England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		14/12/2007

Mr Justice Wyn Williams :


 


1. The Local Government Pension Scheme Regulations 1997 came into force on 1 April 1998. As their name implies they relate to the pension arrangements for employees who work for local government organisations (although it is correct to record at the outset that the Regulations can also apply in certain circumstances to employees of private organisations).
2. The Regulations use the word "Scheme" to mean one occupational pension scheme constituted by the Regulations. However, there are a number of different pension funds within the Scheme. One such fund is the Tyne and Wear Pension Fund (hereinafter referred to as the "TWPF").
3. Under the Regulations each pension fund has an "Administering Authority". The Regulations define that phrase to mean a body which is required to maintain a pension fund under the Regulations. The Claimant is the administering authority for the TWPF.
4. By virtue of Regulation 77 each administering authority was obliged to obtain an actuarial valuation of the assets and liabilities of each of its pension funds as at 31 March 1998. It was also obliged to obtain a report by an actuary and a document known as a "Rates and Adjustments Certificate". Thereafter it has been obliged to obtain such documents on a periodic basis.
5. Prior to 31 March 2004 the Claimant commissioned Hewitt, Bacon and Woodrow Limited (herein after known as "Hewitt") to carry out an actuarial valuation of TWPF. Hewitt carried out such a valuation as at 31 March 2004. It did so as part of a comprehensive report. One of its conclusions was that TWPF had a funding deficit of £1,344.5m.
6. Hewitt also prepared a rates and adjustment certificate for the period 1 April 2005 to 31 March 2008 and incorporated that certificate into its report as an Appendix.
7. The rates and adjustments certificate was prepared in conformity with Regulation 77(3). That Regulation provides: -

"(3). A rates and adjustments certificate is a certificate specifying

(a) the common rate of employer's contribution,

(b) any individual adjustments,

for each year of the period of three years beginning with 1^st April in the year following that which the valuation date falls."

The common rate of employer's contribution is defined by Regulation 77(4). That reads:-

"(4). The common rate of employer's contribution is the amount which in the actuary's opinion should be paid to the fund by all bodies whose employees contribute to it so as to secure its solvency, expressed as a percentage of the pay of their employees who are active members."

Regulation 76(6) defines the phrase "an individual adjustment". It provides:-

"(6). An individual adjustment is any percentage or amount by which in the actuary's opinion contributions at the common rate should in the case of a particular body be increased or reduced by reason of any circumstances peculiar to that body."

As I have said, the rates and adjustment certificate prepared by Hewitt conformed to Regulation 77. It set out in tabular form the amounts to be paid by the employers whom Hewitt considered were under a liability to make payment into TWPF for the period 1 April 2005 to 31 March 2008. It included in the list of employers who were obliged to make payments Northumbria Magistrates' Courts Committee. According to Hewitt, Northumbria Magistrates' Courts Committee had a liability to pay into TWPF the sum of £214,000 in respect of the period to which I have referred.

8. The Northumbria Magistrates' Courts Committee was first constituted by the Magistrates' Courts Committees (Northumbria) Amalgamation Order 1998. It came into being on 1 April 2000. Prior to that date there had been Magistrates' Courts committees for the areas of Northumberland, Gateshead, Newcastle, North Tyneside, South Tyneside and Sunderland. Those committees were abolished by the 1998 Order. However, the Order provided, in summary, that employees of the abolished committees should become employees of Northumbria Magistrates' Courts Committee and, further, that the liabilities of the abolished committees should pass to the new committee.
9. Immediately prior to 1 April 2000 five of the abolished committees employed persons who were members of TWPF. Some were members in the sense that they were then current employees of the abolished committees who paid contributions into TWPF; some were members in the sense that they were no longer employed by the abolished committees but they were eligible for a pension in the future; some were members in the sense that they were former employees who were being paid a pension from the fund. In the Regulations the phrase "active member" is used to describe the first of those categories; the second category is referred to as "deferred members" and the third category is referred to as "pensioners." Deferred members and pensioners were under no obligation to make contributions to TWPF.
10. Upon the coming into being of the Northumbria Magistrates' Courts Committee all of the then current employees of the abolished authorities ceased to be members in TWPF. They began to participate in a pension fund known as the Northumberland CCPF. However persons formerly employed by the abolished committees and in the category of deferred members or pensioners remained as members of TWPF.
11. When Hewitt certified that Northumbria Magistrates' Courts Committee should pay the sum of £214,000 into TWPF it did so on the basis that this was the appropriate amount in respect of the former employees of the abolished committees who were deferred members or pensioners.
12. The First Defendant is the successor to the liabilities of Northumbria Magistrates' Courts Committee. I do not need to explain why that is so in this judgment since that is acknowledged to be the case. If, therefore, the Northumbria Magistrates' Courts Committee was under an obligation to make payment of £214,000 into TWPF the First Defendant acknowledges that he must satisfy that liability. He disputes, however, that Northumbria Magistrates' Courts Committee had any such liability. His contention is that the Committee had no liability to make payments into TWPF in respect of the former employees of the abolished committees who were deferred members or pensioners.
13. In these proceedings the Claimant contends to the contrary. The Claimant contends that the Committee had an obligation to make payments into TWPF in respect of former employees of the abolished committees who are either deferred members or pensioners.
14. The issue between the parties depends upon the proper interpretation of the 1997 Regulations and, in particular, upon Regulation 79. The relevant parts of Regulation 79 are as follows:-

"(1) An employing authority must contribute to the appropriate fund in each year covered by a rates and adjustments certificate under Regulations 77 or 78 the amount appropriate for that authority as calculated in accordance with the Certificate and paragraph (4).

(2) During each of those years an employing authority must make payments to the appropriate fund on account of the amount required for the whole year.

(3)………..

(4) An employer's contribution for any year is the common percentage for that year of the pay on which contributions have during that year been paid to the fund under Part II by employees who are active members (other than contributions under Regulations 18(3), increased or reduced by any individual adjustment specified for that employer for that year in the rates and adjustments certificate."

By virtue of Schedule 1 the phrase "employing authority" means:-

"a body employing an employee who is eligible to be a member".

15. The rival contentions of Claimant and First Defendant can be easily stated. Miss Laing, for the First Defendant, submits that the natural meaning of Regulation 79 is that the obligation to make contributions into a fund rests upon those employers who employ active members of the fund at the time of the certificate. On that basis no liability rests with the First Defendant. Mr Kerr QC, for the Claimant, submits that Regulation 79 imposes a liability upon an employer to make contributions to a fund if at the material time there are former employees who are either deferred members of the fund or pensioners or both and the employer employs employees who are active members of any fund within the Scheme.

PRINCIPLES OF INTERPRETATION

16. The object of interpretation of a written instrument is to discover the intention of its author. The object in construing secondary legislation is to ascertain the intention of Parliament considering the legislation as a whole and in its proper context.
17. In his submissions on behalf of the Claimant Mr Kerr QC relies upon the following further principles which he derives from Bennion: Statutory Interpretation 2002 Edition. Firstly, it is a principle of legal policy that law should be just. The court, when considering which of two opposing constructions of an enactment would give effect to the legislative intention, should presume that the legislature intended to observe this principle. The court should, therefore, strive to avoid adopting a construction that leads to injustice. The second principle which Mr. Kerr QC derives from Bennion and which he relies upon is that it is presumed to be the legislature's intention that the court, when considering which of the opposing constructions of a particular enactment corresponds to its legal meaning, should assess the likely consequences of adopting each construction both to the parties in the case and, (where similar facts are likely to arise in future cases) for law generally. If on balance the consequences of a particular construction are more likely to be adverse than beneficent this is a factor telling against the construction. The third principle which is urged upon me by Mr Kerr QC is that it is the duty of a court to further the legislator's aim of providing a remedy for the mischief against which the enactment was directed. Accordingly the court will prefer a construction which advances this object rather than one which attempts to find some way of circumventing it.
18. In respect of each of those principles Mr Kerr QC cites authority in support. It does not seem to me to be necessary to quote from those authorities since, as I understand it, the principles themselves are uncontroversial. Nothing which Miss Laing submits suggests that she takes issue with any of them as principles. What is of importance in this case is the application of the principles.

THE RELEVANT CONTEXT

19. Miss Laing, for the First Defendant, made a number of submissions about this aspect which, in my judgment, are uncontroversial. Firstly, TWPF is one of a number of funds which constitute the Scheme currently administered under the 1997 Regulations. Many of the employers who participate in the Scheme are engaged in work in the public sector. That said, however, the Regulations permit private companies and their employees to participate in the Scheme (including TWPF) in prescribed circumstances. In summary such employers enter into "an admission agreement."
20. The public bodies which participate in TWPF are funded by taxation in one form or another. Obviously, that is not true of participating private bodies.
21. As a generalisation a public body can only cease to exist if legislation so provides. A company, of course, would cease to exist under the relevant principles of private law which apply to it.
22. Under the Regulations, the source of money for any of the funds within the Scheme, primarily, is contributions from employers and active members. The contributions which make up any particular fund are invested in a range of investments with the object of satisfying the pension liabilities of the fund in question as and when each liability falls due.
23. It is at this point, however, that Miss Laing's submissions become more controversial. She submits that viewed in context the Regulations are structured on the basis that there is an expectation or assumption that liabilities arising for any particular employee will have been funded by the joint contributions of his employer and the employee over the term of the employee's employment.
24. It does not seem to me that this submission can be made good by reference to any of the 1997 Regulations themselves. No evidence has been adduced which supports the existence of the expectation or assumption.
25. This proposition is vigorously opposed by those acting on behalf of the Claimant. This aspect of the Claimant's submissions was dealt with by Mr Newman. He submits that the only safe assumption or expectation in relation to pension funds is that predictions will be wrong. Predictions about funds, of course, are made by actuaries and Mr Newman submits that, inevitably, their predictions will not accord with what actually happens over time. That is why it is common for there to be actuarial reviews of the value of pension funds at periodic intervals and comparatively short ones at that. In those circumstances it simply cannot be that there is an assumption or expectation that an employee's pension will be funded completely from the contributions which are made by the employer and employee during the course of the employee's service.
26. Mr Newman's submissions derive a great deal of support from the actuarial valuation report produced by Hewitt for 31 March 2004. Obviously, the report must be read as a whole but the following quotations seem to me to support Mr Newman's essential points. The references hereafter are references to the page numbers of the Trial Bundle. At page 57 opposite the heading "A snapshot view" the following appears: -

"This report concentrates on the Fund's financial position at the valuation date. As time moves on, the Fund's finances will fluctuate. It will therefore be necessary to carry out further valuations to monitor the position. In the mean time, if you are reading this report sometime after it was prepared, you should bear in mind that the Fund's financial position would have changed significantly."

On page 62 under the heading "Funding Objective" the report reads:-

"Purpose of funding

The purposes of funding are set out in the Scheme's Funding Strategy Statement as follows:- To enable Employer contribution rates to be kept as stable as possible and affordable for the Fund's Employers. To ensure that the Fund is always able to meet its liabilities. To manage Employers' liabilities effectively. To maximise the income from investments within reasonable risks parameters.

Risk

The funding purposes do not include provision of security of members' benefits, as these are guaranteed by Statute However there is still the risk that the assets held in the Fund are not sufficient to pay all of the promised pensions at any given formal valuation, causing Employer contribution rates and possibly local taxation to rise. The risks depend on: Funding Risk The funding target may be less than the value of the liabilities on the low risk solvency measure (see section 8). The assets may be less than the funding target. Investment Risk If the investment characteristics of the assets do not match those of the liabilities their value will not move in line. The risk is that the value of the assets falls without a corresponding fall in the value of the liabilities which can happen over a short period of time. The more mismatched the investment strategies, the greater the risks."

Finally, on page 64, the following appears:

"Volatility

We would expect the results of a series of valuations to be volatile. This could be reflected in potentially large changes at successive valuations both in the funding surplus/deficit position and in the future service contribution rate. Fluctuations in the future service contribution rate arguably reflect "true" changes in the future cost of benefits as expectations for future long-term levels of investment return and inflation fluctuate. However, much of the volatility in the funding surplus/deficit position is likely to arise from relative movements between the Fund's assets and those assets that most closely match the underlying liabilities."

27. In the light of Mr Newman's submissions, as supported as set out above, I do not accept the point made by Miss Laing that I should proceed on basis that the expectation or assumption underpinning the Regulations is that pension liability in respect of any individual employee will be met by the combined contributions of his employer and him over the period of his employment.
28. As I think Miss Laing recognises if it is correct to proceed upon the assumption or expectation that an individual employee's pension will be funded from the joint contributions made by that employee and his employer during the period of his employment, that would add significant weight to the argument that the First Defendant's interpretation of the Regulations should prevail. In my judgment, however, the contrary is also true. If the assumption or expectation is that an employee's pension will not or may not be funded simply from the joint contributions of his employer and him during the course of his employment that militates against the First Defendant's interpretation. I say that of course since if the pension cannot be met from those contributions it must be met from additional sources. If that is correct why should those employers who formerly employed employees who are eligible for a pension not contribute to that pension?

THE CONSEQUENCES OF THE RESPECTIVE INTERPRETATIONS

29. Mr Kerr QC submits, strongly, that the Defendant's interpretation, if adopted, is bound to lead to injustice. He sets out the reasons why in paragraph 25 to 27 of the Skeleton Argument of the Claimant and I can do no better than quote these paragraphs in full.

"25. The principle underlying the funding of multi-employer occupational pension schemes ought to be that, so far as possible, each employer should (provided that it is financially capable of so doing) be responsible for the costs of those scheme members who were and are employed by it. Employers do not participate in pension schemes to fund the pension liabilities of employees of other employers and should not have to do so, except to the minimum extent necessary to secure the fund's solvency in the event of financial failure of another employer. Otherwise, their participation would make no commercial sense, and the law would act as a disincentive for otherwise eligible private sector bodies to participate in the LGPS, as well as penalising the taxpayer through higher contributions payable by public sector participants in the LGPS.

26. Yet the [First Defendant] is asking the court to construe the 1997 Regulations in a way which has just this effect. If the [First Defendant's] contention is correct, and the Fund is unable to recover from the [First Defendant] the £3-4 million of contribution in respect of former NMCC employees for which the [First Defendant] is otherwise responsible, the resulting deficit in the Fund will have to be made good by the actuary setting higher future contributions payable by other employers of the Fund, which include private and public sector bodies.

27. Quite apart from this case, if the [First Defendant] is correct, whenever a group of employees moves from one fund to another by operation of law as a result of government reorganisation there would be a drain on the outgoing fund as their non-active fellow employees would remain and deplete the fund. This would result in government removing at a stroke by legislative fiat (e.g. the 1998 Order) a substantial number of employees from one fund to another, leaving that first fund to remedy the deficit by levying punitively high rates of contribution on those employers who happen still to employ one or more active members."

30. Miss Laing sought to meet the thrust of these points by urging me to the view that one cannot look at the issue of injustice at a particular moment in time but, rather, over a substantial period of time if not over the whole life of fund or Scheme. It may be that a deficit in funding currently exists but that may change in the future with different market conditions or different pension liabilities.
31. I appreciate that it can often be dangerous to look at the consequences of an interpretation of a provision simply at one given moment in time. However, it seems to me that that is not in reality what the Claimant invites me to do. There is no realistic possibility, in my judgment, that the Northumbria Magistrates' Court Committee or its successors will make future contributions towards the pensions of deferred members and pensioners (in the absence of liability under the Regulations) so that, inevitably, that liability must fall upon the remaining employers who contribute to the fund. Such evidence as I have suggests that the number of employers is decreasing. Certainly there is no suggestion that the number of employers is likely to increase substantially. In any event is it a realistic likelihood that new employers will join TWPF in the knowledge that their contributions will have to be higher than would otherwise be the case so as to fund the deficit created by employers ceasing to make contributions once they cease to have active members of the fund. For if the First Defendant's interpretation is correct as employers cease to have active members so the burden upon employers with active members will escalate.
32. In my judgment the Claimant has demonstrated that the consequence of the First Defendant's interpretation of Regulation 79 is to create an injustice.
33. In the written material on behalf of the Claimant the suggestion is also made that the First Defendant's interpretation of Regulation 79 will produce administrative inefficiency. The reasons why are explained in the Skeleton but there is now no purpose in me dealing with the same. Mr Kerr QC acknowledges in his oral submissions in reply that this is very much a secondary argument to the argument that the First Defendant's interpretation will cause injustice. When analysed in the light of Miss Laing's submissions the charge of administrative inefficiency probably does not arise in any event.
34. In my judgment the application of the principles of interpretation set out in paragraph 17 above to the likely consequences of each party's interpretation point strongly in favour of the interpretation suggested by the Claimant. The Claimant's interpretation means, in effect, that employers will always contribute to the pensions of persons whom those employers have employed. In the context of a Scheme where the majority of contributions from employers are themselves paid from the fruits of taxation that appears to be just and probably is just. Conversely, the First Defendant's interpretation has the effects described above. Not only would that be unjust but it probably frustrates one of the likely purposes of the legislation which is to spread the burden of pension liability fairly and equitably amongst those whose employees are the beneficiaries under the Scheme.

DISCUSSION

35. As will be apparent, in my judgment the First Defendant's interpretation of Regulation 79 will lead to injustice. It is not suggested, however, that this, of itself, must mean that the First Defendant's interpretation is erroneous. If, despite my view of the effect of his interpretation, I am driven by the words of the Regulation read in the context of the Regulations as a whole to the conclusion that he is correct I must so find.
36. The relevant parts of Regulations 79 are set out at paragraph 13 above. The crucial phrase is "an employing authority". That is defined to mean "a body employing an employee who is eligible to be a member." Miss Laing takes two points upon the definition of an employing authority. She submits, firstly, that the word employing in context naturally means "currently employing". Secondly she submits that the use of the word "eligible" to qualify the word member is not consistent with the concepts of deferred membership and/or pensioner as described above. She also draws attention to Regulation 2(2) which provides:-

"………references to members and membership generally refer to active members and active membership respectively."

37. In evaluating Miss Laing's submissions it is to be noted firstly that Regulation 2(2) is subject to the qualification that the context may dictate a different meaning to "members" and "membership". It is also important, in my judgment, to have regard to Regulation 4. The relevant parts read: -

"(1) A person may only be an active member if this regulation, regulation 5 [regulation 5A] Chapter 1 of part V enables him to be one and he is not prevented by Regulation 6.

(2) A person may be a member if he is employed by a Scheme employer.

(3) A Scheme employer is a body which is listed in Schedule 2 or is a resolution body."

As can be seen a distinction is drawn in terms of membership between eligibility to be an active member (sub-regulation (1)) and eligibility to be a member (sub-regulation (2)). A person may be a member if he is employed by a Scheme employer. At first blush that would preclude any person not employed by a Scheme employee from being a member. Yet it is common ground that deferred members and pensioners are members within the Regulations. Upon its true interpretation, therefore, Regulation 4(2) is sufficiently wide to include former employees of Scheme employers and is an example, in my judgment, of the context dictating a different meaning to the word "member".

38. In my judgment the phrase "eligible to be a member" is no more likely to mean eligible to be an active member than any kind of member. I do accept, however, that the use of the word "employing" would more naturally mean currently employing as opposed to currently and formerly employing.
39. Mr Kerr QC approaches Regulation 79(1) from an entirely different perspective. His analysis is set out in paragraph 6(A) of a document entitled "Summary Amended Reply to the Summary Grounds of Resistance". The point he makes in that paragraph is encapsulated by sub-paragraph 4 which reads:-

"No distinction is made between different funds under the LGPS in determining whether the employer is liable to pay contributions under the 1997 Regulations: they all constitute part of "the Scheme." An "employing authority" remains so for the purpose of its liability to repay contributions under Regulations 79, even if that liability relates to a fund which differs from the fund in respect to which its current employees are members……."

40. As a matter of fact, of course, Northumbria Magistrates' Court Committee was employing employees who were eligible to be members of the Scheme at the relevant time so that, on the above analysis, it would be liable to pay contributions into the Scheme in which their current employees were members and also into TWPF in respect of deferred members and pensioners.
41. I am not convinced that this interpretation is as natural an interpretation of Regulation 79 as that placed upon it by the First Defendant. I am, however, completely satisfied that such an interpretation is a reasonable one and one that takes into account, as I do, the fact that an injustice which I have identified as being inherent in the interpretation advanced by the First Defendant will be removed.
42. In support of the First Defendant's interpretation Miss Laing also relied upon the wording of Regulations 77(6), 78 and 91.
43. I have set out Regulation 77(6) in paragraph 6 above. Miss Laing's point, expressed I hope accurately, is that this provision does not authorise the actuary to make an individual adjustment in a situation where no liability arises to pay the common rate of employer's contribution. Further, she submits that it is not permissible to increase or reduce the common rate of employer's contribution simply because the particular employer has no active members within a particular fund but does have deferred members or pensioners.
44. The approach of the Claimant in response is simply to say that this provision does not preclude the making of an adjustment. That is so, in particular, because the contributions at the common rate can be increased or reduced not just in percentage terms but by specific amounts.
45. When considering Regulation 77 Mr Kerr QC also draws attention to Regulation 77(10) which provides that the administering authority must send copies of any valuation, report or certificate under Regulation 77 or revision under Regulation 78:

"(a) …………

(b) to each body with employees who contribute to the fund in question, and

(c ) to any other body which is or may become liable to make payments to that fund."

46. That, submits Mr Kerr QC, is a very clear indication that liability to make payments to TWPF may arise notwithstanding the fact that a body (which for this purpose must include an employing authority) has no employees currently contributing to the fund in question.
47. It is in the context of Regulation 77(10) that Miss Laing invokes Regulations 78 and 91. I need not set out those Regulations in detail but, in essence, she submits that Regulation 77(10)(c) exists to cater for liability under those two Regulations.
48. In my judgment there is nothing in the Regulations which restricts the ambit Regulation 77(10) to a liability arising under Regulation 78 or Regulation 91. Of course, it can be read in that way but I have not been persuaded that any substantial reasons exist as to why it should be read in that way. Regulation 78 relates, specifically, to admission agreements. As I have said those are agreements whereby private employers are admitted to participate in the fund in question. Regulation 91 relates to pension increases under the Pensions (Increase) Act 1971. Since these are two specific and discrete sets of circumstances it is difficult to see why Regulation 77(10)(c) is not expressly restricted to these circumstances if that is what Parliament intended.
49. As will be readily apparent, these Regulations are capable of considerable textual and linguistic analysis and I have no doubt that the interpretations of Regulation 79(1) for which the Claimant and the First Defendant contend are capable of being accommodated within the language of the Regulation. I am not persuaded, however, that the language inevitably and inexorably points to the interpretation advanced by Miss Laing on behalf of the First Defendant. I am, however, as I have made abundantly clear, convinced that the First Defendant's interpretation would lead to injustice and, further, it probably would frustrate one of the legitimate objects of the legislation. That being so, I have reached the clear conclusion that I should interpret Regulation 79(1) in the manner contended for by the Claimant. It may be that for the avoidance of future doubt a declaration as to the true meaning of the provision should be made. If the parties agree or the Claimant wishes to pursue such a declaration it would be helpful to have a draft at the handing down so that there can be no possible doubt about its extent.
50. On the basis that the interpretation advanced by the Claimant is correct I understand it to be accepted that the actuary lawfully specified the sum of £214,000 as being payable by Northumbria Magistrates' Court Committee and that the First Defendant is now obliged to accept that liability. Accordingly I propose to give judgment for that sum against the First Defendant unless, of course, the parties consider that the making of a declaration that the sum is payable is a preferable course.
51. During the course of the hearing no submission was advanced to me to the effect that I should not make the declaration sought by the Claimant as to the future. I propose to make such a declaration unless the First Defendant indicates that he wishes to make representations about it. In that event I will hear those representations after handing down judgment but before I finalise the terms of any Order consequent upon it.
52. It may well be that I have omitted to deal with some of the detail of the submissions advanced both in writing and orally. That omission is not intended as any kind of discourtesy. I have simply focused on those points which, in the end, persuaded me to my conclusion. However, I would like to place on record my tribute to the quality of the written and oral submissions which have assisted greatly in this difficult case.