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England and Wales High Court (Chancery Division) Decisions
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AON Trust Corporation Ltd v KPMG & Ors [2004] EWHC 1844 (Ch) (29 July 2004)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2004/1844.html
Cite as:
[2005] WLR 995,
[2005] 1 WLR 995,
[2005] 3 All ER 587,
[2004] EWHC 1844 (Ch)
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Neutral Citation Number: [2004] EWHC 1844 (Ch) |
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Case No: HC04 C 00274 |
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
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Royal Courts of Justice Strand, London, WC2A 2LL |
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29th July 2004 |
B e f o r e :
THE VICE-CHANCELLOR
____________________
Between:
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AON TRUST CORPORATION LIMITED
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Claimant
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- and -
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(1) KPMG (2) RUTH MUIR JAMES (3) JULIAN WALKER
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Defendants
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____________________
Mr. Christopher Nugee QC and Mr. Jonathan Evans(instructed by Messrs DLA) for the Claimant
Mr. Christopher Tidmarsh QC (instructed by Messrs Herbert Smith) for the 1st Defendant
Mr. Nicholas Warren QC (instructed by Messrs Pinsents) for the 2nd Defendant
Mr. Brian Green QC and Ms Emily Campbell (instructed by Messrs Macfarlanes) for the 3rd Defendant
Hearing dates : 14th, 15th and 16th July 2004
____________________
HTML VERSION OF JUDGMENT
____________________
Crown Copyright ©
The Vice-Chancellor :
Introduction
- What is now the KPMG Staff Pension Fund ("the Scheme") was constituted with effect from 1st July 1949 by a deed dated 20th June 1949. In essence it provided for both employees and the employer to pay into a fund constituted by the employer for the purpose of providing pensions for its permanent staff a sum equal to a specified percentage of that employee's salary for the time being. The deed provided both for amendments to the Scheme and for the adjustment of benefits by reference to either surpluses or deficits revealed by a quinquennial actuarial valuation. The benefit to which the member became entitled on retirement was a pension equal to the sum of the amounts arrived at by multiplying the payments into the fund made by the employee and employer by the factor set out in the table applicable at the time of payment. The factors shown in the tables in force from time to time varied in accordance with age and sex and were designed to give rise to a product equal to the prospective pension at normal retirement date to be expected from those payments on the basis of the actuarial assumptions made at that time.
- Between 1954 and 1998 the periodic actuarial valuations indicated a surplus and bonuses were declared in relation to accruing benefits. But the actuarial valuation as at 31st March 1999 disclosed a deficit of £600,000. With effect from 31st March 2000 the Scheme was varied so as to constitute two funds, a Pre-2000 Fund and a Post-2000 Fund. The Post-2000 Fund is a conventional money purchase scheme with which I am not concerned. The Pre-2000 Fund became a closed fund.
- The actuarial valuation carried out as at 31st March 2002 indicated that the deficit on the Pre-2000 Fund had increased to £71m, though it was capable of being reduced to £65m if half the fund was reinvested in equity investments, as, I understand, has now been done.
- The Part 8 application now before me was issued on 27th January 2004 by Aon Trust Corporation Ltd which was appointed as sole trustee of the Scheme on 23rd December 2002. The Trustee seeks the determination of the Court in respect of five questions. Two of them, Questions 3 and 4, are designed to resolve the issue whether the first defendant, KPMG, the well known firm of chartered accountants, is liable to make good the deficit in the Pre-2000 Fund either as the employer under the provisions of ss.56 to 61 or s.75 Pensions Act 1995 ("the 1995 Act") or by virtue of an obligation in the Scheme itself. Questions 1 and 2 concern the ability (if any) of the Trustee to reduce pensions in payment to members so as, if thought fit, to reduce or eliminate the deficiency. Question 5 seeks, in effect, the directions of the Court as to what the Trustee should do in the light of the answers to the prior questions. It is agreed that Question 5 should be adjourned until after I have given judgment on the others or such of them as now arise.
- The defendants are (1) KPMG, (2) Ruth Muir James and (3) Julian Walker. KPMG is joined because it is the Principal Employer under the Scheme and, depending on the answers to Questions 3 and 4, may be liable to make good the deficit. The second defendant ("the Pensioner Member") is a former employee of KPMG and a member of the Scheme. She is now receiving the pension due to her under the Scheme and has been joined to represent principally all other pensioners and also some members not yet in receipt of benefit. The third defendant ("the Active Member") is a member of the Scheme but has not retired. He is joined to represent all other members not in receipt of benefit. Appropriate representation orders are sought in respect of both the Pensioner Member and the Active Member.
The Scheme
- The provisions of the Scheme have been revoked and replaced and amended on numerous occasions since its inception in 1949. The document currently governing the Pre-2000 Fund is the Consolidated Text of the Third Deed of Revision dated 24th April 1996 as amended by five Deeds of Variation the last of which was dated 2nd January 2001. Schedule 1 contains what are described as New Clauses, Schedule 2 the General Rules applying to either or both the Pre- and Post-2000 Funds and Schedule 3 the Revenue Limits Rules for approval of both Pre- and Post-2000 Funds.
- There are 22 New Clauses in Schedule 1. They cover such matters as Interpretation, Trusts and Name of the Scheme, the Trustees, Investment and Safe Custody of the Fund and Accounts. Clause 8 deals with the Actuary and Actuarial Valuations. After providing for the appointment of an Actuary and for his valuations clauses 8.4 and 8.5 provide
"8.4 If an actuarial valuation or interim review of the Pre-2000 Fund shows a surplus the Trustees may with the consent of the Principal Employer and after taking the Actuary's advice and after making any such amendments to the Trust Deed and/or Rules as may be necessary, decrease the contributions of any Member and/or increase (by declaration of bonuses or interim bonuses or otherwise) the benefits or future benefits of any Member or other person entitled to receive any benefit from the Pre-2000 Fund.
8.5 If an actuarial valuation of the Pre-2000 Fund reveals a deficiency in the Pre-2000 Fund's resources the Trustees may with the consent of the Principal Employer make such adjustments and amendments to the benefits secured or thereafter accruing for and in respect of the Members as are necessary in the opinion of the Trustees after taking the Actuary's advice to secure the continued solvency of the Pre-2000 Fund."
- Clause 9 confers certain powers on the Trustees. Clause 10 provides for the augmentation of benefits at the request of the employer. It enables the employer to ask the Trustees to grant additional or new benefits. Before doing so the Trustees are required to obtain an estimate of the cost of compliance and advice as to how to fund it. By clause 10.3 the Trustees are required to grant the benefits so requested subject to the Revenue Limits and subject to the employer making such additional contributions to the General Fund as are necessary to fund the increase. Clause 10.4 points out that other provisions for augmentation are to be found in clause 8.4 (para 7 above) and Rule 21 (para 16 below).
- The Schedule continues with clauses concerning lump sum benefits, transfer payments, powers to buy or transfer out benefits, and employers. In the event of an employer ceasing to be a participating employer his obligation (clause 17.11.3) to pay any contributions ceases "except...any sum payable by it pursuant to Section 144 of the Pension Schemes Act 1993". Clause 18 provides that with the consent of the Principal Employer the Trustees have power
"at any time or times to alter, amend, add to and/or cancel all or any of the provisions of the Trust Deed or Rules provided that nothing shall be done which would:-
(a) cause the main purpose of the Scheme to cease to be that stated in Clause 2.3 or
(b) cause the payment or transfer of the Fund or any part of it to the Principal Employer or any Participating Employer."
- Clause 19 provides that the Principal Employer and the Trustees may terminate the Scheme in circumstances specified for each of them. One of the consequences prescribed by Clause 19.4.3 is that
"The Employers shall cease to have any obligation to pay any contributions to the Scheme except contributions due but unpaid at the date of termination and any sum payable by them pursuant to Section 144 of the Pension Schemes Act."
- Clause 20 deals with the winding up of the Scheme in the event of its termination. Clause 20.12 empowers the Trustees in the event of delay in realising the assets of the Scheme "including the discharge of any debt due to them from any of the Employers under Section 144 of the Pension Schemes Act" to apply assets of the Scheme in securing its liabilities. The remaining Clauses deal with a number of miscellaneous matters it is not necessary to describe.
- The General Rules contained in Schedule 2 are divided into 9 sections and an Appendix. Sections I, II and VIII are of general application, Sections III to VII apply to benefits payable out of the Pre-2000 Fund. Section I comprises rules 1 to 4. They deal with questions of interpretation, eligibility, membership and temporary absence. Section II comprising rules 5 and 6 deal with the contributions to be paid by members and employers respectively. The rules are now much more complicated than they were in 1949 but, in essence both the member and the employer are required to pay contributions equal to a specified percentage of the member's salary varying in accordance with age and bands of income (rules 5.1-5.5 and 6.1-6.5). In addition a member may pay voluntary contributions, called additional voluntary contributions (rule 5.6). The destination and use of such additional voluntary contributions depends on whether the member has agreed with the Trustee that they should be taken into account into the computation of benefits payable from the general fund. In that event the contributions are paid into the general fund (rule 5.8); but in the absence of such an agreement such contributions are to be applied by the Trustee in providing additional benefits which must be money purchase benefits within the meaning of s.75 Pensions Act 1995 (rule 5.9).
- Section III comprising rules 7 to 9 deals with Members' Pensions. Rules 7.1 and 7.2 provide
"7.1 A Member whose Pensionable Service terminates as a result of his retirement from Service on his Normal Pension Date shall be entitled to a pension from the Scheme which shall commence to be payable with effect from the day following his Normal Pension Date for the remainder of his lifetime and calculated in accordance with this Rule.
7.2 The annual amount of a Member's pension under sub-rule 7.1 shall be calculated as follows:
(1) by taking the total amount of the contributions paid by him and his Employer into the General Fund during or in respect of each Contribution Period up to and including the Contribution Period ending 31st March 2000 and multiplying it by the appropriate factor determined from the Tables in Appendix A in accordance with sub-rule 7.3 in order to give the amount of pension derived from each Contribution Period;
(2) by increasing the amounts determined in accordance with paragraph (1) of this sub-rule by bonuses declared pursuant to sub-Clause 8.4 or the corresponding provisions of the Trust Deed which it has superseded and/or by reducing them by any adjustments made pursuant to sub-Clause 8.5; and
(3) by aggregating the amounts of pension determined in accordance with paragraphs (1) and (2) of this sub-rule."
Sub-rule 7.3 identifies the relevant tables in Appendix A, which like those attached to the original deed governing the scheme, specify the factor to be applied to the contribution to ascertain the amount of pension derived from particular Contribution Periods.
- As a simplified illustration of how the rule works take a male aged 25 at his next birthday in the calendar year 1999. The factor is 0.960 for a pension payable unreduced at age 65. If in that year he earned £20,000 and the contribution rate for both him and the employer was 4% then the computation of benefit on retirement at age 65 would be £20,000 x 8% (i.e. £1,600) x 0.960 = £1,536 per annum. If in the same year there had been a bonus declaration of 5% under Clause 8.4 then the pension in respect of that year of service would have increased to £1,612.80 (£1,536 + (5% x £1,536)). On the other hand a deduction of the like percentage under Clause 8.5 would give rise to a pension aged 65 of only £1,459.20. The formula is applied for each year of service to the contributions made in that year and the pension at retirement is the sum of the product of such computations for each year of service.
- Rule 8 deals with the pensions of early leavers. The general rule is to adjust the pension due on normal retirement date by discounting it to the date of actual retirement. But in the case of early retirement through ill-health Rule 8.4 entitles the Trustee to determine the annual amount of the pension after consultation with the principal employer and having taken advice from the actuary but otherwise in its discretion so long as it complies with certain preservation regulations.
- Section IV deals with alternatives to member's pensions. Section V deals with benefits on the member's death both before and after retirement or normal retirement age. Section VI provides for early leavers. Section VII sets out arrangements for payments and for increases. Rule 20.4 recognises that no increase in pension is guaranteed but that increases may be payable as a consequence of the declaration of a bonus in accordance with Clause 8.4. Section VIII deals with what is called a Special Account. The Trustee is bound to maintain such an account with sub-accounts for each member. The Trustees are required to credit to such sub-accounts amounts coming within one or more of the six descriptions set out in Rule 21.2. It is unnecessary to set them all out but they include (1) amounts representing the value of benefits purchased with additional voluntary contributions which, if paid, would exceed the Revenue limits (rule 5.11(2), (2)) amounts equivalent to the lump sum attributable to the employer's contributions in respect of a member who died in service with no dependants to whom the Trustee might in its discretion pay the same (Rule 12.2). By Rule 21.4 the Trustee is required at the direction of the Principal Employer to apply the credit balance on the special account in payment of a member's future contributions or in payment of additional benefits or for any other purpose of the Trust Deed and Rules.
- The Appendix contains 9 tables setting out the factors to be applied for any given period of service according to age and sex from the inception of the Scheme down to 31st March 2000. These are required to compute the benefits accrued in the Pre-2000 Fund. They have no application to the Post-2000 Fund. Schedule 3 contains details of the Revenue limits which, by Clause 2.4 of the New Clauses contained in Schedule 1, restrict both the benefits and contributions which may be provided and made. No party has referred me to any provision of Schedule 3 or suggested that any of its contents is relevant to any of the questions I have to decide.
Question 1
- The issues raised by this question are
"whether the power under clause 8.5... includes power...
(i) to make reductions to pensions in payment at the date of exercise of the power;
(ii) to make different reductions to the benefits of different members...."
There is no dispute about (ii). Accordingly if the answer to (i) is in the affirmative I am invited to give an affirmative to answer to (ii) as well.
- The Pensioner Member invites me to answer question 1(i) in the negative. She submits that a pension in payment cannot be reduced. She relies on the terms of the rules and what she submits is the practice of the Inland Revenue in relation to approved schemes. The Active Member, by contrast, submits that there is no evidence of any relevant practice of the Inland Revenue and the terms of the Scheme show that the power may be exercised in relation to pensions in payment as well as to any other benefit.
- It is convenient to deal at the outset with the question of the Inland Revenue practice. Such practice may provide a background against which to construe the scheme documents, see Stevens v Bell [2002] PLR 247. The evidence in this regard falls into two categories, published practice notes and recent correspondence and telephone conversations between representatives of the parties' solicitors and officials of the Inland Revenue. The published practice notes relied on are IR12 entitled Practice Notes on the Approval of Occupational Pension Schemes (1979) paragraphs 6.31 to 6.33 and 22.8 and the same document as published in 1991 paragraph 7.22.
- Paragraphs 6.31 to 6.33 of the 1979 Version point out that the pension is not assignable, may not commence before normal pension date and must be payable for the pensioner's life as a minimum period, subject to provision for forfeiture but only in exceptional circumstances. Paragraph 6.33 points out that the annual rate may be varied where it is drawn before state pensionable age so that the pensioner's total income from occupational and state pensions is roughly constant throughout retirement. This would involve a higher pension from the occupational pension scheme before state pensionable age. Paragraph 22.8 merely points out that if a scheme is amended previous approvals do not continue so that approval of the Inland Revenue to the amendment is required. Paragraph 7.22 of the 1991 Version deals with the same point as paragraph 6.33 of the 1979 Version. Nothing is said in either version about reductions in pension after state pension age for the purpose of securing the continued solvency of the fund.
- The evidence of the correspondence and telephone conversations with officials of the Inland Revenue is at best contradictory but inconclusive. The evidence does not, in my judgment, provide any support for the proposition that the Inland Revenue would not have approved the Scheme had they thought that clause 8.5 could be applied to reduce pensions in payment.
- Accordingly, the resolution of this issue depends on the proper construction of the Scheme without any predisposition to one answer rather than the other in the light of any practice of the Inland Revenue. Counsel for the Pensioner Member points out that increases or decreases pursuant to clauses 8.4 and 8.5 have to be taken into account as required by Rule 7.2(2) in calculating the amount of a member's pension for the purposes of Rule 7.1. He relies on the fact that the pensioner is entitled to such a pension from his normal pension date "for the remainder of his lifetime". He points out that whereas clause 10.4 and Rule 20.4 contemplate increases to a pension in payment by, amongst other methods, a bonus declared under clause 8.4 there is no corresponding provision recognising or requiring its reduction in consequence of the operation of clause 8.5.
- This is disputed by Counsel for the Active Member. He points out that in clause 1 of the Scheme a member is defined as "an individual who has been admitted to membership of the scheme....and who remains entitled (whether prospectively or actually) to any benefit from the Scheme". He relies also on the fact that clause 8.5 operates on both benefits "secured" as well as "thereafter accruing". He points out that both rule 10.4 and 20.4 are in rules dealing expressly with increases so that it is hardly surprising that no provision is made in those rules for reductions.
- I prefer the submissions of Counsel for the Active Member. Clause 8 deals with actuarial valuations and their consequences. Such a valuation is bound to take account of liabilities in respect of pensions in payment as well as in prospect. The terms of clause 8.5, when read with the definition of member, reflect this requirement. The definition of member and the reference to benefits secured each embrace pensions in payment. Rule 7.2(2) expressly contemplates a reduction in accordance with clause 8.5 before retirement but does not exclude the consequence of a reduction thereafter. Whether or not the further provisions in relation to increases to be found in clause 10.4 and rule 20.4 are necessary, I do not consider that the absence of a corresponding provision in respect of clause 8.5 leads to any conclusion different from that which the clear language of both clause 8.5 and rule 7.2(2) require.
- Accordingly I answer question 1(i) in the affirmative. As I have already indicated no party was concerned to argue for a negative answer to question 1(ii). Having considered the matter for myself I think that they were right not to do so. If the power exists at all, there are no words to indicate that it must be exercised in the same way for all members. Nor, given the fiduciary duty of the Trustee, is there any reason to imply any such limitation. Accordingly I will answer question 1(ii) in the affirmative also.
Question 2
- S.67 of the 1995 Act, so far as relevant, provides
"(1) This section applies to any power conferred on any person by an occupational pension scheme...to modify the scheme.
(2) The power cannot be exercised on any occasion in a manner which would or might affect any entitlement, accrued right or pension credit right of any member of the scheme acquired before the power is exercised unless the requirements under subsection (3) are satisfied.
(3) Those requirements are that, in respect of the exercise of the power in that manner on that occasion –
(a) the trustees have satisfied themselves that –
(i) the certification requirements, or
(ii) the requirements for consent,
are met in respect of that member, and
(b) where the power is exercised by a person other than the trustees, the trustees have approved the exercise of the power in that manner on that occasion."
Subsection (4) defines the expressions used in sub-paragraphs (i) and (ii) of subsection (3)(a) by reference to regulations. They are The Occupational Pension Schemes (Modification of Schemes) Regulations 1996 SI 2517/1996.
- Given that I have concluded that clause 8.5 confers on the Trustee the power to reduce pensions in payment, the question arises whether that power may be exercised free from the restrictions imposed by s.67. Accordingly Question 2 asks
"Whether and if so to what extent clause 8.5 is a power to modify the Scheme for the purposes of s.67 (1) Pensions Act 1995."
- Counsel for the Pensioner Member invites me to give an affirmative answer to that question. He points out that the section applies to any power to modify however it may be exercised and that the purpose of the section is to protect an existing entitlement. He submits that the exercise of the power conferred by clause 8.5 will reduce the pensions in payment and so affect the member concerned. He suggests that the reference to "adjustments and amendments" indicates that either is a modification and that, in any event, the exercise of the power conferred by clause 8.5 will necessitate some amendment to the Scheme under clause 18.
- Counsel for the Active Member contends for a negative answer to this question. He submits that the scheme which may not be modified save in accordance with s.67 includes clause 8.5 so that its exercise by an adjustment does not constitute a modification. His submission is limited to exercise by adjustment because he accepts that its exercise by amendment must engage s.67 because of the decision of the Court of Appeal in Stevens v Bell [2002] PLR 247.
- S.124 (5) of the 1995 Act incorporates the definition of "modifications" to be found in s.181 of the Pension Schemes Act 1993 ("the 1993 Act"). The latter section provides that
"unless the context otherwise requires –
"modifications includes additions, omissions and amendments, and related expressions shall be construed accordingly."
Thus an 'addition' or 'omission', not amounting to or requiring an amendment will be a modification. It follows that an adjustment requiring such an addition or omission comes within the section. This demonstrates that a modification does not require any change to the relevant documents.
- Then does the exercise of the power conferred by clause 8.5 necessitate such an addition or omission? In my view it does. The argument of Counsel for the Active Member appears to me to attribute to the word "scheme" a sense corresponding to the document in which it is recorded but excluding the rights conferred by it. It may be that an exercise of the power contained in clause 8.5 can be implemented without any alteration to the constituting documents of the scheme. In this sense an adjustment not involving an amendment can be made by deducting from the pension otherwise due the amount of the reduction. But to conclude from that consideration that the section does not apply appears to me to ignore the clear intention behind it.
- The purpose of the section is to protect, amongst other things, entitlements. A pension in payment is an entitlement under the scheme, Barclays Bank plc v Holmes [2000] PLR 339 para 129, albeit subject to reduction in the event of the exercise of the power conferred by clause 8.5. The entitlement is a part of the scheme. In my view to reduce the entitlement is, to that extent, to modify the scheme by the equivalent of an omission. The fact that the reduction or omission from that part of the scheme is effected by the use of another part of the scheme, that is clause 8.5, does not seem to me to be material. For these reasons I will answer question 2 in the affirmative.
Question 3
- Ss. 56 to 61 of the 1995 Act introduced the minimum funding requirement designed to ensure that the value of the assets of a scheme is not less than amount of its liabilities. Those sections make detailed provision for periodic valuations and other related matters. S.60 ensures that in the case of a serious underprovision, defined as a deficiency of more than 10%, the employer must pay into the scheme whatever is necessary to make up the value of the assets to at least 90% of the amount of the liabilities. S.75 takes the matter further and provides that the amount of any shortfall at an applicable time shall be treated as a debt due by the employer to the trustees.
- None of those provisions applies to an occupational pension scheme which is a money purchase scheme, see s.56 (2)(a) and s.75 (1). S.124 (5) of the 1995 Act incorporates definitions contained in the 1993 Act. In s.181 of the 1993 Act the expression "money purchase scheme" is defined to mean
"a pension scheme under which all the benefits that may be provided are money purchase benefits".
The same section provides that
""money purchase benefits" in relation to a member of a personal or occupational pension scheme or the widow or widower of a member of such a scheme, means benefits the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of the member and which are not average salary benefits;"
- There is no general definition of average salary benefits in either the 1993 Act or the 1995 Act. But a definition for the purposes of s.84 of the 1993 Act is conceded to be of general application. That definition is in the following terms
""average salary benefit" means benefit the rate or amount of which is calculated by reference to the average salary of a member over the period of service on which the benefit is based."
- Plainly it is of the greatest importance to all the parties to this claim to know whether the scheme is a money purchase scheme. Accordingly question 3 asks
"Whether the scheme is or is not a "money purchase scheme" (within the meaning of the Pension Schemes Act 1993 and the Pensions Act 1995)."
KPMG submits that it is. Both the Pensioner Member and the Active Member submit that it is not.
- The arguments on this question have been particularly wide-ranging. Counsel for KPMG has fastened on the definition of money purchase benefits and the other contexts in which it has been used for the purpose of supporting a submission as to the purpose and policy behind the definition. So regarded, he submits that all the benefits provided by the scheme as it stands are calculated by reference to payments rather than by reference to the average salary of the member and that the various powers to amend, augment or introduce other benefits, such as Clauses 8.4, 10 and 18 and Rule 21 do not affect the conclusion.
- This is disputed by Counsel for both the Pensioner Member and the Active Member. They point out that most of the contexts on which Counsel for KPMG relied relate to the use of the expression 'money purchase benefit' rather than the expression 'money purchase scheme'. They emphasise that the definition of the latter expression excludes any scheme under which any non money purchase benefit is provided. They contend that under this scheme none of the pension, bonuses declared under clause 8.4, ill-health early retirement benefits under rule 8.4, ex gratia payments funded out of the special account under rule 21.4 and benefits arising from additional voluntary contributions paid into the general account under rule 5.8 is a money purchase benefit. In addition they rely on the powers conferred by clauses 8.4, 10 and 18 as well as rule 21 for the proposition that other non money purchase benefits "may" be provided.
- I shall start by considering the derivation of the expression 'money purchase benefits' and the contexts in which it has been used. The earliest use to which my attention was drawn is in Schedule 1A to the Social Security Act 1985 which was inserted into the Social Security Act 1975 with effect from 1st January 1986. Such a benefit was defined as
"any benefit the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of him".
The schedule deals with the revaluation of pensions of early leavers, that is persons whose pensionable service terminates before normal pension age. Different methods of revaluation were to be applied to differently calculated pensions. Paragraph 3 dealt with pensions calculated by reference to the member's average salary, paragraph 4 to pensions calculated by reference to the member's length of service and paragraph 5 to pensions calculated by reference to a payment or payments made by the member or by any other person in respect of him. In the case of paragraph 5 "the investment yield and any bonuses arising from" such payments were to be applied in providing such benefit as would have been provided under the scheme.
- These provisions with amendments were re-enacted in ss. 84 and Schedule 3 to the 1993 Act. Schedule 3 provides for four methods of revaluation, final salary method, average salary method, flat rate method and money purchase method. The last mentioned method is applicable to money purchase benefits arising under an occupational pension scheme, see ss.84 (3). The method is to apply the investment yield and any bonuses arising from payments made by or on behalf of a member towards providing any pension or other retirement benefit which would have been payable under the scheme.
- I accept the submission of counsel for KPMG that the evident object of these provisions is to try to ensure that an early leaver should ultimately obtain a benefit equating as nearly as possible with what he would have got had he remained an active member of the scheme. Equally it demonstrates quite clearly that it is envisaged that a money purchase benefit arises from and is correlative to a fund, actual or notional, and its investment yield constituted by the contributions paid by the member and his employer.
- The second context in which the expression 'money purchase benefit' had been used is that of "contracting out". The Social Security Act 1986 made provision by s.6 and Schedule 2 for schemes providing money purchase benefits to contract out of the State Earnings Related Pension Scheme ("SERPS"). The definition of such benefits was
"benefits the rate or amount of which is calculated by reference to a payment or payments made by a member of the scheme or by any other person in respect of a member other than average salary benefits".
These provisions were re-enacted in ss.7 to 39 of the 1993 Act.
- The purpose of singling out money purchase benefits was to ensure that if the scheme was to be allowed to contract out, a member with only money purchase benefits must have special money purchase contracted-out rights rather than a salary-related guaranteed minimum pension. Thus the distinction recognised that a money purchase benefit had no guaranteed or defined benefit for it depended on the investment yield obtained or attributable to the fund derived actually or notionally from the contributions made by the member and his employer.
- The third context on which counsel for KPMG relied is s.144 of the 1993 Act. This was concerned with cases of a deficiency of assets on the winding up of the scheme or of the employer. It has been re-enacted with amendments in s.75 of the 1995 Act. The effect was to deem the deficiency to be a debt due from the employer to the trustees. The relevance for present purposes is that the schemes to which the provision applied excluded money purchase schemes as defined in s.181 of the 1993 Act.
- Counsel for KPMG submits that s.144 does not indicate a Parliamentary assumption that a money purchase scheme cannot be in deficit because the benefits are correlative with the assets in the fund, actual or notional. He submits that such a scheme may have a deficit if it is a flat rate scheme. He suggests that a deficit may also arise if the trustees instead of buying an annuity for the pensioner grant a pension of a specified amount which, in the event, cannot be fully met from the fund attributable to it. I will accept for the purposes of the argument, but without deciding, that these are real possibilities. Nevertheless it appears to me to be obvious that Parliament recognised that in a money purchase scheme in all normal circumstances the benefits are matched by equivalent assets. This is to be contrasted with a defined benefit scheme, such as a final salary scheme, when assets and liabilities will not match each other unless the actuarial and other assumptions on which the level of contribution was fixed actually occur.
- Counsel for the Active Member also relied on s.102ff of the 1993 Act, now repealed. This section provided for the automatic increase in certain pension benefits by reference to a limited retail price index and the most recent actuarial valuation. Its relevance is that it did not apply to a money purchase scheme as defined in s.181 nor to a pension from some other type of scheme which was a money purchase benefit. Counsel for KPMG submitted that no clear policy could be discerned. I do not agree. In my view it shows once again that Parliament envisaged that the money purchase benefit or scheme already provided to the member the benefit of the investment yield on the underlying fund, actual or notional so that there was no justification for providing a further increase by reference to the index.
- I was also referred to passages in the Report of the Pension Law Review Committee CM 2342 published in September 1993, better known as the Goode Report. In paragraph 2.2.2 the Committee disclaimed any intention to provide detailed and comprehensive explanations but the general descriptions they did give are instructive. In paragraph 2.2.11 they state that the most important division is between schemes where the benefits to be provided are related to members' earnings and schemes where the benefits provided are a product of the contributions made and the investment return on them.
- In paragraphs 2.2.12 – 2.2.17 they describe schemes in the former category including, in paragraph 2.2.17, schemes called 'average salary schemes'. These, though now rare, are described as schemes where the eventual pension is based on the member's salary over the whole period of employment, rather than just the final year or years.
- In paragraphs 2.2.18 to 2.2.20 the Committee describe money purchase schemes. They point out that the contributions payable by member and employer are fixed but the benefits payable on retirement variable "according to the investment performance of the resulting fund and the rate at which the fund can be converted into a pension at the time of retirement". They note that such schemes are often called defined contribution schemes. In paragraph 2.2.19 they said
"Though the final pension achieved will be linked indirectly to the individual's earnings during working life, there is no direct link between the pension and the member's salary at any particular time."
In paragraph 4.4.58 the Committee reiterated their view that "money purchase schemes are by their nature fully funded".
- Finally I must refer to the various contexts in which the expressions are used in the 1995 Act. I have already referred to the context provided by ss.56 to 61 and 75. S.73 deals with preferential liabilities in the winding up of a salary related occupational pension scheme. As a money purchase scheme is not a salary related scheme (see s.125(1)(a)), this section cannot apply to such a scheme. It is suggested that such non-application is another instance of Parliamentary recognition that in a money purchase scheme deficiencies do not normally arise. But this is to be contrasted with s.89 of the 1995 Act which authorises regulations providing for ss.56 to 60 and 75 to apply to money purchase schemes with or without modification.
- This excursus into the various contexts in which the definitions or concepts of money purchase benefits or schemes appear does show the characteristics such benefits or schemes are expected to have. First, a money purchase benefit cannot be a defined benefit because the investment yield from the underlying fund whether actual or notional cannot be precisely predicted. Second, a money purchase scheme is fully funded in the sense that liability for the benefits is in all normal circumstances exactly matched by available assets. Such schemes or benefits are to be contrasted with salary related schemes. They provide a benefit defined by reference to the salary of the member whether average or final. The liability for such benefit is unlikely to be exactly matched by available assets.
- I turn then to consider the various benefits for which this scheme provides. The first and most important is the pension computed in accordance with Rule 7.2. It comprises two elements, namely that prescribed by rule 7.2(1) and the bonuses declared in accordance with clause 8.4 included by rule 7.2(2). The first element requires the application of the factor to be ascertained from the table to the proportion of the member's earnings in that year, that is in the example given in paragraph 14 above £20,000 x 8% (i.e. £1,600) x 0.960 = £1,536 per annum. That process is repeated for each year of service and the aggregate represents the basic pension before the addition of bonuses. Counsel for KPMG submits that this computation complies with the definition of a money purchase benefit because the benefit (£1,536 pa) is calculated (x 0.960) by reference to the payment (£1,600). Counsel for the Pensioner Member and the Active Member dispute this. They contend that the benefit (£1,536 pa) is computed (x 8% (i.e. £1,600) x 0.960=) by reference to the salary of the member (£20,000). In a sense they are all right!
- I accept the submission of counsel for KPMG that the definition must be applied with regard to the substance of the calculation. In addition I consider that it must be interpreted and applied having due regard to the contexts in which it appears and the purposes for which it is applied. In my judgment the phrase "calculated by reference to" points to the yardstick or measure by which the benefit is to be ascertained or defined in the context of an occupational pension scheme. In a conventional money purchase scheme that will be the payments, actual or notional, into the fund for the ultimate benefit is defined only by what the fund will purchase at retirement. By contrast in a final salary scheme the benefit is ascertained or defined by reference to the final salary whether or not the liability for it has been matched by the contributions.
- An average earnings related scheme is likely to have resort to both earnings and contributions/payments in the ascertainment or definition of the benefit. It is necessary to do so in order to take account of both the level of earnings going to make up the average and the time when they arose. This, in my view, is the explanation for the exclusion of average salary benefits at the conclusion of the definition of "money purchase benefit". It was recognised that in the calculation of such benefits account must be taken of contributions paid in order to weight them according to the period in which they were paid. But as the resulting benefit was ultimately defined by reference to average earnings, not contributions, it was not to be regarded as a money purchase benefit.
- I conclude that this element of the pension benefit is calculated by reference to the average salary of a member over the period of service on which the benefit is based. The requirement for an annual calculation and a percentage contribution based on the earnings in that year gives rise to a measure or yardstick based on average salary. The application each year of a different factor to the contribution provides for weighting that average. The resulting benefit is ultimately calculated by reference to average earnings not payments. As such it cannot be a money purchase benefit. It follows that for this reason alone the scheme is not a money purchase scheme.
- The other element of the pension benefit which enters into the calculation required by Rule 7(2) is any bonus declared in accordance with clause 8.4. This benefit is both contingent and discretionary. It is contingent on there being a surplus revealed by the actuarial valuation, the consent of the Principal Employer and favourable advice to the trustees from the actuary. Even then the right of the member depends on the exercise by the trustees of the discretion given to them by clause 8.4. Such a benefit need not be calculated by reference to payments made by or in respect of the member at all. For example an increase in benefit of 5% in the year to which my example (paragraph 14 above) relates is an increase to the amount of the prospective benefit. No doubt in deciding how large an increase to award the trustees would consider the size of the surplus but that would not give rise to the calculation of the benefit by reference to the surplus. Further, the proportion of the surplus attributable to the bonus credited to a member would not necessarily have arisen from that member's contributions. An example given by Counsel for the Pensioner Member illustrates this. Take two members of the same age who each retired at 65 with a pension of £4,000 per annum. Their contribution record may be very different, one may have served at a relatively modest level but for longer than the other, yet both will receive the same bonus.
- For these reasons I do not consider that the bonus element in the pension benefit is a money purchase benefit either. It follows that the pension as a whole is not a money purchase benefit and the scheme is not a money purchase scheme. In these circumstances it is unnecessary for me to deal with the similar submissions made in relation to the other benefits, referred to in paragraph 39 above, on which counsel for the Pensioner Member or the Active Member relied. I will answer question 3 in the negative.
Question 4
- In the light of my conclusion in respect of Question 3 this question does not arise and I need say no more about it.
Conclusion
- For all these reasons I will make declarations:
(1) in answer to Questions 1(i) and (ii) in the affirmative,
(2) in answer to Question 2 in the affirmative, and
(3) in answer to Question 3 in the negative.
I will make the representation orders and other orders sought by paragraphs 6, 7 and 8 of the claim form. I will adjourn Question 5 with liberty to the Trustee to restore on a date to be fixed through the usual channels. I understand that it is agreed that KPMG will pay the costs of the Trustee, the Pensioner Member and the Active Member as agreed or assessed. I will make an order to that effect if asked.