England and Wales High Court (Chancery Division) Decisions

Stevens, Webb, Brand, Bromwich and Ors. v. Bell, Palmer, British Airways Plc and K.M.R. Post [2001] EWHC Ch 13 (16th February, 2001)

Case No: HC 0000209

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 16 February 2001

B e f o r e :

THE HONOURABLE MR JUSTICE LLOYD

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Elizabeth Gloster Q.C. and Richard Hitchcock (instructed by Macfarlanes for the Claimants)

Nigel Inglis-Jones Q.C. and Nicolas Stallworthy (instructed by Nabarro Nathanson for the First Defendant)

Andrew Simmonds Q.C. and Barbara Rich (instructed by A. J. Hows & Associates for the Second Defendant)

Brian Green Q.C. and Paul Newman (instructed by Linklaters for the Third Defendant)

The Fourth Defendant appeared in person

Hearing dates: 22 to 25 January 2001

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JUDGMENT

Pursuant to CPR Part 39 PD 6, I direct that no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Lloyd:

1. This judgment is concerned to answer a number of questions of construction which have been raised in relation to the terms of the Airways Pension Scheme ("APS" or "the Scheme"). Until 1984 APS was the pension scheme for staff of British Airways ("BA") and its predecessors. As of 31 March 1984 it was closed to new members and a new scheme, NAPS, was brought into operation for new employees and for those (and there were many) who wished to transfer to it from APS. APS has more than 4,000 active members, that is to say those who are still employed by BA, but it has approaching 6,000 deferred pensioners, who have left BA's employment retaining their rights under APS, but have not started to draw their pensions under APS, and it has over 26,000 pensioners who are in receipt of pensions under the Scheme. By comparison NAPS has over 41,000 active members, some 14,000 deferred pensioners and rather more than 10,000 pensioners.
2. APS has, on any footing, a substantial surplus of assets over liabilities. The latest valuation figures show that NAPS has a significant deficit. Before the latest figures were produced, it was proposed that the two schemes should be merged. The then trustees of both schemes agreed to such a merger, subject to the court approving it. These proceedings were commenced in order to obtain that approval. The proposal was controversial among beneficiaries of APS, and excited active opposition. A lengthy hearing was envisaged. In October 2000, once the figures for the latest valuation were available, showing the significant deficit of NAPS, the trustees decided not to proceed with the proposal. However, in the course of the debate about the proposed merger, questions of construction of the APS documents had been identified on which there was doubt and disagreement. Accordingly, the parties agreed that it would be sensible to amend the proceedings to a form in which these questions could be put before the court for decision and part of the time allocated for the original hearing could be used for this purpose. This was done, including the amendment of the parties to eliminate those only concerned under NAPS, as well as the formulation, after discussion between the parties, of 10 questions, and the amendment of the claim form to raise these issues.
3. As the matter has come before me, the parties are as follows. The Claimants are 15 out of the 16 Management Trustees, and the custodian trustee, whose respective roles I will touch on later when describing the Scheme. The First Defendant is a pensioner of APS, and the Second Defendant is an active member. By an order of Park J dated 5 April 2000 they represent, respectively, all pensioners and deferred pensioners under APS, and all active members of APS, from time to time. The Third Defendant is BA. Although provision is made for other employers under the scheme, the questions posed are to be determined on the assumption that BA is currently the only material Employer for the purposes of the clauses I will have to consider, but there can be and from time to time have been two or more employers. A representation order was made that BA represent all companies participating as employers in APS and NAPS. This should presumably be amended to delete the reference to NAPS which is no longer relevant. The Fourth Defendant, Captain Post, is the other of the Management Trustees of APS.
4. Captain Post was elected as a pensioner trustee and took office on 1 October 2000. He had been very active and vocal in opposition, on behalf of both pensioner and employee beneficiaries, to the proposed merger. Although he no doubt welcomed the trustees' decision, at the first meeting he attended, to abandon the merger, he has strong feelings about the conduct of BA and of some of his fellow trustees in the matter. When the time came for the formal amendment of the proceedings to take account of changes in the trusteeship as well as of the change in the nature of the proceedings, the 10 questions having by then been formulated and agreed, he felt unable to agree that certain aspects of the questions should even be asked of the court by the trustees. He therefore refused to join in as a Claimant, and consequently had to be joined as a Defendant, in order that all the trustees should be before the court. He appeared at the hearing, representing himself. At the hearing he put in a witness statement in which he explained why he was unwilling to join as a Claimant. When the time came at trial he spoke of those reasons, to explain something about the underlying circumstances which led him to this position. He did not make any separate submissions on the points of construction. While I respect and note his feelings, the circumstances which led him to that position are not of any relevance to the matters I have to decide, and I therefore did not allow anyone in reply to comment on what he had said, nor would I have allowed in any evidence to answer his witness statement. Other witness statements also seemed to have been influenced in some respects by the strong feelings aroused by the merger proposal. I have sought to ignore matters of history other than those which are strictly relevant on the questions of construction. I am also aware that there are issues which have been raised by the merger idea which are not before me, such as whether APS may be reopened to new members. Nothing I say is intended to have any bearing on that, on which I have heard no argument.

The history of APS

5. APS was set up originally in 1948, as a single industry-wide scheme to apply to the employees of three separate airways corporations, all then owned by the government: British European Airways Corporation, British Overseas Airways Corporation and British South American Airways Corporation. It was established under the Airways Corporations (General Staff Pension) Regulations 1948, made under section 20 of the Civil Aviation Act 1946. The Minister of Civil Aviation had functions under the Scheme as it then stood to which I will refer later. Section 20 imposed on him a duty to provide, by regulations made under the section, for the establishment and maintenance of pension schemes for the employees of the three corporations.
6. I do not need to trace the sequence of employers under the Scheme in detail. British Airways Board succeeded the three corporations, and BA was then created to succeed it, not least in preparation for privatisation. The Scheme is governed by a Trust Deed and Rules, both of which have been amended over time. The Rules now consist of six Parts. Part I was introduced in 1948 and dealt with General Staff. At that stage it comprised the only rules of the Scheme. Successively Parts II to V were introduced between 1951 and 1963, dealing with particular classes of employees or particular forms of benefit. In 1973 Part VI was introduced, which applied generally to new members thereafter, and which existing active members could join if they wished. I am told that most current members derive their entitlement to benefits under Part VI, though some have benefits under Part V, and some pensioners may derive benefits under other Parts. I was shown some modest differences between the contribution rules as they stood in 1948 and as they are now. Otherwise it seems that nothing turns on differences between the various Parts of the Rules for present purposes.
7. In 1984 the Trust Deed was amended, among other things to close the Scheme to new members: clause 23. It is clear that this was part of the process of preparing for privatisation. There were aspects of APS which made it unsuitable for the private sector, among which is the full index-linking of pensions, both in payment and in deferment, which had applied under APS since 1973, under Part VI (and had been operated ex gratia before that time). The actuarial valuation carried out as at 1989 showed a surplus of assets over liabilities, and from then on BA has enjoyed a contributions holiday.
8. Undoubtedly APS bears the marks of its public sector provenance, and of its age. It includes provisions which are not found in normal private sector occupational pension schemes, of which full index-linking of pensions is only one. It has a different structure from that which one would expect, in a modern private sector scheme, as regards the respective duties and functions of the employer and the trustees. Other ex-public sector schemes have been the subject of litigation in recent years, above all the Electricity Supply Pension Scheme, in the National Grid and National Power cases, to which I will refer, but also schemes of British Coal and London Regional Transport. Passages from these and other judgments were cited to me, and some are of assistance. APS is not quite like any other scheme which has been the subject of any decision cited to me, and I must start by referring to the provisions of the Trust Deed and to the contribution provision of the Rules.

The terms and structure of APS

9. APS is a balance of cost defined benefit scheme, under which employees make specified contributions, entitling them to pension and other benefits at given rates, and the employer has to make the contributions which are necessary to make up the difference in the cost of providing these benefits over and above the employees' contributions. At regular intervals, now no more than every three years, the Scheme Actuary has to value the assets and liabilities of the Scheme so that he can determine whether the assets are sufficient to cover liabilities, or not, and if not by how much. He then has to deal with two questions: so far as liabilities attributable to service up to the valuation date ("past service") are concerned, do the assets as at the valuation date suffice? If they do not there is a deficiency which will need to be made up. If they are sufficient then, depending on the margin, there may be a surplus which can be used in other ways. He also has to consider the position for the future, as regards the liabilities that will arise in respect of service after the valuation date ("future service"). Normally, in an ongoing scheme, he would expect to find that a given level of employer's contribution will be needed to make up the difference between what employees will pay for future periods and what benefit they will become entitled to as a result of those contributions and that service. That would enable him to establish a rate of contribution for the future for employers. If there is a past service surplus, a possible use for some or all of that is to cover what would otherwise be the employer's future service contributions. In making these assessments and valuations, the actuary uses various assumptions, both financial and demographic. One thing is certain about the results of the forecasts made using these assumptions, and that is that they will not turn out to be exactly accurate. Nevertheless, by applying his professional expertise, he comes to what he regards as the most appropriate estimate of the likely out-turn of all the relevant facts. He needs to hold a balance between the concerns of the employer and of the beneficiaries and will therefore proceed with a degree of caution in deciding on the assumptions to use when making his forecasts. He will also adopt a special approach to the valuation of the assets in the fund at the relevant date. Instead of taking the market value of listed investments, he takes a figure based on the estimated current value of the likely flow of future income which will be generated by the investments held. The point of this is to avoid the haphazard fluctuations which a market valuation might throw up, and to focus on the real value of the asset. All of this is common to any balance of cost scheme. One feature which is unusual in APS is that the regular actuarial valuations which will be used to determine the rate of contribution in respect of future service are also the subject of a special rule governing, in different and more specific terms than would normally be seen in modern private sector schemes, what is to be done as a result if there is a past service deficiency or a substantial past service surplus. The details of that are at the centre of the debate before me, and I will not anticipate them now. I will turn first to setting out the terms of the Scheme which are most relevant, starting with the Trust Deed, which I have before me in a form amended up to 1 October 1999.
10. The parties were originally the three corporations, individuals as the Management Trustees, and the custodian trustee. The custodian trustee has the functions that one would expect. All the active responsibilities of the trustees are borne by the Management Trustees, of whom there are now 16, 8 nominated by BA (called Employers' Representatives) and 8 elected by members and pensioners (called Members' Representatives), of whom 6 by various classes of employees and 2 by pensioners. Any reference hereafter to "the trustees" means the Management Trustees. Clause 1 has a number of definitions, including "the Actuary" as the Scheme's actuary for the time being, and "the Scheme" as APS. It also defines Member in a way which shows that it is limited to those who are still employed by a relevant employer. Correspondingly, the Scheme speaks of Members and Pensioners, which are different classes. There is no definition of Pensioner, but from the context it includes both those in receipt of a pension and deferred pensioners.
11. Clause 2 is the first I need to set out in full, headed Main object.

"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 and no benevolent or compassionate payments can be made therefrom."

12. Clause 3 sets out the employer's covenant to pay its own and the employees' contributions to the trustees. Clause 4 confers on the trustees the duty to manage and administer the Scheme and gives them various administrative and management powers for the purpose. One of them, in paragraph (ix), is "to do all such other things as are incidental or conducive to the attainment of the objects of the Scheme or any of them". Clause 8 provides for the appointment of officers, including the Actuary, whose appointment, removal or replacement is to be made by the trustees with the consent of BA. If they cannot agree on the identity of a new actuary to be appointed, the appointment is to be made by the President of the Institute of Actuaries, but neither of the candidates favoured by the trustees or BA is to be appointed.
13. Clause 11 is the most important clause as regards the issues before me. It is headed Actuary, and is in the following terms:

    "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 ....... 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."

14. Clause 12 provides for the Management Trustees, as I have summarised. The same persons act as Management Trustees of APS and of NAPS, and those who are entitled to vote for them are the members and pensioners (though not deferred pensioners) of both schemes. Clause 14 deals with the proceedings of the trustees. Questions arising are to be decided by a majority of votes, and in the case of equality the chairman has a second or casting vote. The chair is to be taken at meetings by the Chairman or one of the two Deputy Chairmen, who are appointed by BA from among the Employers' Representatives. The quorum at meetings of the trustees is four, of whom two must be Employers' Representatives and two Members' Representatives.
15. The amendment provision is clause 18, in the following terms:

    "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 member 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."

16. Winding-up is governed by clause 19. BA may by written notice terminate its contributions to the Fund. If it does so, the Scheme will terminate unless the trustees decide under paragraph (b) to continue it. If it does terminate, each Employer becomes under a duty to pay to the Fund "such outstanding sums as may be due from the Employer to restore the solvency of the Fund having regard to the rights of Members and Pensioners (and their dependants) accrued at the date of termination". This provision, in the nature of a guarantee of solvency, is one of the features of the scheme, unusually favourable to beneficiaries, which may have contributed to the decision to close APS to new members. Another such is found in paragraph (d), by which if there is a surplus of the Fund on winding-up, there is an obligation to alter the rules so as to increase benefits so far as possible, subject to Inland Revenue limits. Only after that has been done is any remaining balance to be repaid to the Employers, in proportions determined by the Actuary. Another point favourable to beneficiaries is proviso (iii) to clause 18, set out above, whereby amendments are prohibited which adversely affect not just present but also future rights of existing members and pensioners.
17. Clause 23, as I have mentioned, precludes anyone joining the Scheme as a new member after 31 March 1984. Clause 24 is a provision to which some attention has been given, and which I should quote.

    "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 I of Part XIV of the Income and Corporation Taxes Act 1988 would not thereby be prejudiced."

18. Clause 32, headed Revenue limits, overrides any other provision of the Scheme and prohibits contributions and benefits from exceeding the applicable Revenue limits. I do not need to refer at this stage to any other provisions of the Trust Deed, and I turn to the few Rules which I need to consider. In Part VI, the rule dealing with contributions is rule 5, and paragraphs (a) and (b) are as follows:

    "(a) A Member's contributions will commence on admission to the Scheme and (subject to sub-rule (e) and Rules 20 and 35) cease at actual retirement age whether before or after Normal Retirement Age. The appropriate rate is determined by reference to the Table below according to whether the Member is a Higher Rate Contributor or a Lower Rate Contributor. All such contributions shall be payable by a Member for the purpose of securing pension benefits only."

Then there follows the Table, which I need not reproduce, giving the percentages of remuneration which each Employee must contribute, according to the category of Member (pilots, officers and cabin crew have an earlier normal retirement age than others, and therefore pay at a higher rate) and whether they are Higher Rate or Lower Rate Contributors.

"(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 pursuant to Clause 11 of the Trust Deed."

19. In Part I, setting out the original rules, contributions were dealt with in rule 6, by reference, so far as employees were concerned, to an elaborate table. Rule 6(a) required Members to contribute "at rates which depend on the category or categories (as specified in the First Table) to which he may from time to time belong". The Employers' contributions were dealt with by rule 6(b), of which sub-paragraph (ii) was identical to that in Part VI, and sub-paragraph (a) was similar, as follows:

    "(i) Contributions at such rates certified by the Actuary from time to time as shall be required in addition to the contributions payable by the Members to provide the balance of the pension benefits and the whole of the Death and Accident Benefits of the Scheme in respect of persons becoming Members at the normal average age of entry such contributions to be payable at such times so far as possible as the Members' contributions are paid into the Fund."

20. It is convenient at this point to note something about the history of clauses 11, 18 and 19, and to deal first with clause 18. The Trust Deed has to be construed as it stands, but the past history of its provisions has a limited legitimate role in some questions of construction. Originally any amendment of the Trust Deed or the Rules had to be confirmed by regulations made by the Minister of Civil Aviation made under section 20 of the Civil Aviation Act 1946. The original regulations under which APS was set up were amended or modified by some 18 statutory instruments between 1950 and 1971. Section 20 was in fact repealed in 1949. Presumably the amending regulations were treated as having effect under the replacement legislation. By 1984 it seems to have been clear that there was no continuing need for the Minister's confirmation, and the relevant words were omitted from clause 18.
21. The Minister also had a role, originally, under clause 11. In 1948 clause 11(b) provided that, if the trustees and the employer could not agree on the terms of the scheme required under that paragraph, it was to be submitted to the Minister for approval and was to "come into force subject to such amendments (if any) as the Minister may direct". The present text, substituting an appointed actuary for the Minister, was introduced by an amendment in August 1986. The only other amendments to clause 11 which I need to mention are that originally the maximum interval for valuations under (a) was 5 years, and the references to "Employer" were instead to "Corporation" reflecting the participation of the three separate corporations at that time. It is also worth noting that, before 1986, the Minister's approval was necessary before the Employer could give a notice under clause 19 terminating its liability to contribute leading to the winding-up of the Scheme. Of course the Minister had not only his statutory responsibilities for the civil aviation sector generally and for pension provision in particular but he also represented the Government which was, in effect, the paymaster of the industry.

Past service deficiency or surplus: clause 11

22. Thus it can be seen that, after a triennial valuation, if there were a deficit as regards past service, it would be dealt with under clause 11, separately from the future service position. The Actuary would certify the amount of the deficiency, and this would have to be covered by deficiency contributions, payable over a period not exceeding 40 years, prescribed by a scheme for making good the deficiency made by the trustees with the agreement of the Employer, in accordance with clause 11(b). Future service liabilities would be dealt with on the basis of the Actuary's assessment of the position for the future, certifying what amounts were required for the purposes of rule 5(b)(i) of Part VI, or the equivalent provisions of other Parts.
23. If however there is a surplus, rather than a deficiency, the Actuary has to consider whether or not he can certify that there is a disposable surplus, and if so what is its amount. One of the matters debated before me is the meaning of the phrase "disposable surplus", but it is at least common ground, and clearly correct, that it is not the same as a surplus. It does not follow, from the fact that the Actuary's calculations show a past service surplus of assets over liabilities of a given amount, that this amount is a disposable surplus. The Actuary has to exercise professional judgment in deciding whether any, and if so how much, of a surplus is a disposable surplus. Counsel used the phrase "raw surplus" to refer to the bare result of his actuarial calculations, before he considers how much, if any, is "disposable", and I will adopt that. One of the issues is whether a "disposable surplus" is necessarily limited, not only at the threshold by whatever reserve the Actuary decides to fix, but also, by way of a ceiling, to whatever amount can in fact be applied in accordance with the provisions of clause 11(d)(i) and (ii). If the disposable surplus is more than enough for these purposes, there could be a balance of disposable surplus left. On one submission, however, that balance is not disposable surplus at all. It is therefore convenient to adopt another phrase for that balance, which does not beg the question whether it is disposable surplus, and I will use "residual surplus" for that amount.
24. If there is a disposable surplus, it is required to be dealt with by a scheme under clause 11(b) "for disposing of the disposable surplus", and that scheme must make the provision laid down in paragraph (d)(i) and (ii). If there are current deficiency contributions payable, it will first reduce or eliminate them. If there are none, or if it is more than enough for this purpose, the employer's future service contributions are to be reduced to an extent required to dispose of the balance of disposable surplus by annual amounts over such a period not exceeding 30 years as the Actuary shall advise, thus a shorter maximum period than applies to deficiency payments. This is a rather odd provision. The Employer's future service contributions are fixed on the actuarial valuation every three years. In Part VI they are of "amounts" certified by the Actuary, though in Part I and other earlier Parts they were payable at "rates" so certified. Of course, if there is an adequate surplus, the Actuary will not certify, for the purposes of Part VI rule 5(b)(i) and equivalent rules in other Parts, that any amount is required from the employer to provide the relevant benefits, but that will only govern the position until the next valuation, whereas clause 11(d)(ii) covers the position for up to 30 years. What amount will actually be payable in any given year if, at any given valuation date, any amount or rate is certified as required, will depend on patterns of employment, and rates of pay. In a scheme closed to new members, there is not the variable, otherwise relevant, of expansion of the workforce, or indeed turnover without expansion of numbers. But even in such a scheme, the employer's contribution, which is likely to be determined at a percentage of employees' pay, will depend on rates of pay and rates of retention of relevant staff. The provision for "annual amounts over" a period of years suggests that the employer gets a credit of so much per year, over the given period, to be set off against whatever would otherwise turn out to be its contribution for that year in respect of future service. Of course, if the amount were more than is needed, it would not be repayable to the employer, but would merely remain in the scheme, not having been called upon. Whatever the precise operation of this paragraph, however, it is clearly intended to give the employer a contribution reduction, or even holiday, in respect of future service contributions, for up to 30 years, and thus extends far beyond the issue of what contribution is required for the time being, until the next valuation. I should mention that Mr Inglis-Jones submitted that a particular construction which favoured BA and was likely to lead to it making no contributions in future would jeopardise the continued approval of the Scheme for Revenue purposes. There is no evidence on this point and I therefore decline to take it into account.
25. Thus, this particular provision does provide for a past service surplus to be used to give the employer a respite in respect of future service contributions, but does so in a way which is not particularly clear and is certainly not as flexible as would be favoured in a modern scheme. That is a function of the relatively hard and fast distinction made in the scheme between the past service position and that attributable to future service. Looking at the position generally, rather than in relation to APS as such, once a past service surplus in a balance of cost scheme has been used, in whatever way is allowed by the scheme, to allow the employer a contributions holiday, it is not required to provide for past service liabilities nor, within limits, for future service. It is therefore available in the scheme, either to act as a cushion against uncertainties in the future, or to provide for additional benefits and therefore liabilities. In certain limited circumstances it may be possible for part to be repaid to the employer; I will mention later the situation in which that may arise, which is currently governed by legislation in such a way that the terms of any given scheme are almost irrelevant.
26. The principal debate before me has been whether, if there is a residual surplus after paragraph (d) has been fully complied with, that residual surplus is governed by the scheme to be made as required by paragraph (b) and, if so, whether it is to be dealt with under other provisions of the Deed, or whether clause 11 is a free-standing provision enabling it to be dealt with in ways other than those provided for elsewhere.
27. Some part was played in that debate by the curious provisions of clause 11(e). This arises on the same valuation exercise as is required under paragraph (a), but calls for a separate certificate from the Actuary (if he thinks it appropriate) that it is expedient to increase or decrease contributions for a particular purpose. If he does so certify, then the scheme required under (b) may (but does not have to) make provision for the increase or decrease. Some puzzlement was expressed in the evidence as to the circumstances in which this provision might have applied. It is suggested by Mr Wynne Griffith, an actuary who gave evidence for the First and Second Defendants, that the explanation lay in the graded contribution structure of the original scheme, which did not require the employee simply to pay a proportion of his remuneration, but prescribed given rates for bands of pay, and also entitled the employee not to a pension related to final salary, but to defined rates of pension according to the contribution paid. This type of contribution provision was known as a "brick-on-brick" structure; as employees moved up through the relevant rates they earned particular rates of pension, which therefore had to be paid for, as regards the balance of its cost, by the employer. Mr Wynne Griffith comments that it was important to check that the underlying relationship between the pension earned and the contributions paid remained valid, i.e. that the particular table in use remained valid, and said that if an adjustment was necessary it could be made under the paragraph (b) scheme, and, he says, any available amount of disposable surplus could be used to make the adjustment. I am not sure that I fully understand the circumstances in which clause 11(e) might have been applied, but at all events it does not arise as such as matters now stand, since it only relates to those who become new members after the valuation, and clause 23 precludes new membership. I will have to address some issues as to how clause 11(e) might have operated when I come to construe disposable surplus, to which I now turn.

What is the meaning of "disposable surplus"?

28. As I have said, it is agreed, and clear, that disposable surplus is not the same as raw surplus. Once the Actuary has made his first calculations on the triennial valuation which show a surplus rather than a deficiency, he must consider whether there is a disposable surplus, and if so how much it is. In performing that task he may make an allowance by way of reserve, whether against general contingencies or, I dare say, against more specific factors, so as to reduce the amount available to be considered as disposable surplus. He can do this even if he has also built in an element of reserve at the first stage of his calculation. The Actuary, Mr Alexander, did so before getting to his raw surplus figure in 1998 in the case of APS, in respect of a possible investment mismatch under the Minimum Funding Requirement. He intends to do so on the 2000 valuation for an investment mismatch, though not related to MFR. In preserving some part of the raw surplus the Actuary would be acting out of a degree of caution, whether for specific or general reasons, conscious that his forecasts may be wrong either way. Mr Green, for BA, submits that he may legitimately be influenced by knowledge of how the disposable surplus might be applied, depending on its amount. If, for example, there were current deficiency contributions payable, and the raw surplus were enough to cover these, but not to do much more, the Actuary would know that the application of the disposable surplus would not affect the balance of the Scheme to a great extent. If on a future valuation a further past service deficiency were revealed, then new deficiency contributions would be required. The level of risk attached to the actuarial forecasts would not be significantly affected by this application of surplus. If the raw surplus were enough to wipe out any current deficiency contributions and reduce, or even extinguish, up to 30 years' future service contributions from the Employer, but not to do anything else, again the Actuary would know that the risks would not be significantly affected, because of the review that would arise three years later. In the course of the Actuary's valuation exercise he will no doubt have calculated what amount would be needed to extinguish the current deficiency contributions, if any, and also to confer an up to 30 year contributions holiday on the Employer in respect of future service. If, on the other hand, as is submitted for the members and pensioners, a residual surplus can be applied for the benefit of members and pensioners, or both, for example in increasing benefits, and if the raw surplus is enough to allow for this to some extent, then the Actuary would know that (if the clause permits this, which I have to decide) the application of the disposable surplus would or could affect the factors relevant to the calculation of future service liabilities, and therefore could increase the risk element. In that case he could legitimately take that possibility into account, bearing in mind also the amount that might be available for benefit improvements, in determining the amount of the disposable surplus, and he could build in, if he thought appropriate, a larger contingency, thereby setting a higher threshold before getting to the disposable surplus. Mr Green submitted that this was so, and neither Mr Inglis-Jones nor Mr Simmonds took issue with him on this. I hold that it is so, though whether it is relevant depends on whether I accept Mr Green's primary submission that disposable surplus cannot include any element of residual surplus.
29. What the Actuary cannot do is take into account how the disposable surplus will in fact be dealt with by the paragraph (b) scheme, assuming that such a scheme can deal with residual surplus, because he will not know the answer to that, however shrewd an idea he may have of what is likely to be done in fact, at the date when he makes his certificate. The questions posed also ask about the interaction between a possible notice under clause 24 and the certification of disposable surplus. (This issue could have been affected by a point taken by Mr Inglis-Jones on clause 24, but which, for reasons which I will explain later, I do not accept.) The answer seems to me to be that, if a notice under the clause has been given before the valuation date, it will affect the valuation itself. If it is given after the valuation date but before the certificate is given, then the Actuary would at least be entitled to take its effects into account in determining the amount of the disposable surplus, by analogy for example with the reporting of post-balance sheet date events in company accounts. If a notice has not been given by the certification date, the Actuary cannot take it into account, because he cannot know that it will be given. I dare say, however, that if the Actuary knows that BA is seriously contemplating giving such a notice when he is coming up to giving his certificate, it would in ordinary circumstances (subject to any other constraints on the timing of his certificate) be open to him to wait a short time to see whether the notice was in fact given.
30. Mr Green had another submission as to the circumstances in which the Actuary can certify a disposable surplus, which would affect the amount of the disposable surplus which he can legitimately certify. He said that, if the Actuary took the view that, despite the making of the maximum provision by way of a 30-year contribution holiday, there would remain a material risk that the employer would have, within that period, to resume contributions or to make deficiency payments, then he could not certify a disposable surplus without making a reserve out of raw surplus sufficient to reduce that risk to a level which was not material. I do not accept that submission. Any actuarial forecast carries a more than just material risk of being wrong either way. It will be wrong, and may well be wrong to a material extent, and it is impossible to tell which way it will be wrong. It does not seem to me that the Actuary is bound to make an additional allowance, before he certifies the amount of disposable surplus, to cover the risk of his being wrong one way. In deciding both on his actuarial assumptions and his methods he will decide on those that he thinks appropriate. He will apply them with the benefit of his professional skill and experience. He may, I know not, check on his calculations in a sort of sensitivity analysis by considering what would be the effect of using either different assumptions or different methods or both. In whatever way he thinks appropriate he will come to what he thinks is the proper conclusion. It would be wrong, in my judgment, to read the clause as imposing on him an obligation to give effect to a particular factor (that of the material risk identified above) in proceeding from the identification of his raw surplus figure to a figure for disposable surplus. It is a matter for his professional judgment. Mr Green put forward a definition of disposable surplus, in the following terms:

"Disposable surplus is that part of the raw surplus in respect of which the Actuary can certify, without material risk that the cancellation of deficiency contributions or standard future contributions to which it will automatically give rise under clause 11(d) will turn out to be unjustified."

31. Miss Gloster in reply, meeting Mr Green's challenge to other parties who he said were not facing up to the point by submitting merely that the disposable surplus was whatever the Actuary thought it was, put forward a rival formula though disavowing any intention to offer a definition of disposable surplus, as follows:

"Disposable surplus is the Actuary's valuation of the balance of the value of the assets of the Scheme (including the value of any deficiency contributions) over the value of accrued benefits after deducting therefrom such sums, if any, as he considers prudent by way of reserve, to reflect [or perhaps better, to take account of or to allow for] the risk of ultimate residual deficit, the possibility of the employer having to make a further deficiency contribution and any other matter he thinks fit."

32. I do not accept Mr Green's version. Miss Gloster's definition is nearer the mark but, despite Mr Green's challenge, I do not propose to set out a definition of disposable surplus in this judgment.
33. I must mention one last point which arose from the debate about the meaning of disposable surplus and its relationship to raw surplus. Mr Inglis-Jones pointed out that the Actuary could not legitimately use a particular actuarial method known as Aggregate Method in the process of determining disposable surplus. He suggested that an additional question should be posed and answered which would make this clear. He submitted that the Scheme Actuary had used this method on the occasion of some past valuations under clause 11(a). The Aggregate Method is one which takes a balance in respect of past service, between the assets in the fund and the liabilities, but then proceeds to add in the estimated cost of future service liabilities and the estimated value of the future employee contributions, and if there is a deficiency, after bringing those into account against any past service surplus, takes that deficiency as the amount required in respect of employers' contributions. If therefore, there is a surplus, instead, that is a surplus which has already given the employer the benefit of the past service surplus against what would otherwise be his future service obligations. Mr Inglis-Jones is therefore clearly right to say that the Actuary cannot use this method to decide the amount of the disposable surplus which he should certify. That is not in dispute. A similar point arose in Hillsdown Holdings plc v. Pensions Ombudsman [1997] 1 All ER 862, and is discussed by Knox J at 887 to 889. I am not concerned with the rights and wrongs of what has been done on the occasion of past valuations. However it is reasonably clear from the documents relating to the last valuation which has been completed, as at 31 March 1998, that the Actuary used the Aggregate Method for some purposes, but not for certifying the disposable surplus under clause 11(b). I see no reason to add a question on this point to the already long list of questions, and I need say no more about this point.

Clause 11: the paragraph (b) scheme

34. I come now to the linked questions of what can be done by the scheme under paragraph (b), and whether disposable surplus is limited to that which can be disposed of under paragraphs (d) and (where relevant) (e). All Counsel reminded me that the relevant provisions of the Scheme were originally designed for an ongoing scheme, with new members coming in, and had to be read in such a way that they would work sensibly in that situation as well as in the different situation that now exists. That is a fair point. In this context it was Mr Green who pointed out that, with an ongoing scheme, it is not at all likely that there would be a residual surplus at all, and that at the stage of the original drafting, it would not have been expected that there would be such a surplus available to be dealt with. That may well be so.
35. Mr Green's submission, as I say, is that clause 11 is self-contained, that it requires the trustees to make a scheme, with the agreement of the employer, if the Actuary makes a certificate under (b), and that it also sets out the only provisions that such a scheme may include, namely that which is required either by (c) or by (d)(i) and (ii), as the case may be, and optionally also, if relevant, that which is permitted by (e). He points to the fact that nothing in clause 11 suggests that the paragraph (b) scheme will do anything else, unless that is the result of the use of the word "the" in the phrase in paragraph (b): "shall ... make a scheme for ... disposing of the disposable surplus". One of the points relied on by Mr Inglis-Jones and Mr Simmonds is indeed that paragraph (b) imposes a duty to make a scheme which disposes of the, i.e. the whole of the, disposable surplus. Mr Green submits that the use of this one word is a slight indication, inadequate to outweigh what one gathers from elsewhere in the clause, which is that all the scheme can do is what is expressly covered by paragraphs (d) and (e). He therefore submits that either disposable surplus is itself limited to what can be dealt with under (d) and (e), or the paragraph (b) scheme can only make such provision as is mentioned in paragraphs (d) and (e), even if it does not thereby exhaust the disposable surplus.
36. I do not accept Mr Green's first submission, that disposable surplus cannot include residual surplus. The Actuary must consider the amount of the raw surplus, and should make what allowances he thinks proper in the interests of prudence by way of preserving any part of the raw surplus which he regards as not to be disposed of. Once he has done that, bearing in mind the various factors already discussed, he is left with an amount which he does regard as disposable. It seems to me that this is the amount which he must certify as disposable surplus, regardless of how it will in fact be used. To an extent he knows how it will be used, because the provisions of (d)(i) and (ii) are mandatory, and leave only a limited amount of discretion as to the manner in which they are implemented, at any rate if the amount available is more than sufficient. However, even though if (e) is to be relevant at all he will necessarily have given the separate certificate referred to in that paragraph, he will not know for certain whether it will be invoked because it is permissive rather than mandatory.
37. One question is whether the action which might be taken under paragraph (e) would or could impact on the disposal of the disposable surplus at all, or whether it is entirely separate, and is only to be included in a paragraph (b) scheme as a matter of convenience. What may be done under paragraph (e) is to increase or decrease contributions for the future in respect of benefits for new members joining the Scheme more than 3 months after the date of the Actuary's report on his valuation under paragraph (a). Because of the timetable under clause 11(b), this means those joining after a scheme has been made under paragraph (b). Mr Green submitted that it is only the Employer's contributions that can be affected under (e) but the paragraph refers to "the amounts to be contributed by and in respect of such persons", so that, when the Actuary considers his certificate, he is looking at contributions from both sides. It might seem a little surprising that, even as regards new members, the rates applying for contributions by employees should be capable of increase from those set out in the relevant Table without there being any mention of that in the contribution rule. Existing members cannot, I think, have their contribution rate increased for the same benefits, by virtue of proviso (iii) to clause 18. In this context, the limitation on the effect of action taken under paragraph (e) to those becoming members after three months from the certificate, within which time the scheme is to come into force, suggests that the scheme does indeed affect new employees' contributions, whether or not it may also affect employer's contributions. By contrast there is express reference in the contribution rule to the employer's obligation to pay deficiency contributions, if they arise, under clause 11, but of course any imbalance as regards the employer's contributions, at any rate for the next three years, would be redressed by the Actuary's certificate of what is required by way of employer's contributions. I do not find it necessary to come to a conclusion on this particular issue. Whether in respect of employer's or employees' contributions alone, or as regards both employer's and employees', action under paragraph (e) can affect, either way, the contributions to be paid in future, and therefore the amount of the employer's future service obligation, an element which is at the centre of any provision to be made under paragraph (d)(ii). It would be very odd, if the disposable surplus is more than enough to provide the 30 year contribution holiday which is envisaged under (d)(ii), for the calculation of the relevant amount not to take into account the effect on the sum required to provide such a holiday of action taken by the scheme under (e), whichever way it might go.
38. That reading of the clause leads me to conclude that Mr Green's first submission is wrong. But I also think the same conclusion follows more simply from the words and structure of clause 11 as a whole, because it seems to me that the clause does not envisage the Actuary looking on to consider the cost of what may be done under (d), let alone (e), before deciding what is the disposable surplus. In my judgment his task at that stage is only that of fixing the threshold, so to speak, as a matter of prudence, by which to preserve part of the raw surplus which he considers ought not to be applied in whatever way, whether under paragraphs (d) or (e) of clause 11 or, it would follow, under any other provisions of the Scheme.
39. Mr Green also pointed out that paragraph (d) contemplates that the disposable surplus may not be enough to be disposed of fully under (d)(i) and (ii), not that it may be more than enough. I do not regard the absence of any express provision as to what is to happen to any residual surplus as a significant factor either way. He also suggested that, if a disposable surplus can only be disposed of under (d) and (e) there would be a symmetry between the position of surplus and the position of deficiency, in which the only thing that can be done is to require the employer to make good the deficiency. I do not find that convincing. If there is a deficiency, that is all that one would expect to find provided for, in the nature of things. If there is a disposable surplus, it can be used to write off any past deficiency, under (d)(i), but it can also be used for other things, and the question is whether and if so how the Deed provides for it to be so used.
40. Then I come to the next point, on the footing that disposable surplus includes any residual surplus. Does the scheme made under (b) have to deal with the whole of the disposable surplus, or may (or must) it be limited (as Mr Green submits) to that which falls to be dealt with under (d) taking into account, if relevant, any action under (e)? If it is not so limited, the parties also diverge as to what may be done as regards the residual surplus. Mr Green submits that, if a paragraph (b) scheme can deal with residual surplus at all, the clause provides a free-standing code as to how it may be dealt with, and that anything may be done so long as (i) it is consistent with the main objects clause, and (ii) it respects Revenue requirements, so that the Scheme remains an approved scheme, and (iii) the trustees and the employer are able to agree on it, or the appointed actuary approves it in default of agreement under paragraph (b). Mr Inglis-Jones and Mr Simmonds submit that residual surplus must be dealt with under other provisions of the Scheme, notably clause 18. If Mr Green's free-standing code argument is correct, they take issue with the scope of the action possible under the clause, in particular as to whether it can include the making of reserves, or repayments to employers.
41. In my judgment the correct reading of clause 11 is that a scheme under paragraph (b) may, but is not required to, dispose of the whole of the disposable surplus, and that the scope of the provision which may be made as regards residual surplus is not limited to what may be done under other clauses of the Scheme, though it is subject to the main objects clause and to clause 32 as to Revenue requirements. One of Mr Green's submissions for limiting a paragraph (b) scheme to what is provided for under (d) and (e) is that it is only matters of that kind which can sensibly be submitted to an actuary for determination in default of agreement. Conversely, Mr Inglis-Jones and Mr Simmonds submitted that, if it were so limited, there would be almost nothing for an actuary to adjudicate on, there would be so limited scope for disagreement. I was referred to observations of Robert Walker J in National Grid about the range of tasks that might reasonably be expected to be performed by actuaries at paragraph 95 of the judgment: see [1997] PLR page 178. When the arbiter was the Minister, it could not have been said that the scope of what could sensibly be submitted to his determination was necessarily limited to that which could be done under (d) or (e). The words of paragraph (b) cannot readily be understood as having changed their meaning with the substitution of a different arbiter. Moreover, I do not accept that an actuary experienced in pension scheme matters would not be a suitable arbiter. It may be that another professional might have been used, but an actuary (who could be the Scheme Actuary) could in my judgment be expected to be capable of deciding fairly between the rival contentions, even if the scope of the matters the subject of the disagreement is wide. Accordingly, I do not accept that this argument supports either Mr Green's reading of disposable surplus as not including residual surplus, or his submission that a paragraph (b) scheme may not deal with residual surplus.
42. Apart from that point, it seems to me that this latter submission of Mr Green does not give proper effect to the clause as a whole. The trustees must make a scheme for disposing of the disposable surplus, to which the Employer agrees (with the default provision already discussed), and that scheme must make the provision specified in paragraph (d), and may also, if the case arises, make provision such as is mentioned in paragraph (e). While I accept that at the outset in 1948 it may very well not have been supposed that there would ever be a balance of disposable surplus remaining after those provisions had been satisfied, the question is what effect the words used have, in the present circumstances. The absence of an express provision is at best equivocal.
43. Mr Inglis-Jones and Mr Simmonds submitted that clause 11 imposes a duty on the trustees to make a scheme which will dispose of the whole disposable surplus, but that in order to do so in respect of residual surplus, the trustees must have resort to other provisions of the Scheme, and they identify clause 18 for the purpose. That presents a difficulty, having regard to the different procedures which apply under the two clauses, and the fact that clause 18 requires an exercise of the trustees' discretion. Theoretically, at least, a paragraph (b) scheme might be proposed by a bare majority of the trustees, though opposed by all the other trustees, so that any element of the proposal which requires action under clause 18 would not secure the majority required under that clause. Equally, the trustees might propose a scheme to which the employer would not agree, and in default the appointed actuary might determine that a somewhat different scheme should be put into effect, to which, again, so many of the trustees felt unable, in conscience, to agree that the vote in favour by a special majority which is required by clause 18 could not be passed. I do not see that clause 18 can be read as subject to a proviso whereby, if the amendments are proposed in order to give effect to a paragraph (b) scheme, they can be brought into effect under clause 18 without the votes of the special majority of trustees. There would therefore be an impasse in which the paragraph (b) scheme could not be put into effect, despite the terms of paragraph (b) under which the scheme is to "come into force" either as approved by the employer or with such amendments (if any) as may be determined by the appointed actuary.
44. Mr Inglis-Jones and Mr Simmonds pointed out, in support of their contention, that if the action to be taken under a paragraph (b) scheme involves alteration of benefits, it is almost certain that there will need to be an amendment of the rules in any event to reflect the change, so that the difficulty of the interface between clauses 11 and 18 would not be avoided. Mr Green pointed to clause 24, which does not require a rule amendment even though it may be used to confer general improvements of benefit which, if made irrevocably, would be expected to be reflected in the rules. That clause proceeds on the basis that, once the notice has been given, then, subject to payment if necessary, the specified benefits shall be provided. This clause can be used for conferring benefits on an individual basis or for small groups of Members or Pensioners, as well as for people who are or were employees of the Employer but are not Members or Pensioners. Thus by no means every use of clause 24 would lead to something that could sensibly be made the subject of a rule change. If, however, a general enhancement were put into effect under this clause, as it could be, first, it would not depend on a rule change for its effectiveness, but, secondly, if it were put into effect by a notice under the clause, it would hardly be controversial for the trustees to recognise the result by amending the rules under clause 18 in appropriate terms. Equally, whereas on the one hand the problem I have identified could arise if a paragraph (b) scheme depended on action under clause 18 for its effectiveness, on the other hand if the paragraph (b) scheme is effective in accordance with its terms by virtue of clause 11 alone ("shall come into force"), then it would be, again, a mere formality for the trustees to record that position, if appropriate, by changing the rules as appropriate under clause 18, and not to do so might be regarded as eccentric.
45. More generally, it seems to me that clause 11 and clause 18 are dealing with separate matters, and there is no reason to read clause 11 as requiring the invocation of clause 18 to give effect to a paragraph (b) scheme. For this reason, I prefer Mr Green's contention that clause 11 is free-standing, if (as I consider) it does extend to the disposal of residual surplus. Mr Inglis-Jones and Mr Simmonds submitted that it would be odd for clause 11 to confer a very wide power of dealing with residual surplus, when other provisions in the Scheme which involve changing the application of the Fund are subject to careful provisos. As regards that, clause 18, the main other provision, is of course subject to provisos, both by way of the four paragraphs which prohibit its use in particular ways, and by the special majority provision, which means that an amendment cannot be made except with the favourable votes of at least some of both the Employers' Representatives and the Members' Representatives among the trustees. Of course all the trustees, in deciding what position to adopt on a particular point, must and will have regard to their duties as trustees, whether they became trustees by nomination by the employer or by election by members or pensioners. They are not mandated, and all are subject to the same duties. However, there are many points on which reasonable trustees approaching the matter properly may legitimately come to different conclusions and it would be unrealistic not to recognise that different trustees may be influenced in that by their different perspectives. More commonly among modern private sector schemes, the amendment power is exercisable by the trustees but only with the consent of the employer. Clause 18 achieves a different kind of balance, but a balance nevertheless. Clause 11 on the other hand achieves balance by the normal method of requiring the employer's agreement to a proposal by the trustees. Since that will apply to any aspect of the proposed scheme, and since it is undoubtedly governed in any event by clause 2 as well as by the requirement to observe Revenue restrictions, it is not necessary to read in other limitations on the content of the scheme.
46. They also submitted that to find that clause 11 creates its own free-standing power involves the implication of a term into the Trust Deed which, they submitted, could only be justified on the contractual test of necessity, and which does not pass that test in this case. In my judgment the necessity test is satisfied, if I am right that a paragraph (b) scheme may cover residual surplus, because of the mismatch between the procedure under clause 11 and that under clause 18.
47. Mr Inglis-Jones and Mr Simmonds submitted that the trustees were under a duty to make a scheme and that the scheme had to dispose of the whole disposable surplus. The first point is clearly correct. The second depends on the use of the words "a scheme for disposing of the disposable surplus". They submit that "to dispose of" implies finality, from which they also submit that you cannot "dispose of" any part of a residual surplus by setting up a reserve, because that is, inherently, provisional, not final; they say it is the opposite of disposing of that part of the fund. I was shown various dictionary definitions, including some from editions current in 1948. It is a fair point that most of the definitions, other than those said to be obsolete, involve an element of the definitive, such as " to deal with definitely". I am guided more usefully by the context of the clause and the Scheme as a whole than by particular meanings culled from dictionaries of whatever date. Disposing of a particular resource is the natural thing to expect to do with something which is defined as disposable. It is defined as disposable because it does not need to be earmarked to meet past service liabilities. Part of it is to be disposed of by being earmarked to meet other liabilities, first for deficiency payments (if relevant) and secondly, in any event, for future service liabilities. The rest is available to be disposed of otherwise. It will not be lost to the fund, or at least not directly, unless a repayment to the employer is permissible and is to be made. It is not therefore a disposal in the sense of "getting rid of", or parting with, an asset. It is a question of allocating part of the fund to particular purposes. I accept Mr Inglis-Jones' and Mr Simmonds' submission that "dispose of" carries a meaning of definitive allocation, and that setting a part of the disposable surplus aside as a reserve would not satisfy that aspect of the meaning.
48. On the other hand, I do not accept Mr Inglis-Jones' and Mr Simmonds' submission that the scheme must dispose of the whole of the disposable surplus. It seems to me that a paragraph (b) scheme which provides, first, as it must, for paragraph (d)(i) and (ii) to be satisfied to the full, and then goes on to make provision for some of the residual surplus, but deliberately leaves some of it unallocated, or allocates some of it expressly as a reserve, is nevertheless a scheme for disposing of the disposable surplus, despite not providing for disposing of it all, and so it would be even if no provision was made beyond that which is required under paragraph (d). That seems to me to be a legitimate reading of the clause and a better one in the context of the Scheme as a whole than either Mr Green's preferred reading, that the scheme cannot deal with residual surplus, or that proposed by Mr Inglis-Jones and Mr Simmonds, that it must deal definitively with all of the residual surplus. It is more flexible; it is therefore more likely to produce sensible results, by way of the process of negotiation which is inherent in paragraph (b), whereas either of the two more rigid readings would, I think, be likely to produce more arbitrary results, in requiring either that the whole residual surplus be left to the discretionary operation of clause 18, or that the whole must be applied irrevocably, to the last penny, in one way or another. I was reminded of Robert Walker J's comment in his judgment in the National Grid case that the ESPS structure for coping with a similar situation was a clumsy one, which he illuminated with a graphic analogy: see paragraph 22 of his judgment, and see also paragraph 75, [1997] PLR pages 164 and 174. It was submitted that I should not expect to find in APS the sort of well-designed flexibility and consistency, born of years of experience in drafting pension schemes, which one would hope to find in a modern private sector scheme. That is a fair comment, but it is not a reason for not seeking a more rather than a less practical and sensible reading of the clauses, so long as it is based on a proper reading of the clause and the Deed as a whole.
49. Mr Inglis-Jones and Mr Simmonds both submitted that there was no good reason to read the clause as allowing for the creation of a reserve, since the actuarial process is likely to have involved already elements of caution both in making the basic valuation, before even a raw surplus is identified, and then in determining the amount of disposable surplus. Why, they ask, should there be any need for yet another reserve to be allowed for? The making of a reserve at the stage of a paragraph (b) scheme, either expressly or by failing to deal with a part of the fund, is the choice of the trustees, with the agreement of the employer, rather than of the Actuary. Of course the trustees and the employer will take account of the Actuary's advice and of what he has already allowed for, but I do not see why, if the language allows, the trustees should be precluded from building an element of reserve into what they propose under paragraph (b), nor why the employer should not propose it in turn if the trustees do not.
50. À propos of reserves, Mr Green had a submission similar to that which I have mentioned and rejected concerning the existence of a material risk that, despite being given a 30 year contribution holiday, the employer will have to resume contributions or make deficiency contributions within that time. He submitted that, if a paragraph (b) scheme may provide for a reserve, then if the Actuary advises that such a material risk such as I have mentioned does exist, the trustees can only properly exercise their powers under paragraph (b) by making a reserve sufficient to eliminate that material risk. I do not accept that, but I do accept that it is open to the trustees to provide for a reserve in a paragraph (b) scheme. I have commented in paragraph 30 above as to the prospect that the actuarial forecast will not match the eventual out-turn of the scheme. Just as it would be wrong to regard the Actuary as bound to make a particular reserve, before certifying the amount of disposable surplus, though he may well be entitled to do so in the exercise of his professional judgment, so it would be wrong to regard the trustees as compelled to use their powers under paragraph (b) to make an additional reserve of the kind proposed out of any residual surplus before applying any part of it in, for example, making benefit improvements, though I regard it as open to them to do so if they consider it appropriate.
51. I must say something about repayments to the employer. In my judgment, these are theoretically possible under a paragraph (b) scheme, though not in practice possible in present circumstances. Moreover, even if the Scheme did not permit them, the legislation would allow them to be made if the circumstances required. The prohibition on repayment to the employer, except of an ultimate surplus in a winding-up, originates with Revenue requirements, but is not to be regarded as any the less important because of its source and the fact that it might not be needed, or not in the same terms, nowadays. It is reflected in APS by clause 18(ii) and by the absence of any other provision for such repayment except clause 19(d), and some minor cases of no significance, in the express terms of the Scheme. There are circumstances, though they have not yet existed in relation to APS despite its history of surplus, in which the Revenue regards a pension scheme as seriously over-funded and may require arrangements to be made to reduce the over-funding if the scheme is to retain favourable fiscal treatment. This is governed by section 603 of, and Schedule 22 to, the Income and Corporation Taxes Act 1988. Among the arrangements which can be made is a repayment to the employer. The over-funding exists if, on the prescribed basis, the assets of the scheme exceed 105% of its liabilities. The basis of valuation is quite different from that used for ordinary actuarial valuations, or for the Minimum Funding Requirement, so that APS could be regarded as having been more than 120% funded for MFR or ordinary actuarial purposes, but less than 105% funded for Schedule 22 purposes. Since 1973 there has been a statutory power, originally vested in the Occupational Pensions Board, to modify ongoing pension schemes whose provisions do not permit a repayment to the employer so as to make such a repayment possible, but this is only exercisable where the scheme is more than 105% funded on the Schedule 22 basis. The present legislation on the point is section 69 of the Pensions Act 1995. Conversely, where the provisions of a scheme do permit repayment to the employer, section 37 of the 1995 Act applies so that only the trustees have the power, and so that it cannot be exercised except in pursuance of arrangements made under Schedule 22. Thus, whether or not a paragraph (b) scheme can permit repayment to the employer is a somewhat academic question. The only difference it makes is as to whether a modification order is one of the several things needed before a repayment can be made.
52. It was submitted that a repayment to the employer could not be consistent with the main objects clause, and it may indeed be asked why trustees should in any circumstances agree to part with some of the fund for the benefit of the employer. The answer lies in the process of negotiation which is intrinsic to the paragraph 11(b) process if there is a disposable surplus, and applies in many, if not most schemes, in one situation or another where there is balance between the position of the employer and the employee and pensioner beneficiaries, through the trustees. The words of Millett J, as he then was, in Re Courage Group's Pension Schemes [1987] 1 W.L.R. 495 at 515 are very pertinent, in particular the following (though the passage ought to be read in context of the concluding passage from 515F to the end):

    "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."

53. It is therefore a question of negotiation, in which the trustees, acting in accordance with their fiduciary duties as such, have an interest in securing enhancements of benefit for members and pensioners, and the employer, who has to comply with the duty of good faith recognised in Imperial Group Pension Trust Ltd v. Imperial Tobacco Ltd [1991] 1 W.L.R. 589, has an interest, if the circumstances are right, in securing the return of part of the surplus. Of course, the question can only arise, in practice, where the scheme is very largely over-funded and there are fiscal implications of failing to make suitable arrangements. In APS the trustees might be regarded as having a relatively strong bargaining position in some respects, what with the absence of a requirement for the employer's consent under clause 18, and the special protection under clause 18(iii) for future benefits. On the other hand, in some ways the scheme is so generous already, with its compulsory and unlimited index-linking of pensions and the mandatory augmentation of benefits in winding-up, that there may be less scope for improvement for the members and pensioners than there would be in some other schemes. However that may be, in those limited circumstances in which the question of repayment to an employer might arise at all, in my judgment it is something that is within the scope of a paragraph (b) scheme, subject to the effect of the legislation.

Clause 24

54. As I have mentioned Mr Inglis-Jones put to me a separate point on clause 24. For this purpose, I must mention the history and provenance of the clause. As of a rule change in 1983, rule 13A in Part VI (and others in other Parts) gave an employer a discretionary power to augment a member's benefits at early retirement. It also provided that within a given period of the commencement of an augmented pension "the Employer shall pay to the Management Trustees by way of contribution to the Scheme a sum that is the Actuarial Equivalent of the augmentation element of the pension". Actuarial Equivalent means such amount as the Actuary shall certify as being appropriate. Mr Inglis-Jones submits that the employer had actually to pay the sum, and could not draw on any existing surplus to satisfy its obligation. I can see the basis for that submission.
55. That power was replaced in 1986 by a different provision, rule 34, not limited to early retirement, and closer to the present clause 24. The provision of additional benefits under the new rule was "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". Clause 24 came into the Trust Deed by amendment in 1990. Mr Inglis-Jones submits that clause 24 requires that the Employer actually pay the relevant amount into the fund, and he explains the words "if any" as referring to the case in which the changes are such that the Actuary regards them as cost-neutral. He submits that the employer had to pay under the original rule, that it would not be normal to allow an employer to use surplus without the trustees' consent, and that the clause should be construed accordingly. I am not concerned with the propriety of the amendment to introduce clause 24. Though similar in some respects to rule 13A, it is different in words and in scope. In my judgment it has to be read on its own, in the context of the Deed as a whole but not of different wording of a different provision with more limited effect, no longer part of the Scheme, which applied in different circumstances. This is not a point on which the history of the provision is a legitimate aid to construction of the present provision, because of the different wording. I have no doubt that if clause 24 is used, it is open to the Actuary to take the view, depending of course on the facts, that, although the increased benefits will have a cost to the scheme, the funding of the scheme is adequate to cover that cost and that therefore no sum is necessary to be paid by the employer to the Fund for the purposes of clause 24.

The appointed actuary

56. There was some debate before me about the scope of the role of the appointed actuary, but in the end I do not think there was anything much between the parties as to this, once the question is decided as to what is the scope of a paragraph (b) scheme over which he has authority. I realise that the conclusion to which I have come, that, although there is a duty to make a paragraph (b) scheme, it does not have to dispose of the entire disposable surplus, means that there is more rather than less scope for disagreement between the trustees and the employer, and therefore the area over which the actuary has to adjudicate is the more extensive. It seems to me clear that the actuary has to consider the proposals by the 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 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.

The National Grid and National Power litigation

57. The Electricity Supply Pension Scheme (ESPS) is an industry-wide scheme originating in schemes dating back to 1949, but which still governs pension provision for employees of the privatised electricity companies. It is not an ordinary balance of cost scheme, because employers are required in any event to pay standard contributions at twice the rate of their employees. It does however have balance of cost elements. Clause 13 which governs employers' contributions provides for the standard contribution, and also for deficiency payments under clause 13(1)(e), and recognises that if a deficit is revealed by an actuarial valuation, employers may come under an obligation to make additional contributions to cover the deficiency, pursuant to arrangements made under clause 14(4). Clause 14(5) applies where on an actuarial valuation the actuary certifies that a past service surplus is disclosed. It obliges the employer to make arrangements, certified by the actuary as reasonable, "to deal with such surplus", and to give notice of such arrangements to the scheme trustees. In its judgment the Court of Appeal records that it was common ground that the scheme permits the employers to take more decisions unilaterally than is usual in modern pension schemes, and noted that it was described by Counsel as very one-sided and atypical and as giving the trustees a much smaller role than is the case in most pension schemes today: see [2000] ICR 182 paragraph 12.
58. On the 1992 valuation in respect of the National Grid part of ESPS, a past service surplus was disclosed, so that arrangements had to be made under clause 14(5). National Grid decided on arrangements which included some benefit improvements, a reduction in employer's contributions for the future and the elimination of deficiency payments which had arisen from a previous valuation. The actuary certified these arrangements as reasonable. Later two pensioners complained to the Pensions Ombudsman about the arrangements, and he found that they did not comply with the relevant obligations, in particular that such arrangements could not justify the writing off of an employer's existing obligation to make deficiency payments under clause 13(1)(e), and more generally that the scope of arrangements which could be made under clause 14(5) was not unlimited, as the employers argued, but was limited to things that could be done under other provisions of ESPS.
59. National Grid and the trustees appealed. National Power, to which similar criticisms might have been applied as regards what had been done in its sector of ESPS on the 1992 valuation and the next one after that, took the initiative in commencing proceedings to have it decided whether matters had been dealt with correctly in their case. The various proceedings came before Robert Walker J whose judgment is reported at [1997] PLR 157. He allowed the appeals, holding that clause 14(5) did create a free-standing power, not dependent on or limited by what could be done under other provisions of ESPS, and held correspondingly that matters had been dealt with correctly by National Power. An appeal came before the Court of Appeal, and was allowed, in a judgment reported at [2000] ICR 174. The Court of Appeal held that clause 14(5) did not confer a power on the employer to forgive itself unilaterally its existing liability under clause 13(1)(e): see paragraph 56 at [2000] ICR 193. As it happens the House of Lords has been hearing argument on appeal from that decision in the course of this week.
60. Clearly there are some similarities between the relevant provisions of ESPS and those of APS. In particular Robert Walker J said of clauses 14(4) and (5) at paragraph 75, [1997] PLR 174, that "together they provide a mechanism (although if slavishly followed a very clumsy one) for action to be taken, on the occasion of periodic actuarial valuations, towards bringing the scheme into actuarial equilibrium. To use another metaphor, they provide the mechanism for setting a new course into the middle channel between under-funding and over-funding". The same might be said of clause 11(b) to (e) in APS. However there are also important differences. Although APS is old-fashioned in some ways and bears clear marks of its public sector provenance, it is nothing like as one-sided as ESPS. In ESPS both the making of arrangements under clause 14 and, so far as I can tell, the making of amendments to the scheme under clause 41 were matters for the employer alone, subject in the case of clause 14(5) to the actuary's certificate as to reasonableness. In APS the power to provide for additional discretionary benefits under clause 24 is up to the employer alone, but the making of a paragraph (b) scheme under clause 11 is a task for the trustees to propose and the employer to agree, with the provision already noted in case of failure to agree. Amendments to the scheme do not involve the employer at all, as such, though there is the provision for a special majority of trustees. It is clear that the Court of Appeal was influenced in its decision by the one-sided nature of ESPS: see paragraph 47 at [2000] ICR 191. Given those differences, let alone others, between ESPS and APS, it seems to me that the decision on clause 14(5) of ESPS cannot be a guide to the correct conclusion on clause 11 of APS, though I have noted and considered the matters in each judgment on which the various Counsel before me relied. My judgment must depend on the words used in the particular scheme before me, APS, and the facts otherwise relevant to that scheme. On that material I come to the conclusions already expressed on the main questions of construction, and I will answer the several questions in the Claim Form accordingly, as follows.

The Questions in the Amended Claim Form

61. Question 1 is: 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? It is common ground that the answer is that the Actuary is not so constrained: see paragraphs 23 and 28 above.
62. Question 2 is: 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:

1. the scheme which the Management Trustees might wish to make to dispose of that 'disposable surplus' under Clause 11(b)?; and/or
2. a potential use of Clause 24 by the Employer?

63. The answer is that 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: see paragraphs 28 and 29 above. 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 the Actuary certifies the amount of the disposable surplus: see paragraph 29 above.
64. Question 3 was formulated on the basis that it only arose if a scheme under clause 11(b) could not create a reserve. However it does not only arise in that case. Omitting the words which are irrelevant for this reason, the question is this: 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 where 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)? The answer is that it may be, and it is a matter for the professional judgment of the Actuary: see paragraph 30 above.
65. Question 4 is in the following terms, amending the quotation from clause 11 for completeness: 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:-

1. confers a free-standing power to dispose of the 'disposable surplus' certified by the Actuary without exercising powers conferred on them elsewhere in the Scheme (in particular under Clause 18)?; or
2. only permits the Management Trustees to dispose of such 'disposable surplus' by exercising powers conferred on them elsewhere in the Scheme (in particular under Clause 18)?

66. The answer is in sense (i) rather than (ii): see paragraphs 40 to 49 above.
67. Question 5 is this: 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)? The answer is yes: see paragraphs 34 to 39 above.
68. Question 6 is: 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 APS? The answer is that it is restricted by the main objects provision in clause 2, and by the requirement to observe Inland Revenue constraints under clause 32, but not otherwise: see paragraph 41.
69. Question 7 was also common ground. It is as follows: if the answer to 5 above is 'no', whether the Management Trustees may exercise their powers under Clause 18 to amend the provisions of APS 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)? In terms it does not arise, but all Counsel agreed, and it is indeed clear, that 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.
70. Question 8 does arise. It is in these terms, again amending the quotation from clause 11 for completeness: 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:

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

1. the making of a reserve
2. the provision of benefit improvements (whether as directed by the Employer under Clause 24 or otherwise);
3. the provision of new benefits to and/or in respect of APS beneficiaries;
4. the making of a payment to the Employer; and/or
5. the reduction or suspension of employee contributions?; and/or

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

71. The answers to these points are as follows. 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 (though any such provision could only arise in the special circumstances described in paragraph 51 above), 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, as I have held, 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: see paragraphs 41 and 48 to 53 above.
72. Question 9 is as follows. If the answer to 8.1 (a) above is "yes", whether the Management Trustees are permitted under Clause 11(b) to dispose of the 'disposable surplus' in any other, 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 11(c)? The answer is yes; it will depend on their judgment, on advice, what provision they choose to make, if any, by way of a reserve: see paragraph 50 above.
73. As for question 10, concerning the appointed actuary, it asks this: 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? The answer is that the actuary must have regard to the interests of all concerned including the employer; see more generally paragraph 56 above.
74. The Claim Form does not expressly raise as one of the alternatives the construction which I hold to be correct, namely that although there is a duty under clause 11(b), in the given circumstances, to make a scheme for disposing of the disposable surplus, and the scheme must include any provision which is required by clause 11(d)(i) and (ii) on the particular facts, if there remains a balance of disposable surplus thereafter, the scheme may, but need not, include other provision for disposing of the balance of the disposable surplus, and need not dispose of all of it. The court's order will declare the position accordingly.
75. In the course of explaining my reasoning on the various questions at issue I have not dealt expressly with every point put to me by Counsel, but I have reviewed not only their respective skeleton arguments but also the transcript of their submissions with which I was supplied, and I believe that I have taken account, though sometimes silently, of all points put to me in coming to my decision. I am grateful to all Counsel for their succinct submissions which enabled the hearing to be concluded some time short of the estimate.