between the amounts to be contributed by and in respect of such persons and the amounts of benefits to which such persons will become entitled it is expedient to increase or decrease contributions payable to the Fund provision may be made by the scheme referred to in paragraph (b) above for such increase or decrease as the case may require.

f) The Actuary shall also make and give such other reports and certificates and give such advice and information relating to the Fund as the Management Trustees or any Employer may deem to be necessary or expedient.

...

Amendments and additions

18. The provisions of the Trust Deed may be amended or added to in any way by means of a supplemental deed executed by such two Management Trustees as may be appointed by the Management Trustees to execute the same. Furthermore the Rules may be amended or added to in any way and in particular by the addition of rules relating to specific occupational categories of staff. No such amendment or addition to the provisions of the Trust Deed or to the Rules shall take effect unless the same has been approved by a resolution of the Management Trustees in favour of which at least two thirds of the Management Trustees for the time being shall have voted PROVIDED THAT no amendment or addition shall be made which:-

i) would have the effect of changing the purposes of the Scheme or

ii) would result in the return to an Employer of their contributions or any part thereof or

iii) would operate in any way to diminish or prejudicially affect the present or future rights of any then existing members or pensioner or

iv) would be contrary to the principle embodied in Clause 12 of these presents that the Management Trustees shall consist of an equal number of representatives of the employers and the members respectively.”

...

Winding-up

19. (a) British Airways reserves the right by giving not less than six months previous written notice to the Management Trustees to terminate its contributions to the Fund in whole or part whereupon as also in the event of termination of the scheme in accordance with sub-clause (b) hereof or by effluxion of time or otherwise then such outstanding sums as may be due from an Employer to restore the solvency of the Fund ... shall become immediately due and payable.

...

(d) In the event of their being any balance in the Fund upon the expiry of the Scheme or remaining after application under the provisions of sub-clause (c) of this Clause the Rules of the Scheme shall be amended in consultation with the Actuary and subject always to the approval of the Commissioners of Inland Revenue to provide additional benefits (in the form of pensions and/or allowances) for Members or Pensioners by way of non-commutable annuities PROVIDED HOWEVER that the aggregate of the actuarial values of such additional benefits shall not be in excess either of such balance or of the actuarial equivalent of such additional pensions or allowances. Such annuities to be purchased in manner provided under the said sub-clause (c) of this Clause. Any balance then remaining being repaid to the Employers in proportions determined by the Actuary.

Discretionary Benefits

24. The Employer may by notice in writing to the Management Trustees specify that there shall be provided under the Scheme:

i) increased or additional benefits to or in respect of any Member, Pensioner or category of Member or Pensioner, and

ii) benefits on different terms and conditions from usual for or in respect of any Member, Pensioner or category of Member or Pensioner, and

iii) benefits under the Scheme in respect of any employee or former employee of the Employer or category thereof (other than Members or Pensioners)

and the Management Trustees shall thereupon provide the same accordingly (subject to the payment to the Fund by the Employer of such sum or sums, if any, as may be advised by the Actuary to be necessary) PROVIDED THAT the approval of the Scheme by the Commissioners of Inland Revenue as an exempt approved scheme under Chapter 1 of Part XIV of the Income and Corporation Taxes Act 1988 would not thereby be prejudiced.

Rule 5.......

(b) The contributions of each Employer will consist of:-

(i) contributions of such amounts as shall be certified by the Actuary from time to time as being required in addition to the contributions payable by the Members to provide the balance of the pension benefits and the whole of the Dependent Child’s Allowances and the death benefits of the Scheme;

(ii) such deficiency contributions if any as may be required in accordance with the provisions of any scheme made pursuance to Clause 11 of the Trust Deed.”

21. Clause 12 of the APS Trust Deed provides that there are to be sixteen management trustees. BA has the right to appoint eight management trustees. The remainder are appointed by the members and pensioners of both APS and NAPS. The chairman and deputy chairmen are appointed by BA from the management trustees appointed by it (clause 14(b)). The chairman of a meeting of management trustees has a casting vote (clause 14(a)). Accordingly it is said that the management trustees appointed by BA are in a position to control resolutions put to the management trustees, unless the APS Trust Deed requires some special majority as in the case of clause 18.

Valuations pursuant to clause 11 of the APS Trust Deed

22. The valuation of the scheme assets and scheme liabilities pursuant to clause 11 of the APS Trust Deed has given rise to surpluses. A distinction, however, is drawn between the “raw” surplus, which is the excess of scheme assets over scheme liabilities, and “disposable” surplus, that is the surplus which the actuary certifies under clause 11(b). By his answer to question 1, the judge confirmed that a distinction could be drawn between these two types of surplus and there is no appeal from his judgment on this point.
23. Under clause 11 of the APS Trust Deed, the actuary is required to value the assets and liabilities of the scheme triennially. At the time of the hearing before Lloyd J, the actuary had produced a provisional valuation pursuant to clause 11 which showed a surplus of £820m. as at 31 March 2000, as explained above. He also concluded that the amount which would provisionally be required to give BA a thirty-year contribution holiday under clause 11(d)(ii) was £328 m.
24. The actuary completed his valuation on 31 March 2001. Having considered the matter further, the actuary concluded in his final valuation for the purposes of clause 11 that the disposable surplus was £150m. In this valuation, the actuary has (for the first time) adopted market value as the basis of valuation on account of the increasing maturity of the scheme. The final valuation has been admitted in evidence on this appeal.
25. The expression “residual surplus” is used below to denote disposable surplus after application in accordance with clause 11(d) and (e) of the APS Trust Deed.

The interpretation of pension schemes

26. There have been several reported cases about the interpretation of provisions of pension schemes in recent years. There are no special rules of construction but pension schemes have certain characteristics which tend to differentiate them from other analogous instruments. I mention some of those characteristics in the following paragraphs.
27. First, members of a scheme are not volunteers: the benefits which they receive under the scheme are part of the remuneration for their services and this is so whether the scheme is contributory or non-contributory. This means that they are in a different position in some respects from beneficiaries of a private trust. Moreover, the relationship of members to the employer must be seen as running in parallel with their employment relationship. This factor, too, can in appropriate circumstances have an effect on the interpretation of the scheme.
28. Second, a pension scheme should be construed so to give a reasonable and practical effect to the scheme. The administration of a pension fund is a complex matter and it seems to me that it would be crying for the moon to expect the draftsman to have legislated exhaustively for every eventuality. As Millett J said in Re Courage Group’s Pension Schemes [1987] 1 WLR 495 at 505:

“[its] provisions should wherever possible be construed so as to give reasonable and practical effect to the scheme, bearing in mind that it has to be operated against a constantly changing commercial background. 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.”

In other words, it is necessary to test competing permissible constructions of a pension scheme against the consequences they produce in practice. Technicality is to be avoided. If the consequences are impractical or over-restrictive or technical in practice, that is an indication that some other interpretation is the appropriate one. Thus in the National Grid case, to which I refer below, where there was a choice of possible constructions, Lord Hoffmann held that the correct choice depended “upon the language of the scheme and the practical consequences of choosing one construction rather than the other.” (see [2001] 1 WLR 864 at 887, paragraph 53).

29. Third, in pension schemes, difficulties can arise where different provisions have been amended at different points in time. The effect is that the version of the scheme in issue may represent a “patchwork” of provisions: see per Robert Walker J in the National Grid case. Pension schemes are often subject to considerable amendment over time. The general principle is that each new provision should be considered against the circumstances prevailing at the date when it was adopted rather than as at the date of the original trust deed: see per Millett J in Re Courage Group’s Pension Schemes, above, at 505 – 506. Likewise, the meaning of a clause in the scheme must be ascertained by examining the deed as it stood at the time the clause was first introduced. Thus, for instance, at the time clause 11 was introduced, neither clause 24 nor its predecessor formed part of the APS Trust Deed, so that clause is not to be taken into account in the interpretation of clause 11. (I should add that the appellants have recently made a complaint to the Pensions Omsbudsman about the introduction of clause 24. We are not concerned with that complaint.)
30. Fourth, as with any other instrument, a provision of a trust deed must be interpreted in the light of the factual situation at the time it was created. This includes the practice and requirements of the Inland Revenue at that time, and may include common practice among practitioners in the field as evidenced by the works of practitioners at that time. It has been submitted to us that the factual background is only relevant if the document is ambiguous. I do not accept this submission, which is inconsistent with the approach laid down by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896. In Lord Hoffmann’s words “[i]nterpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background that would reasonably have been available to the parties in the situation in which they were at the time of the contract” (912H). Lord Hoffmann also distinguished the meaning of the words to be found in dictionaries from the meaning of documents:

“(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.”

31. Fifth, at the end of the day, however, the function of the court is to construe the document without any predisposition as to the correct philosophical approach. Both sides urged on us their respective philosophical approaches. Mr Inglis-Jones submitted that the overall approach of the APS Trust Deed was favourable to the members. BA submitted that it should be remembered that this was a balance of cost scheme and so the fact that there was a surplus meant that the employer had paid too much. As Brooke LJ, giving the judgment of this Court (Nourse, Schiemann, Brooke LJJ), said in the National Grid case [2000] ICR 174, 193

“The solution to the [problem of construction in that case] lies within the terms of the scheme itself, and not within a world populated by competing philosophies as to the true nature and ownership of an actuarial surplus.”

In the same case, in the House of Lords, the beneficiaries of the scheme argued that the surplus represented their contributions or their deferred remuneration. Lord Hoffmann rejected this approach. He expressed the view that, once it was established that the employer could exercise powers conferred by a scheme in its own interests, “I do not see the relevance of the way in which the surplus was funded” (page 869G). I discuss the National Grid case in detail below.

32. Sixth, a pension scheme should be interpreted as a whole. The meaning of a particular clause should be considered in conjunction with other relevant clauses. To borrow John Donne’s famous phrase, no clause “is an Island entire of itself.”

Regulatory and fiscal matters

33. There is a clear public interest in the proper constitution and management of pension funds. The rights of beneficiaries under a pension scheme are accordingly enhanced by statutory protection in the Pensions Act 1995. Various sections of this Act restrict the distribution of surplus funds of a pension scheme to the employer.
34. Another factor relevant to this case is the fiscal treatment of surpluses. As explained above, Revenue practice forms part of the factual background against which a pension fund should be construed. Tax relief is available on contributions into a pension scheme. There are Revenue limits on the benefits which members may receive under the scheme. To counteract any temptation to put more money into a scheme than is needed, sections 601 to 603 of the Income and Corporation Taxes Acts 1988 provide that excessive surpluses must be reduced. If excess surpluses are returned to the employer, they are taxed at 35 per cent (section 601 of the 1988 Act, as amended by section 74 of the Finance Act 2001).

Questions as to the interpretation of the APS Trust Deed

35. The judge was asked to answer a number of questions about the meaning of the APS Trust Deed. By his order, he answered the questions as follows:-

“Question

1. Whether, in certifying what surplus is ‘disposable’ for the purposes of Clause 11(b), the Actuary is constrained to certify as ‘disposable surplus’ such sum as is equal to the whole of the excess of assets over liabilities disclosed by the relevant actuarial valuations under that Sub-Clause?

Answer

No; the Actuary is not so constrained.

Question

2. If the answer to 1 above is ‘no’, whether in determining what surplus is ‘disposable’ for the purposes of Clause 11(b), the Actuary is obliged or entitled to have regard to:

i) the scheme which the Management Trustees might wish to make to dispose of that ‘disposable surplus’ under Clause 11(b)?; and/or

ii) a potential use of Clause 24 by the Employer?

Answer

The Actuary cannot take into account the actual scheme which the trustees might wish to make, or indeed intend to make, but he can take into account the sort of provision which they might make by a scheme, depending on the amount of the disposable surplus. As regards Clause 24, he cannot take into account anything other than an actual use of the power by a notice given by the Employer by the date on which he certifies the disposable surplus.

Question

3. Whether a ‘disposable surplus’ in excess of the value required to extinguish the Employer contributions for 30 years as provided by Clause 11(d)(ii) may be certified by the Actuary in circumstances whether there remains a material risk that the Employer will within that 30 year period have either to resume such contributions or to make deficiency contributions pursuant to Clause 11(c)?

Answer

It may be, and it is a matter for the professional judgment of the Actuary.

Question

4. Whether the duty imposed on the Management Trustees by Clause 11(b) to make a scheme for disposing of a ‘disposable surplus’ attributable to an Employer:-

i) confers a ‘free-standing’ power to dispose of the ‘disposable surplus’ certified by the Actuary without exercising powers conferred on them elsewhere in the APS Trust Deed (in particular under Clause 18)?; or

ii) only permits the Management Trustees to dispose of such ‘disposable surplus’ exercising powers conferred on them elsewhere in the APS Trust Deed (in particular under Clause 18)?

Answer

The answer to question 4 is in sense (i) rather than (ii).

Question

5. If the answer to 4 is in sense (i), whether the Management Trustees or, in default of agreement with the Employer, the appointed actuary, are permitted to include in the Clause 11(b) scheme any measures for the disposal of such ‘disposable surplus’ other than those that are specified in Clause 11(d) and, if applicable, (e)?

Answer

Yes.

Question

6. If the answer to 5 above is ‘yes’, whether any such free-standing power is restricted by any and, if so, what term to be implied therein only having regard to any other provisions of the APS Trust Deed?

Answer

The free-standing power conferred on the Management Trustees by Clause 11(b) is restricted by the main objects provision in Clause 2, and by the requirement to observe Inland Revenue constrains under Clause 32, but not otherwise.

Question

7. If the answer to 5 above is ‘no’, whether the Management Trustees may exercise their powers under Clause 18 to amend the provisions of the APS Trust Deed to include measures in the Clause 11(b) scheme to dispose of the ‘disposable surplus’ other than those that are specified in Clause 11(d) and, if applicable, (e)?

Answer

In the light of the answer to question 5 this question does not in terms arise. But, in any event, the amendment power could be used to amend Clause 11 itself and to make other or additional express provision in relation to a disposable surplus.

Question

8. On the true construction of Clause 11 (as restricted (if at all) by any term to be implied therein) and in particular on the true meaning of the words ‘the Management Trustees shall make a scheme for disposing of the disposable surplus’, whether the Management Trustees or, in default of agreement with the Employer, the appointed actuary, are:

i) permitted to include in such a scheme any, and if so which, of the following:-

a) the making of a reserve;

b) the provision of benefit improvements (whether as directed by the Employer under Clause 24 or otherwise);

c) the provision of new benefits to and/or in respect of APS beneficiaries;

d) the making of a payment to the Employer; and/or

e) the reduction or suspension of employee contributions?; and/or

ii) entitled or obliged to have regard to a potential use of Clause 24 by the Employer?

Answer

A paragraph (b) scheme may include provision for any or all of a reserve, benefit improvements, new benefits for APS beneficiaries, making a payment to an Employer, and reducing or suspending employees’ contributions. When making such a scheme, the parties involved may not take into account action which is proposed under Clause 24, though if action has already been taken by the giving of a notice under that Clause, they must take that into account. More generally, a paragraph (b) scheme may but need not dispose of the whole of the disposable surplus. Any part of the disposable surplus not disposed of by the scheme remains unallocated and is, in effect, for the time being a reserve.

Question

9. If the answer to 8(i)(a) above is ‘yes’, whether the Management Trustees are permitted under Clause 11(b) to dispose of the ‘disposable surplus’ in any other way, and, if so, what, way in circumstances where there remains a material risk that disposal in such other way will cause the Employer within that 30 year period to have either to resume such contributions or to make deficiency contributions pursuant to Clause 1(c)?

Answer

Yes. Whether the Management Trustees do so and, if so, in what way, will depend on their judgment, on the advice they receive and what (if any) provision they choose to make by way of a reserve.

Question

10. If the answer to 5 above is ‘yes’, what, on the true construction of Clause 11(b), are the powers and duties of the appointed actuary to whom such a scheme is referred in default of agreement between the Management Trustees and the Employer and, in particular, whether and to what extent the appointed actuary is entitled or obliged to take into account the interests of the Employer in directing the form of the scheme to be adopted.?

Answer

The appointed actuary has to consider the proposals by the Management Trustees and those put forward by the Employer, and either side’s objections to the other’s proposals, and has to ensure that he is properly informed as to the circumstances of the scheme, and must then decide whether and, if so, how the Management Trustees’ proposed scheme ought to be modified so as to be the appropriate scheme to be put into effect in the circumstances, being fair and reasonable having regard to the interests of all concerned: members, pensioners and others, such as dependants, as well as the Employer.”

Judgment of Lloyd J

36. The judge gave a long and careful judgment but it is not necessary for me to summarise his reasoning on all the questions since not all of the questions are in issue on this appeal and his answers can be discerned from his answers to the questions set out above.
37. The judge carefully analysed the various provisions of the APS Trust Deed, noting that clause 11(d)(ii) enabled past service surpluses to be used to give the employer a respite in respect of future service contributions. He also held that it was not clear in what circumstances clause 11(e) would operate (Judgment, paragraph 27). However, he did not find it necessary to determine whether it was only the employer’s contributions that could be affected under clause 11(e) or whether it could affect both the employer’s contributions and those of employees (Judgment, paragraph 38).
38. The judge had to decide whether the trustees’ power to make a scheme under clause 11(b) was limited to what could be done under clause 11(d) and (e) or whether the scheme could also make provision for the disposal of residual surplus (Judgment, paragraphs 36 and 39). The judge preferred the conclusion that the scheme could deal with the whole of the disposable surplus. The judge further held that clauses 11 and 18 were separate provisions and that there was no need to read into clause 11 a requirement to follow clause 18 to give effect to a clause 11(b) scheme. Accordingly, he accepted that clause 11 was a “free-standing” clause. (Judgment, paragraph 45).
39. The judge was satisfied that this construction was justified as a matter of necessity because of the mismatch of the procedure under clause 11 and the procedure under clause 18 (Judgment, paragraph 46). The judge accepted that it was the duty of the trustees to make a scheme but not that the scheme had to dispose of the whole of the disposable surplus finally. He accepted, however, that a disposal required a definitive allocation and that the creation of a reserve would not satisfy that aspect of the meaning. Nonetheless he held that the management trustees could set up reserves and that a scheme providing for the creation of a reserve would be a scheme for the purposes of clause 11 of the APS Trust Deed (Judgment, paragraphs 47 and 48). Such reserves could be in addition to those made by the actuary.
40. The judge held that repayments to the employer were theoretically possible under a clause 11(b) scheme but considered that in the present circumstances they were academic since only where a scheme is more than 105% funded on the basis prescribed by schedule 22 of the Income and Corporation Taxes Act 1988 can any repayments be made at all and, if no power to make repayments exists under the scheme, the scheme can now be modified by the Occupational Pensions Regulatory Authority to permit repayment to the employer (see Pensions Act 1995, section 69) (Judgment, paragraph 51). The judge referred to various statutory provisions requiring or enabling repayments to be made in certain situations. He considered that trustees might want to provide for repayments in a scheme under clause 11(b) as a means of obtaining the employer’s agreement to the augmentation of benefits out of surplus (Judgment, paragraphs 52 and 53).
41. As respects clause 24, the judge rejected the argument that this required the employer actually to pay a sum of money into the scheme to meet the cost of augmented benefits awarded on a discretionary basis under this clause. He considered that the actuary making his certificate and the trustees making a scheme could take into account a clause 24 notice from the employer that had actually been given and might even delay their actions until it was clear whether or not such a certificate was to be given, but that they could not take into account that such a notice might be served in the future and allocate part of the surplus to a reserve for this purpose (Judgment, paragraphs 54 and 55).

The National Grid litigation

42. At the time the judge gave his judgment, National Grid v Mayes had been decided at first instance by Robert Walker J [1997] PLR 157 and by the Court of Appeal [2000] 1CR 174. After the judge gave judgment, the House of Lords handed down their judgments reversing the decision of the Court of Appeal. The decision of the House of Lords has important implications for this case. The decision of the House of Lords is reported as National Grid Co plc v Mayes, International Power plc (formerly National Power plc) v Healy [2001] 1 WLR 864.
43. The pension scheme in issue in those proceedings was established in 1947, in the year preceding the year in which the scheme in this case was established. It was a contributory scheme to which the employers undertook to make minimum contributions (including, under clause 13(1)(a), a monthly contribution) and to make good any shortfall. The scheme had an actuarial surplus and the trust deed gave the employer the power to “make arrangements to deal with” the surplus (that is, the raw surplus not “disposable surplus” as in the case of APS). Under the relevant clause (clause 14(5)), the arrangements had to be certified by the actuary as reasonable. The employer used some of the surplus for benefit improvements. The balance of the surplus was used to cancel the employer’s liability to meet special redundancy costs or was carried over within the scheme. There does not seem to have been any issue as to whether the actuarial surplus was available to be used for these purposes if sufficient power existed: indeed, the actuary had given the certificate required by clause 14(5). The scheme contained a power of amendment but this power prohibited any amendment which would make any monies payable to the employer (clause 41).
44. Members of the scheme complained to the then Pensions Omsbudsman, Dr Julian Farrand QC, who decided against the employer that the amendment power in the scheme prevented amendments which had the effect of repaying scheme assets to the employer and that cancellation of the liability to pay special contributions was contrary to this power. The employer appealed and Robert Walker J held that the Pensions Omsbudsman was wrong to conclude that the restrictions on amendment overrode National Grid’s powers to make arrangements to deal with the surplus under the equivalent of clause 11(b). The Court of Appeal held that clause 14(5) did not confer power to forgive debts owed by the employer to the Fund. This could be done only by amendment of the scheme. The Court of Appeal did not consider that the restriction on amendment applied.
45. However, the House of Lords allowed the appeal and concluded that the arrangements made by National Grid were within clause 14(5) and that the restriction on amendment did not apply. The prohibition on the repayment of scheme assets to the employer was originally inserted to obtain Revenue approval. However, only actual payments were caught because these were payments on which the employer had obtained tax relief by making contributions into the scheme. On its true interpretation the amendment power did not affect any transaction which merely had the same economic effect as the payment to the employer. Accordingly, the cancellation of the liability to pay special redundancy costs is not the same as a payment to the employer. Other issues arose, but they are not material to this appeal.
46. Separate speeches were given by Lord Hoffmann, Lord Clyde and Lord Scott. Lord Slynn and Lord Steyn agreed with both Lord Hoffmann and Lord Scott. Lord Clyde agreed with Lord Hoffmann and on the question of whether or not elements of the arrangement altered the scheme he also agreed with the view expressed by Lord Scott. Lord Scott agreed with Lord Hoffmann.
47. In paragraph 35 of his speech, Lord Hoffmann agreed with Robert Walker J that clause 14(5) of the scheme was apt to confer the powers to make the arrangements necessary to deal with the surplus and that it connoted not only a duty to make a scheme but also the power to discharge that duty:

“I do not think that it requires an employer to scratch around among the other provisions of the scheme to find specific powers. But I would not go so far as the judge in saying (as he did in paragraph 83) that the employer’s power was not intended to be restricted “either specifically by clause 41(2)(b) or by what the employer could do under other clauses of the scheme, or generally by the context and purpose of the scheme.” I find it difficult to believe the general words of clause 14(5) were intended to give the employer power, without amendment, to do something which would contradict the express provisions of the scheme.”

48. In paragraph 36 of his speech Lord Hoffmann thought that there was considerable force in the view of the Pensions Omsbudsman that the amendment power was not intended only to cover payments otherwise than out of surplus. However, he accepted in paragraph 37 of his speech that the fact that the scheme could not be amended to allow something to be done does not necessarily mean that a limited power to do that thing does not already exist within the scheme. However, he added “but such a prohibition is rather odd if the scheme already contains a very wide power”. He did not, however, find it necessary to express a final view on this point.
49. In paragraph 56 of his speech, Lord Hoffmann expressed the conclusion that the fact that under clause 14(5) the actuary had to certify the arrangements as reasonable, whereas the power of amendment did not have to be so certified, suggested that clause 14(5) was a separate power subject to its own conditions.
50. Lord Hoffmann was also impressed by practical arguments. He held that “[t]he operation of the pension scheme should not be encumbered by unnecessary technicalities. On the other hand if the amendment procedure provides for important safeguards for the members or the trustees, that might be a good reason to construe the scheme as requiring the employer to adopt it” (speech, paragraph 57).
51. At paragraph 63 of his speech, Lord Hoffmann gave as one of his reasons for rejecting the respondents’ arguments in that case, that they accepted that the employer could create a reserve out of which to pay future contributions but could not set off accrued contributions against a reserve. In his judgment, any such distinction was unjustified.
52. Lord Clyde held:

“So far as the construction of clause 14(5) is concerned, despite the apparently unrestricted language, I agree that it should be construed as requiring that the arrangements should be made in accordance with the whole scheme, so that if a particular arrangement involves an alteration to the provisions of the scheme an amendment will be required, but if it does not, then it may be made without amendment. The question then is which, if any, of the particular elements of the arrangement innovate upon the scheme and in that regard I agree with the views expressed by my noble and learned friends, Lord Hoffmann and Lord Scott of Foscote”.

53. Lord Scott also accepted that clause 14(5) was a power-conferring provision. He continued as follows:

“But it does not follow that it confers power upon the employer to amend the scheme. Clause 41 contains an express power to amend the scheme. The provisions of the scheme must be construed as a whole and, if so construed, clause 14(5) cannot, in my opinion, be regarded as conferring on the employer the power of amendment free from the safeguards to which the clause 41 power of amendment is subject.” (paragraph 76)

54. Lord Scott summarised his views in paragraph 78 of his speech:

“... (i) Arrangements made under clause 14(5) which involve altering the contribution obligations of either the employer or the employees under clause 13(1)(a) require in my opinion an amendment of the scheme. .....

(iv) Arrangements made by the employer under clause 14(5) could take the form of a direction to the fund trustees, first, to set aside the surplus, or part of it, as a reserve fund, and, second, to appropriate the reserve fund in or towards the payment of future contributions falling due under clause 13(1)(a). Directions of this character would not, in my opinion, require any amendment of the scheme unless the result were to reduce the current monthly contribution obligation of the employer to less than twice that of the members. If that were the result, an amendment of clause 13(1)(a) would be required.

(v) Arrangements made under clause 14(5) cannot take the form of a payment out of the pension scheme to the employer. Absent an amendment to the scheme, the trustees could not justify making such a payment and an amendment authorising such a payment would be barred by clause 41(2)(b).”

Submissions

55. All three leading Counsel made detailed submissions and in the following summary I have merely referred to the principal submissions advanced orally although I have taken into account all the additional points made in writing as well.

Appellants’ submissions

Clause 11(b)

56. Mr Inglis-Jones, for the appellants, submits that the balance of any disposable surplus not required to be applied in accordance with subclauses (d) and (e) of clause 11 is required to be applied in the augmentation of members’ benefits. He accordingly submits that a clause 11(b) scheme is not restricted to the application of surplus in accordance with those subclauses. Thus the wider construction of clause 11(b), which the judge preferred, is correct. Mr Inglis-Jones further submits that APS is a very mature scheme and that that fact has an effect on construction. He submits that, if the disposable surplus is not applied in augmenting members’ benefits in a scheme, the stage will be reached when there is so much surplus that there is a tontine effect, i.e. those who are still in there in five or six years’ time will benefit and those who have died in the meantime will miss out.
57. Mr Inglis-Jones accepts that the court should look at the practical consequences of any construction if more than one construction is tenable. The respondents contend that to augment benefits will jeopardise the scheme in the end result. Mr Inglis-Jones submits that the augmentation of members’ benefits could be achieved in ways other than cash payments, such as giving employees a contributions holiday. Moreover, the disposable surplus only comes into existence after an employer has had a thirty year contribution holiday and the payment of augmented benefits out of such a surplus can hardly be said to be imprudent.
58. Mr Inglis-Jones submits that clause 11(b) does not import a power to do anything. It is just a duty. A power to forgive a debt would arise under section 15(f) of the Trustee Act 1925. If clause 11(b) imports a power, the power could be exercised without any amendment of the APS Trust Deed.
59. Mr Inglis-Jones submits that in the present case the amendment procedure contains some important safeguards for members and that in National Grid (at page 878, paragraph 57, cited above) Lord Hoffmann recognised such a case might arise. In this case, the decision under clause 11(b) could be taken by a simple majority and the casting vote is always held by one of the management trustees nominated by BA. Moreover, monies that go out of the scheme may never come back. Lord Hoffmann suggested that, where the amendment power contained such safeguards, that might be a good reason to construe the scheme as requiring the employer to adopt it. Mr Inglis-Jones submits that that is the position in the present case.
60. Mr Inglis-Jones submits that the purpose of clause 11(e) may be to make it clear that there may be differential contributions between corporations. He submits that clause 11(e) suggests that the scope of a clause 11(b) scheme must extend beyond the purposes specified in sub-clauses (d) and (e).
61. Mr Inglis-Jones submits that clause 11(f) indicates that the actuary will give a certificate regarding augmented benefits. He has wide powers to resolve any disputes between the employer and the trustees. Mr Inglis-Jones relies on the observations of Robert Walker J in National Grid at first instance (paragraphs 93 to 96) respecting the suitability of the actuary as an arbitrator in any dispute as to the way in which the residual surplus should be applied.
62. Mr Inglis-Jones relies on the words “shall come into force” at the end of clause 11(b). He submits that these words apply only to give effect to any amendments required by the independent actuary appointed under clause 11(b). He also submits that these words are there because the trustees already have powers of amendment under clause 18. On the appellants’ case, amendments are necessary to give the trustees’ power to apply disposable surplus to reserves or make refunds to the employer.
63. Mr Inglis-Jones submits that it would not be wrong for trustees to vote against amendments proposed under clause 18 to implement the scheme under clause 11(b).
64. He submits that there is no restriction in clause 11 on the meaning of the word “scheme”. As submitted by Mr Green, the word “scheme” is a wide word. If sub-clauses (d) and (e) were exhaustive, the surplus would simply sit in the pension scheme and it would not bring the scheme back into balance. Indeed the surplus might not be identifiable. There would be little point in having an independent actuary if sub-clauses (d) and (e) exhausted the management trustees’ power to deal with the surplus.
65. Mr Inglis-Jones submits that the actuary could apportion the distributable surplus between employers and employees. The employer receives a considerable advantage under clause 11 (c) and (d). It would not be surprising if any further disposition of surplus had to be for the benefit of members. Moreover, it was inconsistent with the nature of a balance of cost scheme for BA to be enabled to avoid all risk of having to make contributions in the future.
66. Mr Inglis-Jones relies on the fact that clause 11(b) refers to “the” disposable surplus.

A power to reserve?

67. Mr Inglis-Jones submits that a surplus should be struck after actuarial and demographic assumptions have been used by the actuary. He accepts that this surplus can be volatile and that it is highly unlikely to be correct. He submits that the trustees should not be able to create another reserve after the actuary has performed his task. Mr Inglis-Jones also submits that the proposed reserves are not ring-fenced against use by the employer under clause 24, for example on redundancy or retirement.
68. Mr Inglis-Jones submits that the judge correctly accepted his submission below as to the meaning of the word “dispose of”. The concession which had been made in National Grid was not applicable. He submits that the appropriation of sums to a “reserve” is not permitted under clause 11(b) unless the reserve were to be ring-fenced against employer use under clause 24, or were to be a proper reserve against a future liability. The APS Trust Deed can be amended if the trustees require a power to create a reserve. The trustees have used the surplus to provide for liabilities flowing from discretionary benefits awarded under clause 24. This does not amount to establishing a reserve. Nor can they establish a reserve against some vague investment risk. Given the nature of the scheme, a reserve against short-term fluctuations in the value of investments was not appropriate. The surplus has arisen through members’ contributions. This Court held in Edge v Pensions Ombudsman [2000] Ch 602 at 626 that when considering how to dispose of surplus the trustees should look at the origins of the surplus. The word “scheme” has to be construed widely to include benefits for employees even though this is not specifically mentioned.
69. Mr Inglis-Jones relies on the Oxford English Dictionary definitions of “dispose of”. They show that more usually the word means “to deal with conclusively or settle”.
70. Mr Inglis-Jones submits that the function of the actuary under the words in brackets in clause 24 is not just arithmetical but enables the actuary to form a view about what is necessary in all the circumstances of the case.

Can contributions be repaid to BA under clause 11(b)?

71. Mr Inglis-Jones challenges the judge’s answer to question 8(i)(d) that money can be returned to the employer. He accepts that the Pensions Act 1995 imposes a considerable obstruction to returning money in an ongoing scheme. However, schedule 22 of the Income and Corporation Tax Act 1988 imposes a tax on grossly over-funded schemes. While at present there is nothing like a schedule 22 surplus in this scheme, there is a very considerable surplus. In the end there will be a schedule 22 surplus.
72. Mr Inglis-Jones submits that the judge’s interpretation of clause 11(b) robs members of considerable protection. He submits that the original scheme did not contemplate repayment to the employer under clause 11(b). Any such provision for repayment would not have been approved by the Revenue at the time it was established: see Phillips, Pension Scheme Precedents (1957), paragraph 345 which states:

“The only circumstance in which a payment may be made out of the fund of a scheme to the employer, if the scheme is to be approved under section 379, is the termination of the scheme and the dissolution of the fund ...

It sometimes happens, particularly where the employer is guaranteeing the scheme’s solvency, that a time comes when the actuary certifies that the employer has over-contributed. Even such an over-payment must not be returnable to the employer in cash. It must remain in the fund, but can be held to the credit of the employer against the future contributions which he would otherwise have been required to make.”

It was not until 1982 that the Revenue started to allow the return of surpluses.

73. As to question 6, and on the basis that the answer to question 4 is against the construction for which he has contended but that the answer to question 5 is as he contends, Mr Inglis-Jones submits that, whether as a matter of construction or on the basis that clause 11(b) confers a free-standing power, the approach would be the same, namely that clause 11(b) does not confer power to amend the scheme.
74. Mr Inglis-Jones submits that an argument that clause 18 also prevents payments to the employer out of surplus in other circumstances, for example out of raw surplus, or other repayments to the employer is so implausible that on the reasoning of the House of Lords in the National Grid case it must be rejected.
75. Mr Inglis-Jones submits that the differences between the present case and the National Grid case are inessential. Here a scheme under clause 11(b) cannot include a refund of contributions from the fund to the employer. This would require an amendment: the fact that special words are included to bring amendments made by an independent actuary into effect and the fact that protection is provided in clause 18 of the scheme in the form of a special majority support the submission that clause 11(b) does not confer a power to amend. Moreover, the court should reach the conclusion from proviso (ii) to clause 18 that the trustees have no power to repay the employer in the absence of a clear and express power to do so. Alternatively the court should imply such a term into the scheme from the provisions of proviso (ii).
76. Mr Inglis-Jones submits that it follows from the National Grid case that clause 11(b) is not a power of amendment: see per Lord Hoffmann (paragraphs 35 and 36); per Lord Scott (paragraphs 76 and 78), and per Lord Clyde (paragraph 72).
77. Lloyd J thought that the possibility of a refund to the employer was more theoretical than real. The matter was being tested by reference to reserves and possible repayments to the employer. The time may well come when the surplus is in excess of that allowed under schedule 22 and in that event section 37 and section 69 of the Pensions Act 1995 would apply. The appellants have received actuarial advice that it is a reasonable expectation that this will occur in the foreseeable future.
78. The difference between clause 11 and clause 18, so far as the employer is concerned, is that under clause 18 the employer had no negotiating position.

Submissions for BA

Clause 11(b)

79. Mr Brian Green QC, for BA, accepts the judge’s answers to question 4, 6 and 8 but puts forward an alternative construction, which is different from that accepted by the judge in answer to question 4. BA’s preferred case on question 4 is, however, the wider construction accepted by the judge because this is more flexible. He accepts that the court could find that the trustees have power to create a reserve but not to make a repayment to the employer. Mr Green submits that when construing clause 11 the court should bear in mind that there may be more than one employer and that there may be separate distributable surpluses for each employer. Mr Green accepts that BA has no negotiating position with the trustees under clause 18 but that it does have a negotiating position under clause 11(b).
80. Mr Green further accepts that although BA is given an apparently unfettered power to refuse to agree to a scheme formulated by the trustees under clause 11(b), BA owes a duty of good faith in the exercise of such power (Imperial Group Pension Trust v Imperial Tobacco Ltd [1991] 1 WLR 589).
81. Mr Green submits that the narrower and wider constructions are more apt than the appellants’ construction, which would fetter the trustees’ discretion after the mandatory objects have been satisfied because it would require benefits to be given to employees including a reduction in employee contributions. This amounts to an unexpressed mandatory third application of disposable surplus under clause 11.
82. Mr Green submits that the narrow construction is a possible construction. He relies on the actuary’s function in assessing the financial position. He points out that subclauses (c), (d) and (e) of clause 11 all concern employer contributions. He relies on the fact that subclause (d) is mandatory whereas subclause (e) is permissive. The latter subclause is extraordinarily specific. It does not have the effect of reducing surplus. He submits that the draftsman appears in clause 11(d)(ii) to have contemplated that there would be no disposable surplus. Clause 11 is structured on the basis that the distributable surplus will be exhausted under subclauses (d) and (e). This supports the narrower construction, the effect of which is that any balance of distributable surplus not required for the purposes mentioned in subclauses (d) and (e) is not in fact disposable surplus at all for the purposes of clause 11.
83. He submits that the court need not be concerned about the mismatch of majorities under clauses 18 and 11(b). The narrower construction would, of course, remove that concern. Mr Green also submits that the independent actuary replaced the Minister under clause 11(b) and this is significant as showing the limited scope of the function.
84. Mr Green adopts the judge’s reasoning on the wider construction. He submits that the best argument for the wider construction is the use of the definite article before “disposable surplus” in clause 11(b). He submits that little significance should be attached to the use of the definite article before disposable surplus. This is included to identify the distributable surplus which the actuary has certified.
85. Mr Green then moves to the third, or hybrid, interpretation put forward by the appellants. This involves submitting that under clause 11(b) the trustees have no power to create reserves or make refunds. According to the appellants, reserves do not “dispose” of a distributable surplus, and any power to make a refund to the employer would be inconsistent with clause 18 and the factual matrix and the winding up provision in the scheme. Mr Green submits that the winding up provision is not significant because it is simply there to exclude a resulting trust.
86. According to the appellants, disposable surplus could be applied in forgiving debts due from the employer or in giving the employer a contribution holiday for more than thirty years. However, there is no provision for debts by the employer in this scheme save that, where future benefits are given under clause 24, payment could be deferred and so indebtedness could arise. The balance of cost covenant gives no indication that time should be given for payment or that payment should be in arrears. If monthly instalments were agreed and were to be paid in arrears, the debt could never make a significant impact on the disposal of residual disposable surplus. This particular category of debt was not contemplated by clause 11 and involves a third use of the disposable surplus which is not discretionary. In any event, the present value of any contribution holiday over thirty years is marginal. Accordingly, the examples which the appellants give are theoretical, and do not detract from the force of the narrower construction.
87. Mr Green submits that the hybrid construction put forward by the appellants is illogical. It involves construing clause 11 as a wide power-conferring clause and then imposing a restriction. It is also impractical because it leaves the trustee and employer and independent actuary with no room for manoeuvre in the administration of APS if financial or other considerations make it prudent to appropriate some to reserves. It is also uncommercial and increases the possibility of a deficiency. He further submits that these points were recognised by Robert Walker J in paragraph 83 of his judgment in the National Grid case:

“Moreover, a construction under which benefit improvements (or a members’ contribution holiday) were the only permitted applications, would so far from making for actuarial equilibrium, tend in the long run to produce oscillation since the employers might find it increasingly difficult to fund successive rounds of benefit improvements.”

88. Mr Green illustrates this point by reference to the provisional valuation in this case which showed a residual disposable surplus of £361 million. By the time that the valuation was finalised this sum had reduced to £250 million. In Mr Green’s submission, mandatory augmentation of benefits threatens the long-term equilibrium which clause 11 is designed to achieve.
89. Mr Green places weight on the fact that this is a balance of cost scheme. The employers’ liability to contribute only arises if there is a shortfall and then only to the extent that the assets of the scheme are insufficient to pay the scheme’s liability. He relies on Re Courage Group’s Pension Schemes, above, at pages 515 C-E, where Millett J held that:

“... any surplus arises from past overfunding, not by the employer and the employees pro rata to their respective contributions, but by the employer alone to the full extent of its past contributions and only subject thereto by the employees.

It will, however, only be in rare cases that the employer will have any legal right to repayment of any part of the surplus ... Repayment will, however, still normally require amendment to the scheme, and thus co-operation between the employer and the trustees or committee of management. Where the employer seeks repayment, the trustees or committee can be expected to press for generous treatment of employees and pensioners, and the employer to be influenced by the desire to maintain good industrial relations with its workforce.”

90. On the basis of this passage, Mr Green submits that if there is a live issue in any proceedings as to the provenance of a surplus, it should be regarded as having come from the employer’s contributions. He accepts that in exercising its right to refuse its consent under clause 11(b) the employer must perform its duty of good faith: see Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd, above. The existence of this obligation of good faith has been recognised and approved by courts at different levels, including the House of Lords, in other employment contexts: see, for example, Malik v Bank of Credit and Commerce International SA (in liquidation) [1998] AC 20.
91. It follows that an employer is entitled to say that it does not wish to pay any more. In the passage cited above from Re Courage Group’s Pension Schemes the surplus referred to must be true surplus. This ultimate surplus Millett J held to be derived from the performance by the employer of its balance of cost covenant.
92. As respects clause 11(d)(ii), Mr Green submits that this is a once and for all exercise. If all contributions have been the subject of a holiday under this provision, further contributions on making the triennial valuation can only be compelled by the deficiency contribution process under clause 11(d)(i). The holiday, once given, cannot be taken away. Mr Green accepts that the drafting of clause 11 is inelegant.
93. Mr Green submits that in a balance of cost scheme it is only in exceptional circumstances that members have paid too much. Accordingly, if there is a live issue as to the ownership of assets on a winding up, the surplus will go to the employer on resulting trust principles: see Wrightson Ltd v Fletcher Challenge Nominees Ltd [2001] PLR 207, in which Lord Millett, giving the judgment of the Privy Council, held that “[i]n a balance of cost scheme like the present, any surplus arising on a final dissolution is generally regarded as the consequence of past overfunding by the employer ...”. Reference was made to Re Courage Group’s Pension Schemes, above, and Davis v Richards & Wallington Industries Ltd [1990] 1 WLR 1511. In the latter case, Scott J rejected the argument that on the dissolution of a pension scheme to which both employers and employees contributed, the surplus assets should be divided between the employers and the employees according to their respective contributions. The employer’s contributions were to be refunded first since the employer’s obligation was only to make good the shortfall. The same conclusions should be drawn, on Mr Green’s submission, during the life of a pension scheme. In the case of APS, contributions by BA over the life of the scheme had exceeded those made by employees by a factor of 2:1.
94. Mr Green also relies on the fact that Millett J in Re Courage Group’s Pensions Schemes considered that a refund to the employer would normally, but not always, require an amendment to the trust scheme. In the National Grid case, Lord Hoffmann held that “a surplus is (by definition) money in excess of what is needed to effect the main purpose of the scheme” (page 869). Mr Green submits that the surplus in the present case is due to employer over-funding although he accepts that both employers and employees are legitimate objects of the exercise of discretion under clause 11(b).
95. Moreover, Mr Green submits that on a valuation of the pension scheme assets and liabilities, no account will be taken of either future liabilities or the fact that the employer may be called upon to contribute under its balance of cost covenant. This would have been the effect of the aggregate method which it was common ground should not be used. Mr Green submits that valuations on the basis of market value are now becoming common. There are variables which have to be taken into account in a valuation such as mortality and projected final salary. Mr Green submits that the only way to reduce a past service surplus is to reduce the assets of the scheme or to increase the liabilities of the scheme: see per Robert Walker J, the National Grid case, paragraph 29.
96. As respects the timetable in clause 11(b), Mr Green submits that the three month point may be exceeded because the scheme cannot be brought into effect in that time. The purpose of clause 11 is to achieve an equilibrium and to achieve zero in 30 to 40 years time.

A power to reserve?

97. In the past trustees have applied sums to reserves. If the court is persuaded that the trustees should not have created reserves in the past, the appellants can challenge what has been done in the past.
98. Mr Green relies on the fact that the word “scheme” has a very wide meaning. The only limits are those imposed by clauses 2 and 32. A distributable surplus is an actuarial construct and therefore “dispose of” means actuarially to account for it. Any decision to allocate or earmark it is a dealing of the requisite type: see per Robert Walker J in the National Grid case. Surplus which is applied in pursuance of clause 11(d)(ii) will be run off over a thirty year period. This satisfies the words “dispose of”.
99. A reserve does not have to be earmarked for any particular purpose. It is possible for the trustees to make an appropriation against future reductions in value or the general volatility of the fund. However, Mr Green accepts that a reserve cannot be left unallocated if it is to be disposed of and furthermore that a clause 11 scheme has to be made in writing and that the trustees cannot decide to do nothing. There has to be a deliberate act.
100. Mr Green submits that a reserve is a specific or general provision against a contingency. In setting up a reserve, the trustees would have the advice of the scheme actuary and other professional advice. They have to form a view as to the likelihood of the contingency as well as its measurement. Their view must be one which they can rationally form. If the trustees do not have power to appropriate disposable surplus to a reserve, their only option for dealing with this surplus is to augment benefits or return monies to the employer. They are entitled to take a view which is more cautious than that taken by the actuary or the view that events have moved on since the actuarial valuation.
101. Mr Green relies on a number of features in clause 11. He refers to the fact that the clause 11(b) power can be exercised by a majority of the management trustees whereas clause 18 requires a two-thirds majority. He submits that it is manifest that subclauses (c), (d) and (e) do not require any amendment to the APS Trust Deed and therefore clause 18 does not apply to them. Likewise, he submits that to establish a reserve against contingencies as within clause 11 does not require an amendment of the APS Trust Deed: see paragraph 78(iv) of the speech of Lord Scott in the National Grid case, which is set out above. Mr Green submits that Lord Hoffmann would have reached the same conclusion even if the appellants in that case had not conceded that the employer (who was in the position of the trustees under clause 11(b) in this case) could use the surplus to create a reserve out of which to pay their future contributions.
102. Accordingly, Mr Green submits that there is no warrant for reading in the two-thirds majority required by clause 18 into clause 11. The power to make a scheme is the correlative of the duty to make a scheme: see per Lord Hoffmann and Lord Scott in the National Grid case (paragraphs 35 and 76). It is to be noted that in that case as regards release of the debt the House of Lords did not look outside clause 14(5) for the power to do it. Mr Green submits that section 15(f) of the Trustee Act 1925 would not assist as it applies only to a compromise. Under clause 18, there is no provision for employer consent and this may be part of the explanation of why a two- thirds majority is required.
103. Mr Green submits that the words “shall make a scheme” impose a duty. The trustees’ decision is capable of being overridden by an independent actuary. There is no limit to the ways in which the independent actuary can require the scheme to be amended. It would be an impossible tension if the actuary’s amendments had to be routed via clause 18. In the National Grid case the discretion under the equivalent of clause 11(b) and the power to amend were vested in the same person, namely the employer.
104. Mr Green submits that the function of the independent actuary under clause 11(b) is wider than that of an independent arbitrator. He has a fiduciary duty to consider what amendments are in the interests of the members of the scheme and the company. Mr Green submits that the substitution of the actuary for the Minister suggests that clause 11 is concerned with actuarial matters.
105. Mr Green submits that the independent actuary under clause 11(b) could require a reserve to be set up.
106. Mr Green accepts that the trustees must be even-handed as between the employees and the employer. But he submits the employer is only obliged to contribute the balance of cost. If benefits were augmented, the thirty-year contribution holiday would be undermined. By creating a reserve, the trustees are protecting the membership as well.
107. Mr Green accepts that the trustees could ring-fence a reserve and keep it from use under clause 24. When the employer gives notice under clause 24 it accepts the risks that it may have to contribute further costs.
108. As regards question 9, Mr Green submits that it is difficult to answer the question in the abstract. Mr Green accepts that the decision of the trustees cannot be disturbed.
109. As regards question 3, Mr Green submits that the disposable surplus must be ascertainable and that its meaning can be derived from clause 11.

Can contributions be returned to BA under a clause 11(b) scheme?

110. With respect to question 8(i)(d), Mr Green submits that the appellants cannot show that there is an irreconcilable inconsistency between clause 11 and clause 18. He further submits that there is nothing in the fiscal context to require the court to construe 11 as impliedly excluding refunds to the employer.
111. On his first submission (fundamental inconsistency), Mr Green submits that in the National Grid case the power to promote a scheme and the power to make amendments were vested in the same person. Mr Green submits that this is a case falling within the opening words of paragraph 37 of the speech of Lord Hoffmann: the fact that there is a prohibition on amendments to effect returns to the employer does not mean that a more limited power to make such a refund cannot exist under some other clause. As respects paragraph 78(v) of Lord Scott’s speech, Mr Green submits that that means that the employer could not do under clause 14(5) that which he could not do if the scheme was amended. It would be highly technical to require a scheme to have to include an amendment. This point is made by Lord Hoffmann in paragraph 63 of his speech. In the present case, clause 18 proviso (ii) is capable of applying to refunds to the employer out of raw surplus.
112. Mr Green submits there is no indication in the APS Trust Deed that it is necessary to amend the trust deed first to enable refunds of surpluses to be made under clause 11(b). He submits that returns of employer’s contributions can be made in winding up and in exercise of the lien for which the rules provide in favour of the employer. A scheme would not require any amendment to the APS Trust Deed: see the final words of clause 11(b). If the trustees were to decide to amend the rules this would be purely a matter of housekeeping. One should assume that the trustees perform their duties. If the court is concerned that refunds to the employer can be made, it should prefer the narrow construction.
113. As respects the Revenue context, Mr Green relies on the fact that it was common ground in the National Grid case that the restrictions on amendments to prevent repayments of contributions to the employer were inserted at the Revenue’s request (paragraph 20). However, there is nothing in the word “scheme” which excludes refunds to employers. Mr Green submits that there is no ambiguity and that the court cannot read clause 11(b) down. The fact is that the Revenue did approve a scheme including clause 11(b). Mr Green concedes that clause 18 proviso (ii) was inserted at the Revenue’s request. But he does not concede that there is a Revenue requirement that there should be no refund to the employer. He submits that the legislative scheme did not preclude Revenue approval of the scheme’s providing for the refund of contributions to an employer. In this connection, he relies on section 32 of the Finance Act 1921, section 379 of the Income Tax Act 1952, section 208 of the Income and Corporation Tax 1970, section 20 of the Finance Act 1970 and section 591 of the Income and Corporation Tax Act 1988.
114. Mr Green submits that evidence as to the practice of the Revenue is not admissible. In support of this he relies on the doubts on this point expressed by Glidewell LJ in Harris v Shuttleworth [1994] ICR 991. He submits that the Inland Revenue would have had a wide discretion to approve the scheme. He submits that the extract from Phillips is inadmissible.
115. Any refunds to BA would be subject to section 37 of the Pensions Act 1995.

The trustees’ submissions

116. The oral submissions of Miss Gloster QC, for the trustees, were principally directed to the question whether the trustees could under clause 11(b) apply the disposable surplus in whole or part to reserves. Her helpful written submissions on other issues were to a large extent made by Mr Green.
117. She submits that there is an overriding need for certainty. The trustees are also concerned that the court’s decision should enable the trustees to manage the fund flexibly. The trustees consider that it is in the interests of all beneficiaries that the powers should be exercised flexibly. Matters may have moved on since the date of the valuation. Actuarial surpluses are notoriously volatile. APS would not receive any further deficiency contribution from the employer under clause 11(d)(i) of the scheme until the next actuarial valuation. The risk of damage to the fund would be aggravated by any concerns about the ability of the employer to contribute in the future. From the purely practical point of view, there were concerns about such matters as new legislation providing for pensions for unmarried partners and children, uncertainty in world stock markets and fiscal changes.
118. Miss Gloster submitted that trustees could decide what part of the distributable surplus to carry forward as a reserve. It does not have to be a reserve against actuarially ascertained risk. It is sufficient if there is a positive decision to carry it forward against a future contingency. She accepts Mr Green’s definition of a reserve. The contingency, however, need not be identified. The reserve can simply be set aside for future use. The trustees might be aware, for instance, that there was a risk of redundancies. In those circumstances, they could conclude that it was not clear that it was appropriate to augment members’ benefits at that point. She rejects the suggestion that there is little point in having a requirement to make a scheme if the trustees can merely carry forward sums. She accepts that the words “as the case may require” in clause 11(b) import some form of discretion.
119. Miss Gloster submits that specifically carrying forward part of the distributable surplus is a disposal of it. The judge put it differently but he was not confused. A scheme for disposing of a surplus does not require all the surplus to be disposed of.
120. As to the remaining questions, Miss Gloster makes no submissions about question 8(i)(d) which she submits is theoretical. As regards questions 3 and 9, she submits that under clause 11(b) the trustees have power to establish a reserve against the possibility that the employer may become liable to make contributions in future notwithstanding a thirty-year holiday. This does not turn on any risk of insolvency of the employer.

Conclusions

121. The questions posed by the Part 8 claim in this case are to some degree overlapping. I propose to answer them by reference to the three substantive issues identified in paragraph 3 of this judgment. It would be impossible to mention or answer all the nuances in counsels’ submissions, and I have necessarily confined my conclusions to those arguments for or against any particular construction which seem to me to be of most relevance.

Clause 11(b)

122. Under this heading I take questions 4, 5, 6 and 7 in the Part 8 claim.
123. The first issue is Mr Green’s contention that clause 11 admits of a narrower construction than that given to it by the judge (question 5). In other words, is a clause 11(b) scheme limited to the matters specifically mentioned in clause 11(d) and (e) or does it extend to any disposal of the disposable surplus? In support of his contention, Mr Green had adduced several arguments. He points out that clause 11(e) is highly specific and submits that the fact that it is highly specific is not logically consistent with the wider construction of clause 11(b). He argues that the role originally played by the Minister in the original form of clause 11(b) is of a more minor nature than the role that would now be attributed to the actuary in accordance with the judgment of Robert Walker J in the National Grid case, paragraph 95. He also points out that sub-clauses (d) and (e) are concerned with contributions. Furthermore, the wording of clause 11(d)(ii) suggests that the draftsman considered that the surplus would be exhausted once that clause was utilised.
124. In my judgment, the construction applied by the judge, that is the wider construction, is to be preferred. The specificity of clause 11(e) is not logically inconsistent with the wider construction of clause 11(b). This specificity of clause 11(e) simply indicates that the draftsman particularly desired to cover one concern. It is notable that he does so only on a permissive basis. Furthermore, the wording of clause 11(b) is that the trustees shall “make a scheme”. The word “scheme” is a word of wide import, covering arrangements of a very wide nature. In my judgment, the draftsman is unlikely to use such a word if he meant that the only types of scheme possible were those specified in 11(d) and clause 11(e). It is also notable that in clause 11(b) the draftsman does not say that the trustees’ duty is to make a scheme “in accordance with this clause 11”.
125. In addition, the surplus to which clause 11(b) applies is the “disposable” surplus. The narrower construction is effectively circular. At the time of making his certificate, the actuary will not know precisely what is required under sub-clause 11(d) because, for example, there may be a change in circumstances between the date of his certificate and the date of the performance of the trustees’ duty. The employer may have served a notice under clause 24. Nor will the actuary know what is required under clause 11(e), which is permissive. Mr Green submits that clause 11(e) can never result in an allocation of surplus on the basis that the calculations for which it provides will have already been factored into the actuary’s calculations before arriving at disposable surplus so that (as Mr Green put it) clause 11(e) “merely goes to the scheme”. I do not accept this argument. The scheme is the vehicle for disposing of the disposable surplus. I proceed for the purposes of this argument on the basis that the actuary has properly included in his calculations the present value of future estimated contributions for future members and that these contributions can form contributions to which clause 11(d) applies. However, clause 11(e) is clearly some form of safety valve to be used to ensure an equilibrium between future members’ benefits and contributions made “by or in respect of” them (meaning as I see it either employees’ contributions or members’ contributions). Clause 11(e) seems to me to contemplate that surplus could be allocated to increasing contributions, and moreover (and this meets the clause 11(d) point) that those contributions may be either members’ contributions or employer’s contributions. (This will not, of course, impose any liability on members themselves: the increase is made out of disposable surplus). Thus the point remains that the actuary cannot certify as “the disposable surplus” that amount which will be required for the purposes of satisfying clause 11(d) and (e). He will not be in a position to know definitively what is so required. As I see it Clause 11(b) imposes a duty to dispose of surplus. The surplus to be disposed of is “the” disposable surplus, which in my judgment means all of it. There is nothing to restrict disposable surplus to surplus which can be disposed of under clause 11(d) or (e). As Miss Gloster’s written submissions asked rehetorically, why certify an amount as “disposable” if you cannot dispose of it? Moreover, there is nothing in clause 11 which requires a scheme to be limited to the purposes specified in those sub-clauses. Ergo the scope of a clause 11(b) scheme must be wider than the specified purposes and the judge was right to reject the narrower construction.
126. On the view which I have formed as to the meaning of clause 11(e), the disposable surplus must be something different from the amount required under clause 11(d) and (e) together and moreover clause 11 is not simply concerned with employers’ contributions. Clause 11(e) is concerned with the adjustment of both members’ and employers’ contributions.
127. Furthermore, the narrower construction means that the balance not utilised under clause 11(d) and (e) simply falls back into the fund. It is possible that the draftsman did not contemplate there would be any such surplus, and of course the general fiduciary duties of the trustees would apply to it. But it would mean that to deal with that surplus would always require an amendment to the APS Trust Deed. Moreover, the trustees would be under no duty to make a scheme in respect of that surplus. Nor would they be under any duty to come to a timeous conclusion in respect of that surplus. Indeed they might not even know that such a surplus was available because it would not have to be identified in the actuary’s valuation. These results are unlikely to have been intended and reduce the practical effect of clause 11(b). Moreover, as I see it, the effect of clause 11(b) is that there should be a scheme for disposing of “the”, i.e. of the whole of the disposable surplus. Otherwise, the trustees would in effect have an option as to how much surplus needs to be dealt with by the scheme. I do not consider that that would have been intended. Such an option would be inconsistent with the duty to make a scheme and with the objective behind a clause such as clause 11, which is to bring the assets and liabilities of the scheme back into balance (and thus a funding equilibrium).
128. Moreover, unless there is power in clause 11(b) to apply surplus in providing for augmented benefits, the trustees would have had power in the APS Trust Deed as originally executed to amend the deed to provide for such benefits but no means of financing them except out of further or increased contributions. In my judgment, that would be a surprising conclusion. I note Mr Green’s submission that clause 11(d)(ii) may be said to have been drafted on the basis that the balance of any disposable surplus would be applied solely in reducing the future contributions of the employer, but like the judge, I do not consider that means that any further application of surplus is not authorised. Logically, since contributions that can be relieved in this way are limited to contributions over the next thirty years, the possibility of non-exhaustion of disposable surplus has always been inherent in this scheme. It would need clearer words than those in clause 11(d)(ii) to make any further application of surplus unauthorised.
129. In my judgment a further reason for rejecting the narrower construction can be found in the provisions of clause 11(b) for the submission of disputes as to the application of disposable surplus to (in the original text) the Minister. Although some area for dispute as to the application of clause 11(b) on the narrower construction is possible and thus some small role can be found for invoking the provisions for submission to the Minister there is little role for this mechanism. This supports the conclusion that the power is wider than sub-clauses (c), (d) or (e). The independent actuary is now substituted for the Minister. The judge considered the position of the independent actuary when answering question 10 in the Part 8 claim, and that answer is not the subject of appeal.
130. The wider construction also gives greater flexibility and accordingly is to be preferred for that reason too.
131. The next question is whether clause 11(b) is power-conferring or whether powers to dispose of surplus have to be found elsewhere. This is the issue raised by question 4 in the Part 8 claim. Undoubtedly, clause 11(b) imposes a duty: the question is whether it also gives the powers necessary to carry out a scheme. As I have already said, the word “scheme” is of wide import. It would be extraordinary if the draftsman, having imposed a duty in these terms, made no provision for the powers necessary to implement a scheme: such a construction would also produce an impractical effect. In my judgment, the words “make a scheme” confer power, and I reject Mr Inglis-Jones’ submission that powers have to be found elsewhere. No distinction for this purpose exists between the relevant words of clause 14(5) in the National Grid case (“shall make arrangements”) and the relevant words of clause 11(b) in this case. As explained above, the House of Lords were unanimous that clause 14(5) was power-conferring.
132. I accept that clause 18 contains important safeguards for members of the scheme. Significantly the power of amendment is vested not in the employer but in the trustees and can only be exercised by a super-majority. A provision for a special majority is common in majority powers to effect constitutional changes. I bear in mind the observations of Lord Hoffmann in the National Grid case in paragraph 57 of his judgment (see paragraph 50 above). The effect on this case of those observations is that the existence of such an amendment procedure might be a good reason to construe the scheme as requiring that procedure to be utilised for the purposes of a clause 11(b) scheme. However, in this case, some powers to dispose of surplus are clearly conferred by clause 11(b) itself. Clause 18 applies only where there is an amendment or addition to the APS Trust Deed. Where powers are already to be found implied into clause 11(b) there is no room, in my judgment, to read clause 18 into clause 11. For the reasons more fully explained below, I agree with Mr Inglis-Jones that there is no necessity, as the judge thought, to imply an amendment power into the trustees’ powers under clause 11(b).
133. This leads to the question whether there is a limitation on the powers conferred by clause 11(b) (question 6). The judge held that there were only two limitations: the main objects clause (clause 2) and the clause forbidding the exceeding of Revenue limits (clause 32). But, after the judge gave his judgment, the House of Lords gave judgment on the National Grid case, reversing the decision in the Court of Appeal which had been available to the judge.
134. The National Grid case concerned the construction of the terms of the pension scheme in that case. However, the decision of the House of Lords also established as a general principle that a wide power to make arrangements or a scheme should be interpreted as subject to the express terms of the scheme and other implied limitations which appear from the scheme on its true interpretation: see per Lord Hoffmann at paragraphs 35 to 37, per Lord Clyde at paragraph 72 and per Lord Scott at paragraph 76, which I have already summarised above.
135. Lord Clyde and Lord Scott expressly held that if the arrangements in that case involved an amendment to the scheme the separate amendment power would have to be used. Lord Hoffmann did not express a final view on this point. In the present case, it seems to me that the power of the trustees to amend the APS Trust Deed is to be found exclusively in clause 18. I appreciate that there could be power to amend also in clause 11(b) but it is not clear to me what the scope of such power would be, and Lord Hoffmann in mentioning this possibility clearly contemplated only a limited power. I am not impressed by the mismatch of majorities under clause 11(b) and clause 18. As I have explained, it is common to require a special majority for constitutional changes. If the trustees in this case wish to make a scheme involving constitutional changes, their scheme could be conditional upon the necessary resolutions being passed under clause 18. There is no difficulty in that; nor would it be a meaningless charade since the special majority is clearly designed to provide an extra safeguard for members. In the unlikely event that the independent actuary, or previously the Minister, required an amendment to the APS Trust Deed, when exercising his powers under clause 11(b), his decision could not be frustrated by the trustees because the concluding words of clause 11(b) give his decision the necessary force and effect. That provision is an example of a limited power of amendment outside clause 18. However, I accept Mr Inglis-Jones’ submission that such power is by implication subject to the same fetters on the amendment power which the trustees have under clause 18. This removes the risk of a conflict between clause 11 (which provides for a scheme to come into effect) and clause 18.
136. Accordingly, in my judgment, there must be added to the limitations identified by the judge in answer to question 6: where any amendment or addition to the APS Trust Deed is required, clause 18 of the APS Trust Deed and any other provision in the APS Trust Deed which on its true interpretation restricts the powers conferred by clause 11(b).
137. That leaves question 7. In my judgment the judge’s answer was correct in the light of the answer to question 5 and the terms of clause 18.

Recapitulation – questions 4,5,6, and 7

In my judgment, for the reasons given above:

• the judge should have answered question 4 as follows: clause 11(b) confers on the Management Trustees power to dispose of the surplus unless such power is excluded by the APS Trust Deed expressly or by implication.

• the judge’s answer to question 5 was correct;

• the judge was correct in his answer to question 6 to hold that the powers conferred by clause 11(b) are restricted by the main objects provision in clause 2 of the APS Trust Deed and by the requirement to observe Revenue restraints in clause 32, but as indicated in my answer to question 4 above he ought also to have held that clause 11(b) is subject to other provisions of the APS Trust Deed which expressly or by implication exclude or qualify powers which would otherwise be implied therein and that clause 18 excludes the implication into clause 11(b) of any power on the part of the trustees to amend or add to the provisions of the APS Trust Deed.

• The judge’s answer to question 7 was correct.

A power to reserve

138. Under this head I propose to take questions 8(i)(a), and (for convenience) 3 and 9.
139. This group of issues raises questions as to the nature of a surplus. In his submissions to the House of Lords in the National Grid case, Mr Inglis-Jones described it as “notional and evanescent” (see paragraph 17 of the speech of Lord Hoffmann). I would describe it as changeable rather than evanescent: whether it is volatile or evanescent may depend on such matters as the nature of its investment. As Lord Hoffmann said, the surplus represents the excess of assets over liabilities. However, as I see it, in the case of an ongoing fund, this is only on the basis that assets and liabilities are calculated on a particular basis. The situation in which the whole of a surplus can be said to be permanent is likely to be exceptional and may only occur when the fund is close to dissolution and the employer can, as under clause 19, hasten that process by giving notice. Assumptions can be made as to mortality, inflation, investment return and so on but there is no guarantee that the assumptions will be borne out in fact. Indeed there is every likelihood that they will not. Accordingly the surplus may not wholly represent a permanent surplus. The surplus will not generally be a permanent surplus as to its entirety at least so long as a fund is invested otherwise than in cash and the liabilities include future or contingent liabilities which are not wholly covered by cash. In the National Grid case, this point did not arise because the employer had received a certificate from the actuary that the proposed arrangements were reasonable and did not itself consider that the financial position of the scheme prevented the implementation of the scheme, but, in the light of the trustees’ attitude, there is a live issue in the present case as to whether the surplus is truly surplus.
140. It is against the background of the nature of the surplus that the words "dispose of" take their meaning. I accept that certainly one dictionary meaning is to dispose of definitively but the dictionary meaning of the word also includes less permanent earmarking of matters. More importantly, however, the word acculturates to its context. As the judge put it: “it is a question of allocating part of the fund to particular purposes” (judgment, paragraph 47). As Mr Green put it, the expression “dispose of” has to be viewed in the light of the fact that surplus is of itself an actuarial construct. It follows in my judgment that the power to dispose of surplus must include the power to create a reserve. By the time of the next valuation the surplus may have gone. That does not matter as regards applications under sub-clauses (d)(i) because there can be further annual deficiency payments. Another valuation will take place in three years' time. A fresh decision about the surplus must be taken then. It is possible that at that date the previous surplus will be found not to exist. Moreover there may even be an event which affects the surplus which occurs in the interval between the valuation and the date of the scheme e.g. the announcement of a material change in legislation affecting the scheme. Given the nature of the surplus in my view it must follow that the types of disposal which the trustees may make under clause 11 (b) include those which will simply regulate the position until the next valuation takes place. Accordingly they may in my judgment take the view that the right course for them to take is to allocate the surplus or a part of it to a particular reserve.
141. The meaning which I place on “dispose” furthers the purpose which Mr Green attributes to clause 11. He submits, in my view correctly, that clause 11(d)(i) and (ii) is designed to produce equilibrium between assets and liabilities. Mr Green submits that, if Mr Inglis-Jones is right that surplus must be expended in providing mandatory benefits, there will necessarily be a disequilibrium.
142. However, there is a difference between my analysis and that of the judge. The analysis of clause 11(b) which I prefer is that clause 11(b) imposes a duty to dispose of the surplus and that means the whole of the surplus. As the judge put it: “Disposing of a particular resource is the natural thing to expect to do with something which is defined as disposable” (judgment, paragraph 47). However, as explained, I consider that surplus can be disposed of by allocating it to a reserve. The judge, on the other hand, took the view that a clause 11(b) scheme could deliberately leave part of the surplus unallocated or allocate it expressly as a reserve, and, while this did not amount to a disposal, nonetheless the scheme would be one for disposing of the disposable surplus within clause 11(b). The difficulty with that view is the situation where the scheme provides for all of the surplus to be so allocated to a reserve. In my judgment, that would (in appropriate circumstances) be within clause 11(b), but not I think within clause 11(b) as interpreted by the judge.
143. I note that Lord Scott in the National Grid case came to the conclusion that clause 14(5) in that case permitted the allocation of surplus to reserves (speech, paragraph 78(iv)). It is pointed out by Mr Inglis-Jones that there was a concession concerning the creation of reserves (see paragraph 63 of Lord Hoffmann’s speech). However, paragraph 78(iv) represents I think the view of Lord Scott, not simply an acceptance of a concession. For all the reasons that Ms Gloster gave in her submissions, the power to allocate a sum to reserves out of surplus is a valuable and important tool for trustees. In my judgment, that is a factor which supports the construction which I prefer.
144. However, the trustees must make a decision as to the destination of the surplus. This is because they are required to make a scheme. It is in the nature of a scheme that its promoters form a plan of action. Moreover it is in the nature of fiduciary duties that the trustees must actively consider how to exercise their discretion. Accordingly, in contrast to the judge, I do not consider that the trustees can take the view that the requirement to make a scheme is sufficiently satisfied if they were simply to resolve to defer a decision on how to dispose of a surplus, or decide to do nothing with it. The trustees must reach an affirmative decision as to the application of surplus. Otherwise there would be no purpose in having an obligation to dispose of surplus.
145. In concluding that the trustees may allocate surplus to a reserve I must clarify what I mean by "reserve". I refer to reserves against contingent liabilities in so far as they exceed the value of the scheme’s assets. That is liabilities which may occur in the future or which will occur in the future but which are uncertain as to amount. In my judgment it is within the power of the trustees to allocate surplus to reserves even if the actuary has already made a provision in respect of the same matter. The amount of any reserve is a question of judgment on which reasonable views may differ. Indeed they may approach its calculation in different but justifiable ways. The reserve should generally relate to the estimated present value of a future or contingent liability not its full amount, and the value attributed to the scheme’s assets must be an appropriate one. On the other hand the power is subject to the limitations in the scheme itself. The trustees could not create a reserve for a matter which would be outside the main objects of the scheme or a matter for which funds of the scheme could not be applied in the first place.
146. That immediately raises the question whether the trustees can create a reserve against payments which the employer might have to make in the future. The judge had to answer this question in relation to notices under clause 24. He held that the trustees could only take into account a notice under clause 24 that had already been given and there is no appeal on that point. Miss Gloster submits that the power to create a reserve extends to making reserves against the possibility of any future liability of the employer, for instance, the liability of BA to make further contributions in respect of existing members’ current benefits due to the assumptions on which surplus is calculated being falsified by subsequent experience. However, this submission does not extend to future liabilities in respect of future clause 24 notices. Had the submission extended to such liabilities, it would have run counter to the judge’s ruling (which has not been appealed) in answer to question 8(i)(b) (that the trustees should take account only of clause 24 notices which had actually been served in making their clause 11(b) scheme). The creation of a reserve against future liabilities in respect of future clause 24 notices would have been beyond the purpose for which the power to allocate to a reserve under clause 11(b) was conferred. If the employer makes a decision in the future which triggers an additional liability, this should be dealt with on the facts as they exist at that time.
147. There is a certain inflexibility within clause 11(b) resulting from the fact that valuations are triennial rather than more frequent. Suppose that the trustees allocate £x of the surplus to a reserve because of a threat of legislation which will affect the calculation of scheme liabilities but during the period of three years the legislation is passed in an amended form and it is found to have little effect on such liabilities. In that situation a sum may be capable of being released from the reserve to which it was allocated but there is nothing which expressly empowers or requires the trustees to consider this nor yet (if the legislation had been passed in a more severe form than had been announced) whether some new reserve should be created. That matter is left to the next valuation of the fund.
148. It follows that I reject Mr Inglis-Jones’ submission that once the process in clause 11(d) has been completed the surplus must be applied in augmenting benefits to members. In my judgment, if he were right on this point, it would still be necessary for the trustees in many cases to create reserves to meet the additional liabilities imposed by most forms of augmented benefits. If they cannot create a reserve and if Mr Inglis-Jones were right that surplus must be expended in augmented benefits, there would necessarily be a disequilibrium between the assets and liabilities of the fund. As Mr Green also points out, it would be odd if clause 11(b) mandated augmented benefits by implication when it mandated other applications of surplus in subclauses (c) and (d) expressly.
149. It was suggested in argument that the trustees could ring-fence a reserve from use by the employer under clause 24. In my judgment, this would require an amendment to the scheme for two reasons. First, the trustees cannot fetter their future exercise of a discretion, in this case the discretion how to apply a reserve. Second, if the employer gives a notice under clause 24, it would be the actuary, not the trustees, who determines whether or not payment by the employer is required. He may take a different view from the trustees as to the reserves required. If he does not require a payment, the cost of the discretionary benefits would have to be borne out of reserves, including the ring-fenced reserve if needs be.
150. As to questions 3 and 9, the judge’s answers were correct unless clause 11 prohibits the actuary from certifying any disposable surplus and the trustees from dealing with any disposable surplus if there is any material risk that the employer will have to resume contributions or make deficiency payments (and, in the case of the trustees, such result flows from the disposal by the trustees of disposable surplus). Apart from the obvious difficulties of finding such a provision in clause 11 given the judgmental nature of “material risk”, in my judgment, the judge’s answers to these questions were correct. The discretion to determine the amount of the disposable surplus and to dispose of it are vested in the actuary and the trustees respectively to be exercised by him or them as he or they think fit.

Recapitulation – questions 8(i)(a), 3 and 9

In my judgment, for the reasons given above, the judge’s answers to all these questions were correct.

Can contributions be returned to BA under a clause 11(b) scheme?

151. This is the issue raised by question 8(i)(d) in the Part 8 claim. This involves consideration of clause 18 (the amendment power), which is set out above. The effect is that the APS Trust Deed may not be amended to introduce a provision for making a return of contributions to the employer. (It is common ground that the prohibition extends to any cash payment out of disposable surplus to the employer). This does not apply in terms to a scheme under clause 11(b). However there would seem to be no practical purpose in having a power to amend which prevents refunds to the employer if in the only circumstances where repayment of contributions is likely to be made i.e. under clause 11(b), it is already permitted.
152. The nature of surplus is again relevant here. I have already pointed out that save in exceptional circumstances the surplus is likely to be changeable. Mr Green submits that surplus is itself an actuarial construct. I have accepted that argument and that a disposal of surplus refers to a disposal in an actuarial, or accounting, sense. That argument is, however, inconsistent with the concept of refunds to an employer, which would involve an actual outflow of funds, not just an actuarial or accounting entry.
153. Mr Green submits that the employer is a legitimate object of the discretion under clause 11(b). He goes further and submits that, as this is a balance of cost scheme, if there is a surplus that must mean that the employer has paid more than he was bound to do, and that there is nothing objectionable in refunds to the employer out of surplus during the currency of the scheme. This argument is reinforced by the requirement for the trustees to obtain the consent of the employer to which the surplus is attributable (see clause 11(b)). But it does not I think follow from the fact that this is a balance of cost scheme that the employer should be repaid its contributions out of surplus before the scheme has terminated as opposed to when the scheme terminates. I note that in the Wrightson case Lord Millett’s remarks were directed to the situation arising on a final dissolution. Indeed Mr Green eschews the proposition that the employer has any vested proprietary claim to the assets of the scheme while ongoing. It has merely a prospective and contingent right (contingent, that is, on the scheme being dissolved and assets being available for distribution to the employer under clause 19); this right may simply be a “floating equity” which may or may not crystallise (see Commissioner of Stamp Duties (Queensland) v Livingstone [1965] AC 694). The absence of a vested proprietary right while the scheme is ongoing is consistent with the impermanent nature of surplus discussed above. Accordingly, it is at least a possible construction of the APS Trust Deed that the employers’ contributions once made are to remain in the scheme and to remain there as security for the members unless and until the scheme is brought to an end. The question however is: what is the true interpretation of the scheme?
154. I have already explained why in my judgment clause 11(b) does not confer power to amend the scheme. That does not mean that clause 11(b) could not confer a power to make refunds to the employer which exists independently of the power to amend in clause 18. The APS Trust Deed contains specific convenants for contributions by the employer and none of these would require to be amended if the proposal was for a refund of contributions out of surplus.
155. In the National Grid case, the majority of their Lordships considered that it was necessary to amend the scheme to make a return of contributions to the employer. Mr Green distinguishes the National Grid case on the basis that both the power to make arrangements to deal with this and the power to amend the scheme were vested in the same person. In the present case the duty to make the scheme is vested in the trustees, who are in a position to negotiate with the employer. In my judgment, that distinction is one of fact, not one of principle or substance. Moreover, the distinction does not provide any explanation as to the true meaning and effect of clause 18 proviso (ii).
156. Mr Green also relies on the concluding words of clause 11(b) which provide that the scheme “shall come into force subject to such amendments (if any) as that actuary may direct”. Thus, on Mr Green’s submission, the scheme has legislative force irrespective of clause 18. In my judgment, those words serve a different function. They ensure that the trustees’ scheme has to have the agreement of the employer or the approval of the actuary and that the actuary can insist on amendments to the scheme. I do not consider that those concluding words of clause 11(b) lead to the conclusion that clause 11(b) itself confers on the trustees a power to amend the terms of the APS Trust Deed.
157. The judge was impressed by the difference in the procedures under clause 11(b) and clause 18. This led the judge to conclude that a power of amendment should be read into clause 11(b) as a matter of necessity. I have explained that in my judgment it is usual to find a requirement for a special majority on constitutional changes (here, changes to the APS Trust Deed) and there is nothing untoward about a scheme under clause 11(b) made conditional on the exercise of power under clause 18.
158. I return then to the question posed above whether clause 11(b) confers a power to make refunds of contributions to the employer without an amendment to the scheme. There is no express prohibition in the scheme on making such refunds. However, there is no express provision which enables such refunds to be made. Indeed, the provision on winding up only provides for such repayments to be made after additional benefits have been conferred on members up to Revenue limits (see clause 19(d), which is set out above). Moreover, I accept that although the Commissioners of Inland Revenue had power to approve a scheme which provided for the return of contributions to the employer in certain events, it was their practice not to do so and that the practice of the Revenue is as set out in Phillips, Pension Scheme Precedents, in the passage cited above. This is consistent with Revenue practice as accepted by the House of Lords in the National Grid case and with what is accepted to be common ground in this case, namely that proviso (ii) to clause 18 was inserted at the request of the Revenue. If clause 11(b) confers power to make return of contributions to an employer out of disposable surplus, there is no reason why the whole of the surplus could not be utilised in that way. Given the Revenue practice, it seems to me highly unlikely that that is what the parties would have intended. I note that in Re Courage Group’s Pensions Schemes, above, Millett J thought the repayment of any surplus to the employer would normally require an amendment to the scheme (see page 515 C-E, set out above).
159. Added to this argument is the point mentioned above, namely that if return of contributions is permitted by clause 11(b) there is very little on which clause 18 proviso (ii) can impact. Mr Green submits that it can apply to the return of contributions otherwise than out of disposable surplus, for example, out of raw surplus. However, this is akin to the argument rejected by the Pensions Omsbudsman as implausible in which view Lord Hoffmann saw considerable force (see paragraph 36 of his speech, referred to above). I would likewise reject it. There is no real likelihood of a proposal to return contributions to the employer except out of disposable surplus and if such a repayment can be done under clause 11(b) the safeguards of clause 18, particularly under proviso (ii), are effectively worthless. A payment to the employer could probably only be made out of disposable surplus because to make a payment of it otherwise would create a funding deficit and be contrary to clause 2. In those circumstances, the right construction in my judgment is that clause 11(b) does not confer power to make a return of contributions. That would be fundamentally inconsistent with the basis on which clause 18 has been drafted. In those circumstances, in my judgment, the judge should not have concluded that clause 11(b) conferred the power to make refunds to the employer and that his answer should in this respect be set aside.
160. The practical consequence of this construction is that refunds cannot be made out of disposable surplus to the employer because clause 18 prevents an alteration to the APS Trust Deed to permit this. However, the employer is entitled to a mandatory thirty- year contributions holiday under clause 11(d)(ii). In addition, following the decision of the House of Lords in the National Grid case, this conclusion does not prevent the disposable surplus being set against debts owed by the employer to the scheme.

Recapitulation – question 8(i)(d)

161. In my judgment, for the reasons given above, the judge’s answer to this question was incorrect and must be set aside. The Management Trustees have no power by virtue only of clause 11(b) to make a return of contributions to the Employer.

Disposition of this appeal

162. Accordingly I would allow the appeal for the limited purpose of varying the Judge’s answers to the questions above where as explained above in my judgment a different answer is to be given.

Lord Justice Waller:

163. I agree.

Lord Justice Auld:

164. I also agree.
Order: Appeal allowed to the extent indicated; counsel to lodge a draft minute of order. (Order does not form part of the approved judgment)