England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		7 December 2006

The Chancellor :

Introduction
1. The claimant, Mr Jones, joined the Gerrard Group of companies in 1977. In June 1980 he joined the Gerrard & National Retirement Benefit Scheme ("the Scheme") of which he was a trustee from January 1999 to December 2003. The Gerrard Group of Companies was taken over by the Old Mutual Group in 2000. By December 2003 Mr Jones was employed by the first defendant, as its chief executive, pursuant to the terms of a contract of employment dated 2nd June 1998 ("the Service Agreement") at an annual salary of £230,000. His employment was of indeterminate duration terminable by notice. Mr Jones' employment was terminated with effect from 31st December 2003 on the ground of redundancy.
2. There followed correspondence between his solicitors, Macfarlanes, and those for the Old Mutual Group seeking to agree the terms of the redundancy package to be paid or provided to Mr Jones. This correspondence ("the Pre-Action Correspondence") came to an end in March 2004 when, no agreement having been reached, Mr Jones instituted proceedings against the defendants, being, as to the first and third defendants, his one time employers and as to the second defendant the holding company of the Group. He claimed sums due to him under his contract of employment, as varied from time to time, damages for breach of contract and a declaration as to his pension entitlement. The claim in respect of his alleged pension entitlement was based on his service contract, sundry variations and an alleged oral agreement between Mr Jones and the chief executive of the Old Mutual company which then employed him to the effect that his retirement age for pension purposes would be 50, as opposed to 52.5 years, and that he would be entitled to a pension calculated on the basis of a final pensionable salary of £350,000. He maintained that this oral agreement provided that the augmentation of his pension benefits was to be financed by annual payments of £35,000 made by his employer to the trustees of the Scheme of which three had been made before he was made redundant.
3. In their defence, originally served on 19th November 2004, the defendants denied the oral agreement but admitted and averred a variation contained in or evidenced by a letter dated 4th May 2001 ("the Pension Benefits Letter") countersigned by Mr Jones. The Pensions Benefits Letter provided that (1) Mr Jones might retire at age 50, rather than 52.5 without actuarial reduction, (2) the cost of such augmentation would be funded by 8 annual payments of £35,000 (ie until Mr Jones was 50), but (3) if Mr Jones was dismissed before he had attained the age of 50 such augmentation would only be granted to the extent justified by the annual funding paid into the Scheme between the date of the letter and the date his employment determined. In paragraph 38 of their defence the defendants alleged:

"(1) It is admitted that the Claimant is entitled to receive a pension on such date earlier than 2 September 2011 as procured by three payments made into the scheme of £35,000 per annum from 2001 to 2003 inclusive;

(2) Accordingly, and before giving credit for the impact of the three augmentation payments referred to in the preceding paragraph, the Claimant having commenced pensionable service under the Scheme on 1 June 1980, he is entitled to receive a pension on 2 September 2011 when he is aged 52½ amounting to two-thirds of his final salary of £230,000 (i.e.£153,333.33 per annum) prior to any commutation for a cash lump sum and with allowance for annual indexation by the lower of RPI and 5% between the date of termination of the Claimant's employment (i.e. 31 December 2003) and 2 September 2011;

(3) The effect of giving credit for the impact of the three augmentation payments (pursuant to the terms of the Pension Benefits Letter) is that the Claimant is entitled to either:

(a) £157,633 per annum from 2 September 2011 prior to any commutation for a cash lump sum and with allowance for annual indexation by the lower of RPI and 5% between the date of termination of the Claimant's employment (i.e. 31 December 2003) and 2 September 2011; or

(b) £153,333 per annum from 2 January 2011 prior to any commutation for a cash lump sum and with allowance for annual indexation by the lower of RPI and 5% between the date of termination of the Claimant's employment (i.e. 31 December 2003) and 2 September 2011…"

4. On 3rd June 2005 the defendants paid £360,000 into court. In respect of Mr Jones' pensions claim they offered:

"In addition to the above payment in, our client is prepared to allow your client to retain … the benefit of the three augmentation payments paid to the Gerard & National Retirement Benefits Scheme to reduce his normal retirement age."

On 6th June Mr Jones' solicitors sought clarification pursuant to CPR Rule 36.9 in these terms:

"Please clarify the pension offer. In particular, does it contain the terms set out in (a) para 38(3)(a) of the Re-Amended Defence, or (b) para 38(3)(b) thereof, or (c) both, or (d) different (and, if so, what) terms?"

The defendants' solicitors replied on 8th June:

"The offer to allow your client to retain the 3 augmentation payments of £35,000 paid to the Gerrard & National Retirement Benefits Scheme does not alter paragraphs 38(3)(a) and (b) of the Re-Amended Defence."

On 17th June 2005 Mr Jones accepted the payment in and the offer so clarified ("the Compromise"). In due course he elected to take option (a) as set out in paragraph 38(3) of the defence.

5. On 23rd March 2006 the Trustees of the Scheme sent Mr Jones a certificate of his entitlement to benefits. It set out a number of personal details including his Normal Pension Date as 2^nd September 2011, his Pensionable Service as 26 years and 3 months and his Final Pensionable Salary as £230,000 p.a. So far as relevant for present purposes it stated:

"Following your withdrawal from pensionable service your benefits under the Scheme are as follows:

Deferred Pension £118,674.00 per annum

[Spouse's Pension]

The above Deferred Pension will become payable from our Normal Pension Date.

Your pension will be increased over the period up to your Normal Pension Date by the increase in the Retail Prices Index, up to a maximum of 5% per annum.

Once in payment, your pension will increase in line with the annual rise in the Retail Prices Index subject to a minimum increase of 3% and a maximum of 7.5%."

6. The solicitors for Mr Jones complained to the Trustees and the solicitors for the defendants that the certificate was incomplete. The latter replied on 4th April 2006 setting out how the sums owing to Mr Jones would be paid from his normal retirement date of 2nd September 2011. There were three components (1) £118,674 p.a revalued from the date of leaving pensionable service (31st December 2003) at the lower of rpi and 5%, (2) as subsequently corrected and confirmed, £4,300 p.a., being the benefit attributable to the three payments of £35,000, revalued from the date of leaving pensionable service by the lower of rpi and 5% and (3) if and to the extent that the aggregate of (1) and (2) fell short of the amount specified in paragraph 38(3(a) of the defence (£157,633) such further sum, likewise revalued, as is needed as at normal pension date to make up the difference. The Trustees of the Scheme have now agreed, as alleged by the defendants, that under the terms of Rule 23(1) of the Scheme the sums payable under (1) and (2) above will be increased annually on a compound basis at the greater of 3% or the lesser of rpi and 7.5%. No such agreement has been reached in relation to the sum described at (3). Thus the principal issue before me is what, on the true construction of the Compromise, is payable to Mr Jones in respect of component (3).
7. There is also an issue as to whether, in considering the question of construction, it is permissible to take account of some of the Pre-Action Correspondence, in particular letters dated 16th January, 13th and 25th February 2004 from the solicitors for the defendants, on which Mr Jones relies. The defendants submit that this correspondence is either part of the negotiation for a compromise which was never achieved or is part of an extended negotiation for the Compromise which was, ultimately, concluded. Either way, they submit, this correspondence is inadmissible. I will deal with that issue when in the course of setting out the factual background to the Compromise I reach the appropriate point.
The Factual Background to the Compromise
8. As I have already mentioned Mr Jones, who was born on 2nd March 1959, joined the Gerrard Group on leaving school in 1977. He became a member of the Scheme in June 1980. Though the Definitive Trust Deed and Rules were made much later, on 17th January 1999, they are supplemental to the original trust deed dated 6th September 1974 and are the starting point for considering Mr Jones' pension entitlements as at the date of his redundancy in December 2003. Clause 8 of the Deed provided that both the Deed and the Rules might, by deed, be amended by the Company, then Gerrard & King Ltd, with the consent of the trustees. It is not suggested that such power was exercised in any respect material to the issues before me; nor is it relevant to consider which body corporate is now 'the Company' for the purposes of the Deed.
9. The Rules are set out in the Second Schedule. Rule 1 contains a large number of definitions. Though 'Normal Pension Date' is defined as the age of 60 it is common ground that at some unspecified time it was agreed that at least in respect of Mr Jones the age should be 52.5 years. The definition of 'Pensionable Service' shows that the service of Mr Jones since 1977 is all to be taken into account. Rule 5(1)(d) entitled a member who, like Mr Jones, entered service before 6th April 1990 and had completed at least 20 years pensionable service to a pension of 2/3rds Final Pensionable Salary. Rules 7, 8 and 9 deal with early retirement. The relevant provisions so far as Mr Jones is concerned are Rules 9(3) and 9(7). The former entitled him, at his option to a deferred pension commencing at normal pension date calculated by reference to the ratio that pensionable service to the date of withdrawal bears to pensionable service to normal pension date. The latter entitled Mr Jones to an increase in the amount of the deferred pension at an annual rate equal to the lower of rpi or 5%. It is the application of these rules which, on the facts relating to Mr Jones, produced the figure of £118,674 set out in the certificate from the trustees of the scheme referred to in paragraph 5 above.
10. Rule 22 entitles the trustees of the Scheme at the request of the Company and subject to payment of such additional sums (if any) as the trustees, having regard to the advice of the actuary, may determine, to provide increased or additional benefits in respect of a member. No such benefit should be such as to prejudice the Inland Revenue's approval of the Scheme. It is this power which could justify the additional benefits for which both the Service Agreement and the Pension Benefits Letter provided.
11. The Service Agreement in force at the time Mr Jones was made redundant was dated 2nd June 1998. He is described as the Executive Director. Clause 5 provided:

"5. PENSION SCHEME

5.1 The Executive Director shall be a member of the Gerrard & National Retirement Benefits Scheme ("the Scheme") in accordance with the Trust Deed and Rules.

5.2 The Company shall procure that subject to Inland Revenue limits the Executive Director's pension on retirement shall be two thirds of the higher of his actual final pensionable salary or £160,000 adjusted for inflation. Inflation shall be calculated from 1 April 1997 by reference to the retail price index subject to a maximum annual increase of 5%.

5.3 In the event of early retirement of the Executive Director before age 55, the base pension payable subject to clause 5.2 above will be as provided by the Rules of the Scheme provided that the Company will procure that there will be no actuarial discount for early retirement if at the date of termination:-

5.3.1 the Executive Director has completed 20 years of service with the Company or an associated company whether as a director or employee; and

5.3.2 the Executive Director is not voluntarily resigning his employment or his employment is not being terminated under the terms of clause 14 of this Agreement."

12. At the time it was entered into the Service Agreement provided prospective benefits for Mr Jones in excess of those to which the Scheme alone entitled him. For example, the retirement age was 55 as opposed to 60 as provided for in the definition of Normal Pension Date in Rule 1 of the Scheme. The prospective pension was, initially, based on a salary of £160,000 p.a which was more than he was then being paid. In the event that Mr Jones' salary was higher the pension was based on 'actual' Final Pensionable Salary as opposed the average salary received over the previous 12 months provided for in the definition of Final Pensionable Salary in Rule 1.
13. In due course the Service Agreement was varied in a number of respects. First, as is common ground, though neither party could say when or how it was done, Mr Jones' retirement date was reduced to 52.5 years. Second, Mr Jones' annual salary was increased to £200,000 on 24th January 2000 and £230,000 on 21st December 2000. Accordingly the alternative figure of £160,000 for which clause 5.2 of the Service Agreement provided was no longer material. I note in passing that, in connection with the take over of the Gerrard Group by the Old Mutual Group, on 11th February 2000 the Group Finance Director of the second defendant wrote to the Trustees of the Scheme to inform them that "Old Mutual will stand behind the pension promise made to members of Gerrard Group's defined benefit pension schemes."
14. On 16th March 2001 there was a meeting of the Trustees of the Scheme, of whom Mr Jones was one. Paragraph 6 of the minutes records:

"A request from Old Mutual plc for ASR Jones to be granted the option of retiring at age 50 on an unreduced pension of 2/3 of his salary at age 50 was considered and agreed. The cost of the augmentation would be £35,000 per year over eight years, the cost to be borne by Old Mutual plc."

15. The Pension Benefits Letter was dated 4th May 2001 and reads as follows:

"Pension benefits under the Gerrard & National Retirement Benefits Scheme

I am pleased to confirm that the Trustees of [the Scheme] have approved an augmentation to your pension benefits upon the following terms:

You will be granted an option to retire two and a half years early (at age 50) from the Scheme, on an unreduced pension of two thirds of your salary (which for these purposes will be based upon your current salary of £230,000 per annum, with allowance for salary increases of up to 6% per annum between now and age 50).

The cost of granting the augmentation will be funded by a level annual payment of £35,000 from Old Mutual Financial Services for eight years, from 2001 until you retire at age 50.

It is important to note that this full augmentation will only apply if you retire from Old Mutual at, or after, age 50. If you leave before age 50, the augmentation will be granted to the extent to which the costs of augmentation have been paid up to the date of leaving unless you have given notice to terminate your employment or your employment has been terminated without notice in accordance with the terms of clause 14 of your employment contract dated 2 June 1998, as amended, in which case the augmentation will not be granted."

16. As I have already noted three annual payments of £35,000 were made to the Trustees of the Scheme before Mr Jones was made redundant on 31st December 2003. As he was then under the age of 50 he was entitled to augmentation of his benefits only to the extent that those payments would finance them. The actuary considers that the appropriate augmentation, if taken as additional pension from age 52.5, is £4,300 per annum. If payable under the Scheme such deferred benefit is to be revalued to "Normal Pension Date" on 2nd September 2011 in accordance with Rule 9(7) and to be increased when in payment thereafter in accordance with Rule 23(1). I infer from paragraph 16 of the Grounds of Resistance of the defendants dated 27th September 2006 and the absence of any evidence to the contrary that the Trustees accept these propositions.
17. There then ensued the Pre-Action correspondence. Mr Jones seeks to rely on the three letters from the solicitors for the defendants to which I have referred for the purpose of satisfying me that his interpretation of paragraph 38(3) of the defence, which, it is agreed, was incorporated into the Compromise, is correct. In the first dated 16th January 2004 they set out what they understood to be Mr Jones' basic pension entitlement and what arrangements they would make to ensure that he received the benefit of the augmentation arising from the three payments of £35,000. They indicated that the Scheme actuary had been asked to calculate two alternatives. Such calculations were provided by the Scheme actuary on 29th January 2004 and have been adduced in evidence without objection.
18. The calculations were provisional only because the Scheme actuary was still awaiting details of Mr Jones' fluctuating emoluments to ensure that the proposed augmentations were within the then current Inland Revenue limits. The calculations were made on certain specified assumptions including one to the effect that Mr Jones' benefit entitlement was to a deferred pension from age 52 years and 6 months based on his actual years of service. The calculation continued:

"With this as a starting point we have calculated the cost of augmenting Mr Jones pension to a pension of 2/3rds of salary (increased at the lesser of rpi or 5% to retirement) from age 52 years and six months.

We have then calculated the impact of using the sum of £105,000 to purchase additional pension from age 52.5 or to bring the pension age forward."

The figures requested were supplied in the form of a table. It is in the following form:

	Benefit at Current date (£pa)	Retirement Age (years and mths)	Cost (£'000)
Current Entitlement	£118,673	52 y 6m	-
Initial Augmentation to 2/3rds	£153,333	52y 6m	845
Additional Pension	£4,300	52y 6m	105
Early retirement	£153,333	51y 10m	105

19. The second letter on which Mr Jones seeks to rely is that from the defendants solicitors dated 13th February 2004. By then they had received the actuary's calculation. In the light of those figures they set out two options from which Mr Jones might select that which he wished. They are the same as those which subsequently appeared in paragraph 38(3) of the defence originally served on 19th November 2004 which I have quoted in paragraph 3 above. With regard to the enhanced pension benefits they indicated that they relied on the Pensions Benefit Letter. The third letter on which Mr Jones relies is dated 25th February 2004 and merely reiterated the point made in the letter dated 13th February 2004 relating to the Pensions Benefit Letter.
20. None of this correspondence was marked without prejudice but all of it was directed to seeking agreement as to the redundancy package to be paid or provided to Mr Jones. Counsel for the defendants submits that such correspondence is inadmissible unless either (1) it shows that the parties had used certain terms in a special sense or (2) it gives rise to an estoppel by convention or (3) it indicates the commercial or business genesis or object of the agreement subsequently made. Counsel for Mr Jones submits that the letters are not tendered as evidence of negotiations and anyway come within the first and/or third of those categories.
21. I was referred to Prenn v Simmonds [1971] 1 WLR 1381. That case concerned the proper construction of the word "profits" in the context of a written agreement. Was it confined to the specific company or did it comprehend the consolidated profits of the group? The appellant sought to rely on the prior negotiations between the parties leading up to the execution of the written agreement. The House of Lords determined that such evidence was inadmissible. Lord Wilberforce, with whom the other members of the Appellate Committee agreed, said (p.1384):

"There were prolonged negotiations between solicitors, with exchanges of draft clauses, ultimately emerging in clause 2 of the agreement. The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties' positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. Cardozo J. thought so in the Utica Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go;..."

22. This principle was recognised by Lord Hoffmann in the well-known passage in his speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912. He said:

"The principles may be summarised as follows:

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

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

23. The 'dictionary' exception is exemplified by the decision of Kerr J in The Karen Oltmann [1976] 2 Ll.L.R 708, 712. He said:

"If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the court to examine the extrinsic evidence relied upon to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the words as the result of their common intention."

I was also referred to Re: Nortel Networks UK Pension Plan [2005] EWHC 103 (Ch); Beazer Homes Ltd v Stroude [2005] EWCA Civ 265 and Proforce Recruit Ltd v The Rugby Group Ltd [2006] EWCA Civ 69. They exemplify the application of the principles but do not appear to me to add to them.

24. In my view each of the letters in question is admissible on the issue of construction. They show the genesis and subject matter of paragraph 38(3) of the defence which became a term of the Compromise. They show the connection between the actuary's calculations and that paragraph and explain the figures and other terms which appear in it. None of them is relied on as indications of subjective intention and on the face of them they are not objectionable on that account. The mere fact that they were written in the course of inter-solicitor correspondence seeking to agree a redundancy package is not, in my judgment, a sufficient objection.
25. That said I do not think that any of them adds a great deal. The relevant correspondence starts with a letter from the solicitors for Mr Jones stipulating that all pension entitlement and enhanced redundancy payments, which they considered to be a contractual benefit, should be included and provided for. The response of the solicitors for the defendants was contained in the letter of 16th January 2004 in the following terms:

"The arrangements in respect of Mr Jones's pension entitlement are that, subject to the augmentation effect described below, the Company will ask the Trustees of the [Scheme] to provide Mr Jones with a pension on 2nd September 2011 when he is aged 52 years and 6 months which is based on two-thirds of his final salary of £230,000 (ie £153,333.33 per annum) prior to any commutation for a cash lump sum and with allowance for annual indexation by the lower of RPI and 5% between his date of termination (31 December 2003) and 2 September 2011.

The Company will also arrange that Mr Jones' pension arrangements will benefit from the augmentation payments of £35,000 per annum that have been paid by the Company to the Scheme between 4 May 2001 and 31 December 2003. The benefit of this augmentation can be taken in either of two forms as Mr Jones may elect. The first form is an increase in the amount of the starting pension on 2 September 2011. The second form is an advancement of the starting date to a date earlier than 2 September 2011. The fund actuary has been asked to calculate these alternatives, ie the amount of the increase and the length of the period by which the starting date may be advanced and this information will be provided to Mr Jones as soon as it is available."

26. The letter dated 13th February 2004 was written in the light of the valuation of the actuary. In relation to Mr Jones' pension the solicitors wrote:

"Our client confirms that it will ensure that Mr Jones will receive a pension entitlement which, after giving credit for the augmentation payments referred to in your letter dated 16th January 2004 can be either:

(a) £157,633 p.a from 2 September 2011 prior to any commutation for a cash lump sum and with allowance for annual indexation by the lower of RPI and 5% between his date of termination, 31 December 2003, and 2 September 2011; or

(b) £153,333 p.a. from 2 February 2011 prior to any commutation for a cash lump sum and with allowance for annual indexation by the lower of RPI and 5% between his date of termination, 31 December 2003, and 2 February 2011.

Please inform us which option your client wishes to choose.

As to your claim for enhanced pension benefits.......the [Pensions Benefit Letter] makes clear that if Mr Jones leaves before 50, the augmentation referred to in that letter will be granted to the extent (and therefore only to the extent) set out in the letter."

As I have already indicated the final letter dated 25th February 2004 added nothing to the concluding passage of that dated 13th February 2004. The Pre-action Correspondence came to an end when the claim form was served on 26th March 2004.

27. I have sufficiently summarised the pleadings in the action and the conclusion of the Compromise in paragraphs 2, 3 and 4 above. The present dispute, as summarised in paragraph 6, arose when Mr Jones eventually received the Certificate of Entitlement to Benefits referred to in paragraph 5 above. On 24th April 2006 the Trustees produced a Memorandum dealing with the position of Mr Jones. It states:

"The pension scheme benefits of Ross Jones have not been altered from those accrued under the scheme during the period Ross Jones was employed and it is the Trustees' understanding that, if applicable, any alteration of pension benefits must be requested by [the Company] and will not be authorised by the Trustees unless appropriate funding is in place."

28. Finally I should refer to a letter from PriceWaterhouseCoopers explaining how various figures are calculated. For present purposes it is sufficient to reproduce the table enclosed with the letter for the years up to and including 2013.

	30/09/2011	31/03/2012	31/03/2013
(1) Estimated Annual Benefit excluding the Additional £4,300 p.a	145,700	148,400	153,975
(2) Annual Extra Payment - £4,300 at date of leaving	5,275	5,375	5,575
(3) Total annual benefit from the Scheme (1) + (2)	150,975	153,775	159,550
(4) Underpin of £157,633 at date of leaving	193,525	193,525	193,525
(5) Annual top-up payment from the Company	42,550	39,750	33,975
(6) Total annual payment from the Scheme and the Company	193,525	193,525	193,525

The figures in rows (1) and (2) are the figures of £118,673 and £4,300 calculated as at 31st December 2003 and revalued as pensions in deferment as provided in Rule 9(7). Under the terms of the first option in the Compromise Mr Jones was to be entitled to an annual pension as from 2 September 2011 of £157,633 subject to revaluation as a deferred pension in accordance with paragraph 38(3)(a) of the defence. This produces the underpin figure of £193,525 and the top-up figure for the first year of £42,550 (i.e. £193,525 - £150,975). As I understand it the top-up represents, in effect, the value of the lost years of pensionable service from 31st December 2003 to 2nd September 2011. The significant point is that the actuary has assumed that the top-up figure is paid by the Company and not the Scheme and is not increased annually as a pension in payment would be under Rule 23(1) or at all. The consequence, as demonstrated in the extension of the table to 31st March 2019, is that the top-up payment ceases altogether in that year because the increases in the pension in payment have removed the need for any underpin.

Submissions for the Parties
29. Counsel for Mr Jones points out that it is common ground that the provisions of paragraph 38(3)(a) of the defence were incorporated into the Compromise. This defines Mr Jones' entitlement. The question is what those words mean. The appropriate test, he submits, is that formulated by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912 namely:

"what the parties using those words against the relevant background would reasonably have been understood to mean."

30. Counsel for Mr Jones submits that paragraph 38 as a whole plainly deals with the entitlement of Mr Jones under the Scheme. Thus paragraph 38(1) deals with the three augmentation payments made into the Scheme as envisaged by the resolution of the Trustees and the Pensions Benefit Letter referred to in paragraphs 14 and 15 above. Then, so he submits, paragraph 38(2) deals with entitlements to benefit out of the Scheme. It aggregates both the basic pension and the augmentation to arrive, in 2004, at the annual sum of £157,633 to be paid out of the Scheme as from 2nd September 2011. Paragraph 38(3) provides in terms for that aggregate deferred pension to be revalued at the lower of RPI and 5%, thereby reproducing the effect of Rule 9(7).
31. Counsel for Mr Jones relies on the three letters to which objection was taken as showing clearly that the subject matter of the discussion was the entitlement of Mr Jones to benefits from the Scheme. Accordingly, as he submits, the obligation of the defendants is to procure the payment of those benefits to Mr Jones in the expectation that they will be paid by the Trustees but on the basis that if they are not then the defendants will pay them.
32. Counsel for Mr Jones accepts that the contractual obligation on which he relies rests on the defendants, not the Trustees. He analyses it in two ways: either it was the obligation of the defendants to procure the payment of the agreed benefits by the Trustees out of the Scheme or it was the obligation of the defendants to ensure that Mr Jones received the benefits to which he was treated as being entitled under the Scheme whether from the Trustees or some other source. In either event, so the argument went, the entitlement extended to revaluation of the pension benefits in payment under Rule 23(1) and sounded in a liability in damages from the defendants if such benefits were not paid in full.
33. These submissions were disputed by Counsel for the defendants. He emphasised that the claim was against the defendants, not the Trustees. He pointed out that under Rule 22(2) the relevant company might request the Trustees to provide increased or additional benefits but could not compel their provision. First the Trustees have a discretion to be exercised in the light of the advice of the actuary; second they are properly concerned not to jeopardise Inland Revenue approval on which the continued tax privileged status of the Scheme depended; third any such benefits must be financed to their satisfaction. Accordingly, as he submitted, the defendants should not be taken to have promised what they could not command.
34. Counsel for the defendants points out that the source of the payments to be made under the Compromise is not identified. He relies on the fact that paragraph 38(3) provides expressly for revaluation of the specified pension in deferment but is silent as to any increase when in payment. He submits that it is the obligation of the defendants' to procure an overall payment as specified in paragraph 38(3)(a) from the source of their choice. If the Trustees provide all or part of it the defendants obligation has to that extent been performed but they will have to make up any difference. He accepts that if the Scheme were wound up the obligation of the Company would continue.
35. In support of those arguments Counsel for the defendants relied on the fact that the Scheme is in deficit to the extent of £17.6m and that the cost of funding the top-up component and its increase when in payment has been estimated by the actuary to be some £845,000. He points out that some such figures would have been known to Mr Jones from his time as a trustee of the Scheme from 1999 to 2003.
36. On a more detailed level Counsel for the defendants relied on the fact that paragraph 38 is silent as to any increase of a pension in payment but, by contrast, envisages the payment per annum of a fixed annual sum then stated to be £157,633.
Conclusion
37. It was common ground, rightly, that the relevant test is that expressed by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912 namely:

"what the parties using those words against the relevant background would reasonably have been understood to mean."

In the context of this case 'those words' must be paragraph 38(3)(a) in the context of the Compromise. It was also common ground that the relevant background included the Scheme and its Rules, the Service Agreement, the Pension Benefit Letter, the first set of proceedings including paragraph 38 of the defendants' defence and the actuary's valuation. In accordance with my conclusion on the admissibility issue it also includes the Pre-Action Correspondence, in particular the three letters to which I have referred.

38. The arguments of counsel for the parties concentrated on the nature of the obligation. Was it to procure a payment out of the Scheme or was it to procure payment of a sum? Given that the substance of the dispute is whether the top-up component of the pension payable to Mr Jones should be increased when in payment I prefer to reformulate the issue so as to identify what it was that the defendants promised would be paid to Mr Jones. What was the subject matter of paragraph 38(3)(a)?
39. I would at the outset reject both the more detailed arguments for the defendants I have summarised in paragraph 36 above. It is true that paragraph 38(3)(a) refers to "£157,633 per annum from 2 September 2011". It was suggested that the words "per annum" predicated that the same sum would be paid each year. I do not agree. Those words denote the frequency of the payment not its amount. In any event the sum payable on 2 September 2011 was not £157,633 because it was to be revalued in deferment in accordance with the formula set out later in paragraph 38(3)(a). And, as now accepted, much of it was to be increased when in payment in accordance with Rule 23(1).
40. Of more substance is the submission that if paragraph 38(3)(a) provides expressly for revaluation of the pension benefit in deferment it would be inconsistent to imply that such pension benefit should be increased when in payment. The cogency of this argument also suffers from the fact, as now admitted, that two of the three component parts of the initial sum of £157,633 (see paragraph 6 above) increase, when in payment, in accordance with Rule 23(1). In any event it is at this point that the relevant background becomes so important. It shows a pattern of discussion and contractual obligation by the Company to Mr Jones in relation to benefits to be paid out of the Scheme in excess of his strict entitlement under the Rules. Thus, as I have pointed out in paragraph 12 above, clause 5 of the Service Agreement provided for pension benefits to be paid to Mr Jones out of the Scheme in excess of that to which the Rules then entitled him. Similarly the Pension Benefit Letter sought to confer benefits on Mr Jones not then warranted by the Rules. In each case it was envisaged that the benefit would be payable out of the Scheme with all that that entailed. For example it would have been obvious that the pension payable in accordance with clause 5 of the Service Agreement at age 55 based on 2/3rds of a salary of £160,000 would, when in payment, be increased as provided for by Rule 23(1). For similar reasons I do not consider that any implication can be drawn from the facts that Mr Jones was a trustee of the Scheme, the scheme was in deficit and any enhanced benefit to him would have to be properly financed. The existence of the deficit was not due to any enhanced benefit promised to Mr Jones and the need for proper finance for any enhancement would have been obvious.
41. It is at this point that the Pre-Action Correspondence becomes significant. It is clear from the letter of 16th January 2004, quoted in paragraph 25 above, that the subject matter of discussion was the entitlement of Mr Jones to pension benefits under the Scheme. It envisaged that the company would do what was required to ensure that he would be entitled on 2nd September 2011 to a pension based on two-thirds of his then salary as augmented by the three sums of £35,000 paid by the company to the Trustees. The valuation sought from the actuary was of a pension of the requisite amount (see paragraph 18 above). The letters from the defendants' solicitors dated 13th and 25th February 2004 discussed the pension to be paid to Mr Jones, as valued by the actuary, as part of his severance package. It is plain that paragraph 38(3) of the defence was taken directly from the letter of 13th February 2004.
42. Paragraph 38(1) and (2) refer expressly to pensions and the entitlement of Mr Jones to receive them. It is not now in dispute, and is in my judgment plain, that the pensions there referred to are pensions payable out of the Scheme in accordance with the Rules and carry with them the right under Rule 23(1) to increases when in payment notwithstanding that only revaluation when in deferment is expressly mentioned.
43. In my judgment the proper construction of paragraph 38(3)(a) necessitates recognition that the sum of £157,633 there referred to is the amount of a pension out of the Scheme. It is recognised as an existing entitlement not an obligation about to be undertaken by a defendant. It is not just an amount to be paid "per annum" without regard to the incidents of payment out of the Scheme. Nor is the express reference to revaluation in deferment necessarily inconsistent with increase under Rule 23(1) when in payment. Paragraph 38(3) referred to the specific amount of £157,633 as the aggregate of the two sums referred to in paragraph 38(1) and (2). If that figure had been stated without reference to revaluation in deferment it would have been ambiguous. Accordingly the addition of the later words is readily explicable as intended to avoid such ambiguity. But it does not follow that such addition is inconsistent with the application of Rule 23(1).
44. The point is emphasised by the terms of the request for clarification and the response, both quoted in paragraph 4 above. Mr Jones' solicitors sought clarification of "the pension offer". It is plainly implicit in the response that paragraph 38(3)(a) contained a pension offer. I take such an offer to have been an offer of payment of the sum specified in paragraph 38(3)(a) as a pension due to Mr Jones under the Scheme on the terms mutatis mutandis of the Scheme's Rules. Those terms include Rule 23(1).
45. In those circumstances I reject the submissions made on behalf of the defendants. Nor does it appear to me to be essential to choose between the alternative formulations advanced on behalf of Mr Jones as summarised in paragraph 32 above, though if pressed I would choose the second.
46. I have been concerned throughout that although the relief claimed is against the defendants, as the other contracting party, it may well impact on the Trustees who are not before the Court. Thus a declaration in the form sought to reflect the first of the two alternative formulations should not bind the Trustees and would therefore, if granted in that form, be misleading. Nor could there be any form of mandatory order on the defendants in the absence of the Trustees because without their concurrence it could not be complied with. In addition the extent to which Mr Jones might be entitled to damages for breach of contract will depend on Mr Jones' entitlement under the Scheme.
47. For all these reasons, and subject to any further submissions which may be advanced, I consider that the only relief I could grant at this stage would be a limited declaration. But the Trustees should be given notice of my intention and given an opportunity either through the existing parties or through counsel instructed on their own behalf to make such submissions as they wish on the terms and appropriateness of the declaration. Subject to any and all further argument from the parties or the Trustees I will make a declaration that:

'As against the defendants, Mr Jones is entitled to be paid as and from 2nd September 2011 the annual sum of £157,633 (i) revalued in deferment as provided for by paragraph 38(3)(a) of the defence of the Defendants in this action, (ii) increased when in payment in accordance with Rule 23(1) of the Scheme and (iii) otherwise in accordance with the rules of the Scheme as if such sum is payable by the Trustees from the funds subject to the Scheme.'