England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN THE MATTER OF THE FSS PENSION SCHEME

		Rolls Building, Royal Courts of Justice 7 Rolls Buildings, Fetter Lane London, EC4A 1NL
		07/05/2014

Mr Justice Newey:

1. This case is concerned with whether the FSS Pension Scheme ("the Scheme") is an "eligible scheme" within the meaning of section 126 of the Pensions Act 2004 ("the 2004 Act"). The claimant, which is its trustee, argues that the Scheme is not an "eligible scheme" and, hence, that it neither qualifies for protection from the Pension Protection Fund ("the PPF") nor is liable for the pension protection levies for which the 2004 Act provides. In contrast, the defendant, the Board of the PPF, submits that the Scheme is an "eligible scheme" and must pay the levies.

Basic facts

2. In December 2005, much of the business of the Forensic Science Service, which was an executive agency of the Home Office, was transferred to Forensic Science Service Limited ("FSSL"), a Government-owned company that had been incorporated a few months earlier. The Scheme was set up for employees of FSSL.
3. However, FSSL ran into financial difficulties, and in December 2010 the Government announced that the company would cease operations by March 2012. FSSL (which has been renamed Forensic Archive Limited) continues to act as custodian for certain items, but its work has otherwise been transferred elsewhere.
4. A question and answer document posted on FSSL's intranet in December 2010 explained that the Home Office had "given assurances that employees' accrued pension rights will be protected through a Government Guarantee". In July of the following year, the Home Office sent the claimant draft heads of terms for the proposed guarantee, and a guarantee was in due course provided by a deed dated 31 January 2012. By this document ("the Guarantee"), the Home Secretary undertook to the claimant that, if FSSL did not meet any "Guaranteed Obligation", she would do so. "Guaranteed Obligations" were defined to mean:

"subject to Clauses 4 and 11, all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally and in any capacity whatsoever) of the Company [i.e. FSSL as principal employer under the Scheme], arising on or after the Effective Date [i.e. 30 November 2011], to make payments to the Scheme up to a maximum amount equal to aggregate of:

(a) the shortfall between the value of the assets of the Scheme, and the amount of the liabilities of the Scheme in respect of pension and other benefits to be calculated and verified by the Scheme Actuary on the assumption that they will be discharged by the purchase of annuities of the kind described in section 74(3)(c) of the Pensions Act 1995 and for this purpose the Scheme Actuary must estimate the cost of purchasing annuities; and

(b) the reasonable costs incurred by the Trustee to wind-up the Scheme following the buy out of the benefits as envisaged under (a) above."

5. The Guarantee included this:

"For the avoidance of doubt, the purpose of this Deed is to ensure that, in accordance with regulation 4(1)(d) of the Occupational Pension Schemes (Employer Debt) Regulations (SI 2005/678), the assets of the Scheme are sufficient to meet its liabilities on an insurance company buy-out basis."

The PPF

6. The PPF was set up under the 2004 Act to give protection to members of defined benefit pension schemes. In broad terms, the PPF assumes responsibility for such a scheme, and pays compensation to its members, if the employer becomes insolvent and the scheme is left with insufficient assets to provide benefits to the level of the compensation available from the PPF. To fund the PPF, pension protection levies are imposed on pension schemes on an annual basis.
7. A pension scheme qualifies for PPF protection only if it is an "eligible scheme" within the meaning of the 2004 Act. Correspondingly, a scheme will not have to pay levies if it is not an "eligible scheme".
8. Section 126 of the 2004 Act deals with when a pension scheme is an "eligible scheme". It explains that the expression applies to an occupational pension scheme which is neither a money purchase scheme nor "a prescribed scheme or a scheme of a prescribed description". Section 126(5) allows for regulations to be made providing that a scheme that would otherwise be an eligible scheme "is not an eligible scheme in such circumstances as may be prescribed".
9. Regulation 2 of the Pension Protection Fund (Entry Rules) Regulations 2005 (SI 2005/590) ("the Entry Rules Regulations") lists pension schemes that are not eligible schemes. Sub-regulation (1) is concerned with schemes that have a public sector flavour. Regulation 2(1) provides, in particular, as follows:

"For the purposes of section 126(1)(b) of the [2004] Act (eligible schemes), an occupational pension scheme is not an eligible scheme if it is–

…

(d) a scheme in respect of which a relevant public authority has given a guarantee or made any other arrangements for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities…."

10. The present case turns on whether the Guarantee means that the Home Secretary "has given a guarantee or made any other arrangements for the purposes of securing that the assets of the [Scheme] are sufficient to meet its liabilities". It is common ground that the Home Secretary is a "relevant public authority" in this context.

The parties' cases in brief outline

11. One of the arguments advanced by Mr Tim Kerr QC, who appeared with Mr Jonathan Hilliard for the claimant, focused on the use of the word "purposes" in regulation 2(1)(d) of the Entry Rules Regulations. This indicates, he submitted, that the provision is essentially concerned with what the authority subjectively intended rather than the objective effect of a guarantee or other arrangements. One asks, Mr Kerr said, whether the aim was to ensure that the assets of the scheme in question were sufficient to meet its liabilities. In any event, Mr Kerr maintained, there is no requirement that a guarantee or other arrangements should render it absolutely certain that members will receive all their benefits in every conceivable situation. It is enough, Mr Kerr said, if there is no material risk of members going unpaid.
12. On the facts, Mr Kerr said that the Home Secretary's aim could be seen to have been to ensure that the Scheme's assets were sufficient to meet its liabilities. That, Mr Kerr submitted, is confirmed by the express statement to that effect in the Guarantee itself. In any case, there is, Mr Kerr argued, no more than a theoretical, and not a material, risk of members receiving less than full payment.
13. In contrast, Mr Nigel Giffin QC, who appeared for the Board of the PPF, maintained that the "purposes" for which a guarantee is given (or other arrangements are made) must be judged objectively, not subjectively. Moreover, to satisfy regulation 2(1)(d) a guarantee or other arrangements must, Mr Giffin said, make it practically certain, assuming the continued solvency of the guarantor and no future change in the law, that the scheme will be in a position to meet all its liabilities. If, Mr Giffin submitted, there is a risk that employer insolvency will leave a scheme unable to pay members' benefits, then (a) the scheme needs to be eligible to enter the PPF and (b) it must pay the levies as the premium for this statutory insurance. In the present case, limitations and termination provisions contained in the Guarantee mean that regulation 2(1)(d) does not apply.
14. In the alternative, Mr Giffin contended that regulation 2(1)(d) was not satisfied until 26 April 2013, when the Home Secretary wrote to the claimant to waive the requirement that a condition precedent was met.

The construction of regulation 2(1)(d)

The significance of the words "for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities"

15. There was some debate before me as to whether the last part of regulation 2(1)(d) of the Entry Rules Regulations relates only to "any other arrangements" or also applies to "a guarantee". In other words, must a guarantee be "for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities" if it is to satisfy the requirements of regulation 2(1)(d)?
16. While not attaching great importance to the point, Mr Kerr was inclined to suggest that the words "for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities" were not intended to govern "a guarantee" as well as "any other arrangements". He supported this submission by reference to the Pension Protection Fund (Partially Guaranteed Schemes) (Modification) Regulations 2005 (SI 2005/277). Those regulations define the expression "partially guaranteed scheme" as:

"an eligible scheme in respect of which a relevant public authority has–

(a) given a guarantee in relation to–

(i) any part of the scheme;

(ii) any benefits payable under the scheme rules; or

(iii) any members of the scheme; or

(b) made any other arrangements for the purposes of securing that the assets of the scheme are sufficient to meet any part of its liabilities".

Here, as Mr Kerr said, the words "for the purposes of securing that the assets of the scheme are sufficient to meet any part of its liabilities" are clearly tied to "any other arrangements", not "a guarantee".

17. On balance, however, I accept Mr Giffin's submission that, in the context of regulation 2(1)(d), the words "for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities" must qualify everything that precedes them and so apply to guarantees as well as "other arrangements". My reasons include these:

i) As a matter of language, the words at issue can naturally be read as relating to both "other arrangements" and guarantees;

ii) The inclusion in regulation 2(1)(d) of the word "other" tends to confirm that, a guarantee, like "other arrangements", must be "for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities"; and

iii) Last but not least, it is inconceivable that Parliament intended that any scheme in respect of which a relevant public authority had given any guarantee at all, however inadequate, should be denied PPF protection. Suppose, say, that a public authority entered into a guarantee limited to £1 million in relation to a scheme known to have a deficit of £10 million. On one view, the guarantee would have been given "in respect of" the scheme and, accordingly, the scheme would not be an "eligible scheme" unless any guarantee had to be "for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities". It would make no sense, however, for a scheme in respect of which a palpably insufficient guarantee had been given to fall outside the PPF's scope.

18. I would add that, had I been persuaded that the last part of regulation 2(1)(d) was not applicable to guarantees, I would have taken the view that, to satisfy the regulation, a guarantee "in respect of" a scheme had to extend to all its liabilities.

Are "purposes" to be judged subjectively or objectively?

19. Mr Kerr accepted that, in assessing the "purposes" for which a guarantee was given, it is relevant to look at its objective effect. A document that is patently incapable of ensuring that a scheme's liabilities are met would not, Mr Kerr said, meet the requirements of regulation 2(1)(d) of the Entry Rules Regulations. As indicated above, however, Mr Kerr's position was in essence that the "purposes" for which a guarantee was given (or other arrangements made) are to be determined by reference to what the relevant public authority subjectively intended. What matters is whether the decision-maker was subjectively aiming at "securing that the assets of the scheme are sufficient to meet its liabilities".
20. Support for this submission is to be found in dictionary definitions of "purpose". The meanings given in the Oxford English Dictionary, for example, include "That which a person sets out to do or attain; an object in view; a determined intention or aim" and "The reason for which something is done or made, or for which it exists; the result or effect intended or sought; the end to which an object or action is directed; aim". Mr Kerr also relied on the fact that the draftsman chose to use the word "purposes" rather than "effect". This confirmed, Mr Kerr suggested, that the focus was meant to be on the public authority's intentions rather than the objective effect of the guarantee or arrangements in question.
21. On the other hand, the meaning of the word "purpose" in any particular provision must depend on the context. "Purpose" is a "protean concept", and how it has to be established "will depend on the construction of the statute in the light of the mischief to which it is directed" (to quote from Lord Sumption in Hayes v Willoughby [2013] UKSC 17, [2013] 1 WLR 935, at paragraph 9). While, therefore, "purpose" is frequently determined by reference to subjective intentions, that it is not always the case. The point can be illustrated by reference to Pi Consulting (Trustee Services) Ltd v Pensions Regulator [2013] EWHC 3181 (Ch), [2013] PLR 433. That case was concerned with whether certain schemes or arrangements were "occupational pension schemes" within the meaning of section 1 of the Pension Schemes Act 1993. Under that provision, an "occupational pension scheme" has to be established "for the purpose of providing benefits to, or in respect of, people with service in employments of a description" or "for that purpose and also for the purpose of providing benefits to, or in respect of, other people" (emphasis added in each case). It was submitted to Morgan J, and he accepted, that the relevant "purpose" was "the purpose of the scheme and not the purpose of one, or even all, of the parties to the documents which established the scheme" and that "the relevant purpose was an objective matter, which turned upon the meaning and effect of the scheme so that it did not turn upon subjective matters such as the motives or the intentions or the beliefs of one or even all of the parties to the documents which established the scheme" (see paragraphs 36-39 of the judgment).
22. In the context of regulation 2(1)(d), it is, I think, difficult to see why Parliament should have intended the availability of assistance from the PPF to depend on the subjective intentions of the relevant public authority. Were it to do so, a pension scheme's members could potentially be left without PPF protection even though they were at real risk. That would be a surprising result. On the face of it, Parliament is likely to have wanted the question of whether a scheme is an "eligible scheme" to turn on whether its members are, as an objective matter, already adequately protected, not on whether a public authority happened to believe that a guarantee or other arrangements gave such protection.
23. Suppose, for example, that a relevant public authority gives a guarantee limited to (say) £6 million in respect of a scheme whose last actuarial valuation disclosed a deficit of £5 million. The authority could plausibly say that it was giving the guarantee "for the purposes of securing that the assets of the scheme are sufficient to meet its liabilities". As, however, experience of recent years has shown, deficits are capable of mushrooming. While, therefore, a £6 million guarantee might be thought ample to cover the scheme's liabilities, that need not prove to be the case at all. In such circumstances, Parliament can be expected to have intended that members should be protected by the PPF.
24. On balance, accordingly, it seems to me that, in the context of regulation 2(1)(d), the "purposes" for which a guarantee is given, or other arrangements are made, must be determined objectively rather than on the basis of the relevant public authority's subjective intentions.

The requisite level of certainty

25. It was common ground, as I understand it, that "securing that the assets of the scheme are sufficient to meet its liabilities" means "ensuring", or "making sure", that the assets of the scheme are sufficient to meet its liabilities. The parties differed, however, as to the degree of certainty that "securing that" denotes.
26. Mr Giffin submitted that regulation 2(1)(d) of the Entry Rules Regulations is satisfied only where a guarantee or other arrangements give practical certainty that members will receive full payment. Mr Giffin accepted that absolute certainty is not required. A guarantee could, he said, suffice even though, in theory, Parliament could legislate to negate it or the public authority could default on its obligations. Mr Giffin was also prepared to accept that other, entirely theoretical or fanciful possibilities might fall to be disregarded. Mr Giffin maintained, however, that the bar is set high.
27. Mr Giffin sought support for his approach in the overall scheme of the legislation; in considerations of practicality; in Parliamentary materials relating to the Entry Rules Regulations; and in the need to comply with Council Directive 80/987/EEC ("the Insolvency Directive"). With regard to the first of these, Mr Giffin said that it can be inferred that Parliament introduced the PPF to ensure that members of pension schemes are protected if their employers become insolvent. It would not be much of a system of protection, Mr Giffin suggested, if it could be displaced because of the existence of a guarantee even though the guarantee did not provide practical certainty that members would be paid. As for matters of practicality, Mr Giffin submitted that the Board needs to be able to judge whether a guarantee satisfies regulation 2(1)(d) from the face of the relevant document, without having to conduct an investigation into the likelihood of liabilities of the scheme being discharged.
28. Turning to Parliamentary materials, those to which I was taken include the explanatory memorandum in respect of the Entry Rules Regulations. Paragraph 7.1 of this memorandum said this:

"Section 126 of the [2004] Act makes provision about which occupational pension schemes are eligible schemes. This section provides for money purchase schemes to be excluded from being eligible for the PPF, the section further provides for regulations to exclude certain defined benefit and hybrid schemes from being eligible for PPF protection, therefore exempting them from payment of the PPF levies. Broadly speaking, schemes which are not eligible for the PPF are schemes which already have very secure provisions for the protection of their members' pensions. The likelihood of such schemes' requiring PPF assistance is zero, and for this reason it is considered that such schemes should not have to pay the levy" (emphasis added in each case).

Mr Giffin contended that this passage indicates that Parliament was intending to exclude from PPF protection schemes with "zero" likelihood of requiring PPF assistance, and he relied on R (D) v Secretary of State for Work and Pensions [2010] EWCA Civ 18, [2010] 1 WLR 1782 as authority for the proposition that such explanatory documents can be used as aids to construction (see Carnwath LJ's judgment, at paragraphs 44-51).

29. So far as the Insolvency Directive is concerned, Mr Giffin referred me to article 8, which states:

"Member States shall ensure that the necessary measures are taken to protect the interests of employees and of persons having already left the employer's undertaking or business at the date of the onset of the employer's insolvency in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors' benefits, under supplementary company or inter-company pension schemes outside the national statutory social security schemes."

As the European Court of Justice noted in Hogan v Minister for Social and Family Affairs (Case C-398/11) [2013] 3 CMLR 27, article 8 of the Insolvency Directive "lays down a general obligation to protect the interests of employees" (see paragraph 38 of the judgment), and it was held in Robins v Secretary of State for Work and Pensions (Case C-278/05) [2007] ICR 779 that "provisions of domestic law that may lead to a guarantee of benefits under a supplementary occupational pension scheme limited to less than half of the benefits to which an employee was entitled [do] not fall within the definition of the word 'protect' used in art.8" (to quote from paragraph 43 of the Hogan judgment). In the circumstances, regulation 2(1)(d) should not, Mr Giffin contended, be construed in such a way as to leave any appreciable risk of pension scheme members losing the majority of the benefits due to them.

30. For his part, Mr Kerr argued that Mr Giffin was seeking to set the bar too high. If, Mr Kerr submitted, there is no material risk of members going unpaid, that must suffice. Parliament will not have intended regulation 2(1)(d) to be inapplicable because, say, a scheme could in theory be left unable to meet its liabilities in full as a result of a reputable insurer defaulting on annuity obligations or a trustee misappropriating money paid under a guarantee. Mr Kerr observed that Mr Giffin's approach would mean that it would not necessarily be good enough for a relevant public authority to give even an unqualified guarantee in respect of an employer's obligations. Take the present case. The Scheme's definitive trust deed and rules ("the Definitive Deed") allow FSSL to terminate its obligation to pay contributions to the Scheme by giving not less than one month's notice to that effect. Were that to happen, the trustee could seek additional contributions from FSSL, but the company would have no further liability even if those proved inadequate. Since the guarantor would be liable for no more than FSSL, a guarantee of FSSL's obligations could similarly leave the scheme with insufficient assets to meet its liabilities. Yet, Mr Kerr said, it must have been envisaged that guaranteeing the employer's obligations would meet the requirements of regulation 2(1)(d).
31. With regard to the explanatory memorandum, Mr Kerr suggested that such materials are to be taken into account only if there is an ambiguity and said that the memorandum cannot help Mr Giffin in any event since, while it spoke of "zero" likelihood of requiring PPF assistance, it also referred to the relevant schemes having just "very secure" provisions for the protection of members. As for article 8 of the Insolvency Directive, Mr Kerr contended that the fact that members could go unpaid in a particular eventuality can be of no importance if the eventuality is one that is not going to happen in the real world.
32. Mr Kerr looked for support for his submissions in regulation 2(1)(d)'s antecedents. He pointed out that wording along the lines of that in regulation 2(1)(d) first featured in regulation 28(1)(b) of the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 (SI 1996/1536), which exempted certain schemes from the "minimum funding requirement" (or "MFR") for which the Pensions Act 1995 provided. At that stage, as Warren J noted in PNPF Trust Co Ltd v Taylor [2010] EWHC 1573 (Ch), [2010] PLR 261 (at paragraph 642), the statutory funding requirements were "very weak". That fact, Mr Kerr suggested, undermines the idea that Parliament was looking for practical certainty that schemes would be in a position to meet their liabilities.
33. In my view, however, it does not follow from the fact that the MFR was relatively undemanding that Parliament intended schemes in respect of which there were relatively weak guarantees to be exempt from it. In this context, it is relevant to note that the existence of exemptions for some public sector pension schemes reflected the report of the Pension Law Reform Committee chaired by Sir Roy Goode, which was published in 1993. Having explained that the committee regarded "minimum solvency standards as necessary to secure the pension rights of scheme members", the report said this (in paragraph 4.17.16):

"Here it is necessary to distinguish schemes backed by a state guarantee from those which are not. All public service schemes are state-guaranteed and are unfunded. There is clearly no security problem in relation to these schemes and no useful purpose in a funding requirement."

The committee was evidently focusing here on conventional public sector schemes in respect of which, as the committee observed, there is "clearly no security problem".

34. To my mind, the better view is that Mr Giffin is right that regulation 2(1)(d) applies only where a guarantee or other arrangements provide practical certainty that members will be paid in full. That conclusion seems to me to derive support both from the provision's use of the words "securing that" and from each of the four matters mentioned in paragraphs 27-29 above. In short, I consider that the requirements of regulation 2(1)(d) will not be satisfied if there is an appreciable risk of a scheme having insufficient assets to meet all its liabilities.

The present case

35. Mr Giffin argued that the Guarantee does not provide the requisite practical certainty of full payment for a number of reasons. Two of them arise from powers of termination.
36. In the first place, clause 12.1(c) of the Guarantee empowers the Home Secretary to terminate it if in her opinion (acting reasonably) the trustee of the Scheme has persistently breached the terms of a memorandum of understanding to be found at schedule 2 to the Guarantee. The memorandum obliges the trustee to take reasonable care to ensure that, in selecting investments, it adheres to two specified principles. One of these concerns "unethical" investments. Scheme assets should not be invested, for instance, in entities that "clearly have … poor environmental records" or "unethical employment practices". The other principle requires the trustee to consult the Home Secretary about changes in investment strategy and to invest in such a way as to reduce the level of investment risk over time.
37. Mr Kerr submitted that there is no practical prospect of the Home Secretary terminating the Guarantee under clause 12.1(c). Certainly, it seems most unlikely that the Guarantee will be terminated in this way. It is, moreover, understandable that the Home Secretary wished to exert a degree of influence over the trustee's investment decisions. On the other hand, she has specifically chosen to include in the Guarantee a provision entitling her to terminate it, and, were she to exercise it, members would be left with no right to support from her. I agree with Mr Giffin that the existence of this power of termination prevents the Guarantee from satisfying the requirements of regulation 2(1)(d) of the Entry Rules Regulations. The possibility of termination cannot be disregarded when it has been expressly provided for.
38. The second power of termination relates to a deed of amendment ("the Deed of Amendment") designed to effect changes to the Definitive Deed. Under clause 12.1(d) of the Guarantee, the Home Secretary can terminate it:

"3 months after the date of a final determination of any judicial proceedings that any of the amendments set out in the Deed of Amendment is, invalid, unenforceable, void or voidable, unless within that time any such invalidity, unenforceability, voidness, or voidability is cured in accordance with Clause 13(b) below."

Mr Kerr submitted that there is no prospect of the Deed of Amendment being held invalid, let alone of it being held invalid and the defect not being cured in accordance with clause 13(b) of the Guarantee. Even so, I think the existence of this power of termination, too, is fatal to the applicability of regulation 2(1)(d).

39. The conclusions I have arrived at in the preceding paragraphs make it unnecessary for me to express views on the other matters that Mr Giffin argued prevented the Guarantee from satisfying regulation 2(1)(d). I do not need to consider, either, Mr Giffin's fallback position: that regulation 2(1)(d) was not satisfied until 26 April 2013, when the Home Secretary wrote to the claimant to waive the requirement that a condition precedent was met.

Conclusion

40. As things stand, the Scheme is an "eligible scheme" in respect of which levies are payable. The position could, however, change if the Home Secretary gave an unqualified guarantee in respect of the Scheme's liabilities.