Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2010] CSOH 34
CA96/08	OPINION OF LORD HODGE in the cause ROBERT BLOWER AND OTHERS TRUSTEES OF THE WTL INTERNATIONAL LIMITED RETIREMENT BENEFITS SCHEME Pursuers; against ERIC EDWARDS and SCOTTISH WIDOWS PLC Defenders: ­­­­­­­­­­­­­­­­­________________

Pursuers: A.R.W. Young, Q.C., F. Thomson, Advocate; Brodies LLP

Defenders : Currie, Q.C., Weir, Advocate and Barne, Advocate; Maclay Murray & Spens LLP

12 March 2010

[1] The pursuers are the trustees of the WTL International Retirement Benefits Scheme ("the pension scheme"). WTL International Limited ("WTL") was a manufacturing company which made timber-based products and was involved in haulage. The group of companies including WTL employed between one hundred and five and one hundred and twenty people in the 1990s. The trustees of WTL's pension scheme were directors of WTL. WTL is in administrative receivership. The defenders are (i) Mr Edwards, the scheme actuary of the pension scheme, and (ii) his employer, Scottish Widows plc ("Scottish Widows").

[2] The pursuers claim damages for breach of contract and negligence in relation to the advice which Mr Edwards gave the trustees in 1999 concerning their decision to switch the assets of the pension scheme from a deferred annuity contract (DAC) with Scottish Widows to a managed fund contract ("MF contract"), also with Scottish Widows. They plead that it was an implied term of their contract with Mr Edwards as scheme actuary that he would exercise the degree of skill and care reasonably to be expected of an actuary of ordinary competence. In summary, they assert that he failed (a) to give an impartial and balanced assessment of the advantages and disadvantages of the switch, (b) to advise them on the value and importance of the guarantees in the DAC and (c) to give a detailed analysis of the options, including the option of leaving existing contributions with the DAC and investing future contributions in an MF contract. The pursuers aver that Mr Edwards owed the same duties in contract and delict. On each basis they aver that no actuary of ordinary skill would have failed in those duties. The pursuers claim that but for Mr Edwards's advice, they would not have switched to the MF contract and so would not have suffered loss.

[3] By interlocutor dated 12 February 2009 the court allowed a proof on liability and causation, reserving for a later date all questions of quantification of damages. As a result, the parties did not address in any detail in their written pleadings the proper quantification of the pursuers' claim for damages.

Background
[4] The pension scheme provided retirement benefits for the directors and employees of WTL. It was a final salary scheme and the directors in particular were to be provided with a significant proportion of their final salaries as a pension. The trustees invested the contributions from WTL and its employees in a DAC in Scottish Widows' with profits fund. By investing in the with profits fund the trustees became members of Scottish Widows, which was relevant in the context of the demutualisation which occurred in 2000. Because the DAC contained certain guarantees, which I discuss below, Scottish Widows held as underlying assets a slightly lower proportion of equity investments than under their MF contracts. In the context of the rising stock market in the 1980s and 1990s this meant that the DAC achieved a slightly lower rate of return. There was as a result a trend in those years for pension trustees to transfer their funds from DACs to MF contracts.

[5] Mr Blower is a chartered accountant. In 1997 he was engaged by WTL as its company secretary and, following a split among the family directors and shareholders of the company, became its managing director in 2005. In 1999 he was not a trustee of the pension scheme but, as part of his duties as company secretary, he provided administrative services to the trustees and corresponded with professional advisers on their behalf. The trustees of the pension scheme in the latter part of 1999 were Mr Colin Gleaves, a chartered certified accountant, who was managing director of WTL, Mark Thompstone, and Stuart Thompstone. The latter two directors did not have financial qualifications. Stuart Thompstone was appointed a trustee in late July 1999.

[6] The trustees as a norm transacted their business informally. They frequently met in the staff canteen of WTL's factory for morning coffee to discuss matters of business in their capacity as directors of WTL and took the opportunity to discuss any matters relating to the pension scheme at the same time. When it was necessary, the trustees had more formal meetings with an agenda and minutes. The trustees generally adopted a cautious approach in relation to the pension scheme. Before taking important decisions they obtained advice from Scottish Widows and from an established independent financial adviser.

[7] Section 47 of the Pensions Act 1995 introduced with effect from 6 April 1997 an obligation on the trustees or managers of an occupational pension scheme to appoint a scheme actuary, who had the role of giving independent actuarial advice to the trustees of the scheme. In 1999, Mr Edwards, who was and is a member of the Faculty of Actuaries, was scheme actuary of between fifty and sixty pension schemes, of which the WTL pension scheme was one. He was and is an employee of Scottish Widows; he acted and acts as a pensions actuary and had and has no managerial role in Scottish Widows.

[8] In April 1997 the Pensions Act 1995 introduced the Minimum Funding Requirement ("MFR"). This involved a statutory minimum funding test by which the liabilities of a pension scheme were assessed using a prescribed set of assumptions. The MFR was measured against the surrender value of a pension scheme contract. If the assets of the scheme were less than 90% of the MFR, the contributors to the scheme were obliged to make up the shortfall in early course. The MFR was also the level to which an employer was obliged to fund a pension scheme if the scheme were to be wound up. In calculating the MFR, the liability of the pension scheme in respect of an employee who was ten or more years from retirement was adjusted to reflect movements in the United Kingdom equity market. In the ten years before retirement, the calculation of the liability in respect of a member was based increasingly on gilts in accordance with a sliding scale. The scheme actuary had an obligation to certify whether or not the MFR was met at each triennial valuation of the scheme. The WTL pension scheme, like many schemes, had a preponderance of members who had more than ten years to serve before retirement. Accordingly the calculation of most of the MFR of the pension scheme moved in line with the United Kingdom equity market. When a scheme was invested principally in equities, its value moved in large measure with the equity markets enabling it more closely to match the MFR. But the surrender value of a pension scheme, which was heavily invested in bonds, was likely over time not to match the MFR. Such a scheme was vulnerable to a rise in the value of UK equities, which was not matched by an increase in the value of gilts.

[9] Until 1999 Scottish Widows allocated their investments underlying the DAC in a ratio of 70:30 between equities and bonds. Because of the strong performance of the UK stock market, the return on the investments underlying the DAC had considerably exceeded the guaranteed rate of return on that contract. Scottish Widows were able to declare bonuses which were used to purchase further deferred annuities. As most actuaries at the time assumed a higher rate of return for schemes invested in equities than for schemes invested in bonds, they were more likely to advise that further contributions were needed for the latter schemes.

[10] In the later 1990s long term interest rates fell from around 8%-9% to 5%-6%. If long term interest rates continued to fall there was a real prospect of the guarantees in the DACs coming into play. Further, as a result of economic changes and also regulatory requirements, Scottish Widows had to hold substantial capital reserves to support their DACs. This prevented them from investing the money in the reserves more profitably elsewhere. Scottish Widows' Appointed Actuary therefore decided that the ratio of investments underlying the DACs was to be switched from 70:30 to 20:80 between equities and bonds. As a result, actuaries in Scottish Widows foresaw that it was very unlikely that DACs would benefit from declared bonuses in future. It was necessary for Scottish Widows to inform theirclients of the change in the investments underlying the DACs. Scottish Widows' decision to inform pension trustees of this change and its possible consequences for predicted future returns and the MFR of pension schemes is the background to this action.

Mr Edwards's terms of appointment

[11] Mr Edwards wrote to the trustees on 5 March 1997 setting out the terms on which he would accept appointment as scheme actuary of the pension scheme. In that letter, under the heading of "Status and personal undertakings", Mr Edwards stated:

"It is a requirement of the Act and of the actuarial profession that any actuary that you employ must be appointed personally, by name, regardless of who might be his/her principal employer. You will therefore be appointing me personally and I will at all times be personally responsible for any actuarial advice I give.

I am however an employee of Scottish Widows and my work there extends beyond pure actuarial work to other areas of pension scheme administration and advice which Scottish Widows provide, as well as to dealing with contracts issued by companies in the Scottish Widows Group and the terms thereof. I may therefore on occasion be supplying you with information or advice which is in respect of these other areas. Whenever I communicate with you I will make it clear the capacity in which I am doing so.

...

I may be appointed by any of the Companies which participate in your scheme to provide them with actuarial advice in relation to this scheme. Should I be, I am required to draw this to your attention formally. Further, in accepting appointment by others, conflicts of interest may arise. If in my opinion a conflict is possible, I shall immediately inform all the parties concerned and will consider after discussion whether it would be proper for me to withdraw from acting for one or other party."

Under the heading, "Communication," Mr Edwards stated:

"You, the scheme Trustees, are my client. As such I am required by my profession to communicate directly with you on all actuarial matters. I cannot pass my advice to you by way of any third party. I will however accept instruction from any agent appointed by you and will, unless instructed by you to the contrary, copy that agent in on any correspondence I may have with you arising from these instructions."

Mr Edwards then listed his statutory duties as scheme actuary and also stated that he would provide all or any other actuarial advice which the trustees might require and set out an expressly non-exhaustive list of those services. In an appendix to the letter the trustees gave certain undertakings and on 27 March 1997 they acknowledged their acceptance of the terms of appointment and the undertakings.

The events in 1999
[12] In early 1999 the trustees of the pension scheme employed Willis National Limited ("Willis") as their financial advisers. They were considering changing their advisers to Barker Pensions & Investments Ltd ("Barkers") who had been recommended to them by Mark Thompstone's son, Simon. Mr Blower met Mr Stuart Taylor of Barkers on 19 March 1999 and asked him to prepare a discussion paper for the trustees by 24 March in the light of their discussions. The trustees were aware of the meeting and of Mr Blower's request. WTL's directors were concerned that Scottish Widows proposed to raise their contribution rate to the pension scheme to 17.1% and wished to explore means to reduce their contributions. Mr Taylor produced a discussion paper dated 22 March. In that paper he recommended that the trustees should meet the scheme actuary to discuss the triennial valuation and to explore whether he could recommend a lower funding rate from WTL. He also suggested that the trustees should investigate the merits of a switch from an insured scheme (i.e. the DAC) to a managed fund. In his discussion of this topic he stated:

"A competitive investment return, particularly in a Final Salary Scheme, where the employer is having to make up any deficit which arises because of poor investment performance or high salary inflation, is vital.

...

There is a valid argument that because investment is tied to the With-Profits Fund it is not ideal for financing a Final Salary Scheme. This is because the with-profits contract has certain guarantees written into it which as a consequence means that these guarantees are backed by Fixed Interest/Gilt Edged Investment. During the last seventy years Gilt Edge has produced, over the long term, a substantially lower return than equities. The investment return should be linked to beating the National Average Earnings Index increase. Thus, in order to avoid a heavy exposure to Fixed Interest/Gilts there is a case for changing from the With-Profit type of arrangement to a Managed Fund Investment or even Direct Investment.

On average, over a long term, managed fund returns have produced a higher return than with-profits. The down side is that managed fund returns are more volatile than a with-profit contract. However, over the long term such a switch of investment should lead to a long term reduction in cost/improvement in benefits for members.

Presently it is impossible to quantify the amount that the Scottish Widows take out of the contract for expenses. Changing to a Managed Fund would mean that the charges for providing services would be transparent. However, it would mean that the trustees would effectively have to surrender the present Scottish Widows contract and buy the above services, perhaps from the Scottish Widows or elsewhere. That means that the Scottish Widows would impose surrender value charges on the contract thus possibly reducing the notional asset value of the fund.

One upside of any such move is that if services are bought separately then the trustees/company can insist upon certain service standards. The trustees/company can also select their own investment vehicle.

Recommendation

With a fund size of £2 1/2 million switching to managed fund is an issue that the Trustees should address.

Investigating the viability of making such a switch is a complex task which we could do. However, it is quite involved and would require actuarial advice re the offer of the transfer value/surrender value. If you would like us to go down this route we would appreciate a detailed discussion first."

In the paper Mr Taylor also recommended that the trustees consider the pros and cons of continuing the pension scheme on a final salary basis rather than a money purchase basis and also whether the pension scheme should be contracted out. He also provided information about Barkers and about his own experience as a pensions consultant over twenty years.

[13] Some time in the second half of March 1999 Mr Blower spoke on the telephone with Mr Edwards and arranged a meeting in order to obtain his actuarial advice. This was the first occasion on which Mr Blower had spoken to Mr Edwards. During the telephone call they discussed whether WTL could secure a pensions contribution holiday and the possibility of the pension scheme moving from a DAC to an MF contract. In order to brief himself for that meeting Mr Blower contacted both Willis and Mr Taylor requesting advice on what to ask Mr Edwards. Mr Wright of Willis and Mr Taylor both faxed Mr Blower questions which included the issues of actuarial valuation and fund performance. Among the questions which Mr Taylor proposed in his fax were the following:

"Insured v Managed Fund

4. If the scheme had been on a Managed Fund basis, rather than insured, for the last twenty years, and invested with the Scottish Widows Mixed Fund, would the Actuary guestimate how the scheme would have fared.

5. Does he recommend a switch to Managed Fund?"

[14] Mr Edwards visited WTL on 31 March 1999 and met Mr Blower, Mr Mark Thompstone and Mr Taylor. There was a dispute in the evidence as to what Mr Edwards said to Mr Blower at the meeting. To determine that dispute I have to set out some of the background facts. WTL funded the pension scheme. The company's directors had an interest in reducing costs and overheads as the profitability of one division of its business had declined. To that end Mr Blower wanted to investigate whether WTL could have a contribution holiday and both Willis and Mr Taylor in their faxes suggested questions which he could raise with Mr Edwards on this subject. In his evidence Mr Blower said that he had seen the main purpose of the meeting as an investigation of how to reduce in the short term WTL's costs in financing the pension scheme. Scottish Widows, as discussed in paragraph [10] above, wished to respond to the changing economic circumstances, which would imminently affect the performance of their with profits fund. WTL's finance director, Mr Colin Gleaves, who of all the trustees had the best understanding of the issues which the trustees had to address, had suffered a heart attack and was off work from 25 March until early June 1999, although he visited WTL's premises on a part time basis in May. Mr Gleaves was not present at the meeting of 31 March. Mr Blower's account of what occurred was supported by the contemporaneous notes which he wrote on Mr Taylor's fax of 29 March and Willis's fax of 30 March, both of which he took to the meeting as his brief. Mr Edwards prepared a note of the meeting for his file and Mr Taylor also made contemporaneous manuscript notes of the meeting.

[15] Among the matters raised at the meeting on 31 March the parties discussed whether WTL could have a contribution holiday and Mr Edwards agreed that they could have a two-year holiday until May 2001. While Mr Taylor did not recall the meeting in detail, his contemporaneous notes recorded his understanding of the answers which Mr Edwards gave to the questions which he had posed in his fax of 29 March to Mr Blower. In relation to question 4 Mr Edwards explained that the with profits fund comprised 20% gilts and 80% equities but that the Department of Trade and Industry were looking at DACs and their cost was likely to increase. There was likely to be an MFR mismatch. In relation to question 5 ("Does he recommend a switch to managed fund?") he recorded the gist of Mr Edwards's answer as "Yes, switch. Members only need 100% of cash equivalents. Doesn't need to provide deferred annuities." The final comment which he noted, after recording the discussion of his other questions, was that if WTL were to keep its final salary scheme the trustees should switch to an MF contract but that if the company were going to wind up the pension scheme they should not switch. In his evidence he described this comment as his summary of what had taken place.

[16] Mr Blower also made contemporaneous notes of the meeting on the fax dated 29 March 1999 from Barkers in which Mr Taylor had set out his suggested questions. He recorded Mr Edwards's advice that WTL could have a contribution holiday until May 2001. In relation to question 4 he recorded Mr Edwards's advice as being that the pension scheme required to move from a guaranteed DAC to an MF contract to enable Scottish Widows to invest in a higher percentage of equities. He recorded Mr Edwards's response to question 5 as an emphatic yes, by writing in capitals and circling the word "Yes" for emphasis. He also recorded that Scottish Widows would give a 3% enhancement and a further enhancement of up to 5% to encourage people to retain their funds with them. When pressed on cross-examination, Mr Blower said he could not now recall whether Mr Edwards said in terms that he recommended a switch or identified a number of factors which pointed towards a switch.

[17] Mr Blower then turned to the questions suggested by Willis. He also wrote contemporaneous annotations of the discussions at the meeting on Willis's fax of 30 March 1999. On it he recorded that Mr Edwards advised that the DAC's performance had lagged behind a managed fund, which was wholly invested in equities. In relation to the third question posed by Willis ("If the company wishes to reduce or suspend contributions, what is Eric's view on future investment philosophies for the scheme?") he recorded the following answer:

"To get close to MFR should move to managed funds against guaranteed. Cannot afford to change to 20% equities since mismatch. Guarantee will hamper SW's ability to perform."

He also noted that the MFR was "a moving feast" and recorded a qualification to Mr Edwards's advice to switch in these terms:

"Assuming equities will outperform gilts and investment performance will outstrip salary increases - will outstrip RPI."

Beside that entry Mr Blower wrote in capitals "Dead Cert", by which he meant that that outperformance was extremely likely, but he could not recall who had proffered that view.

[18] Mr Blower in his evidence recalled that the discussion of the contribution holiday was completely separate from the discussion whether to switch from the DAC to the MF contract. While that may have been so in his mind, I am not satisfied that it was Mr Edwards's view or, for that matter, the view of the independent financial adviser. Mr Taylor did not recall Mr Edwards stating explicitly that the contribution holiday was dependent upon the switch. But I note that Willis's third question, which I set out in the previous paragraph, raised the issue of the pension scheme's future investment philosophies in the context of reduced contributions from WTL and I consider that Mr Edwards's answer was given in that context.

[19] Mr Edwards in his evidence recalled that one of the principal subjects of discussion was WTL's wish for a contribution holiday as it faced difficult trading conditions. At the meeting he explained that Scottish Widows intended to alter the mix of their investments underlying the DAC and outlined reasons why it might be appropriate to switch to an MF contract. His note of the meeting, which he prepared shortly afterwards, recorded that the meeting involved going through a list of points, which Mr Taylor had prepared. It also recorded that he spent some time going over the forthcoming changes to the DAC and why it might be appropriate to switch to an MF contract because of the change in investment mix. Mr Edwards in his evidence did not recall the detail of what was said at the meeting. He drew a distinction between covering the reasons why it was appropriate to switch and making a recommendation to switch. He thought that he had advised that WTL could not have a contribution holiday if the investments underlying the DAC had changed, because the pension scheme would not have a surplus if the allowance for future bonuses were removed from its valuation. He suggested that that was why Mr Blower and Mr Taylor had interpreted his advice as a recommendation. He also thought that he had advised them that the pension scheme would be significantly mismatched against the MFR once Scottish Widows had changed the underlying investments.

[20] I am satisfied that each of the witnesses who spoke to the meeting was trying to do his best to recall truthfully what had occurred. Understandably, with the passage of time their recollection was not good. As a result the contemporaneous notes are the best guide. From the above I conclude that Mr Edwards did not say in terms that he recommended a switch; he said in evidence that he was aware that it was not his role to make such a recommendation and no-one spoke to his using the word "recommend". Nonetheless, I am satisfied that he explained the reasons why it was appropriate to switch in such a way that he left Mr Taylor and Mr Blower under the clear impression that he was recommending a switch. While it is not possible to recreate the precise words which Mr Edwards used, I am satisfied from Mr Blower's and Mr Taylor's contemporary notes that he gave them to understand, and they reasonably understood, that he was advising in favour of a switch unless the trustees were going to wind up the pension scheme in the near future.

[21] I see no reason to doubt that Mr Edwards envisaged that, as occurred later in the year, the trustees would also receive advice from an independent financial adviser on the relative performance of the equity markets and gilts. In his note he commented favourably on Mr Taylor's report and questions for the meeting and speculated that he might replace Willis as WTL's financial adviser. Mr Edwards's subsequent actings must in my opinion be assessed in the light of his knowledge of Mr Taylor's involvement with WTL and the trustees.

[22] On 1 April 1999, WTL's board discussed the issues which had been raised at the meeting with Mr Edwards. This is consistent with the view that Mr Blower's primary concern in arranging the meeting on 31 March was to reduce the contribution burden on WTL.

[23] On the same day, in order to check Mr Edwards's advice on the MFR, Mr Taylor telephoned an actuary in the Norwich Union Life Insurance Society to ask what that insurance company was doing to meet the MFR requirements. In his note of that phone call Mr Taylor recorded his understanding of what Mr Edwards had said in the following terms:

"The SWF actuary had said that the SWF would later this year recommend to its clients that they switch from deferred annuity with profit contracts to managed fund. The driving force behind that is the fact that the assets under deferred annuity with profits scheme do not marry easily with MFR requirements"

The Norwich Union actuary responded by explaining that he was not as

assertive as Mr Edwards but that the problem was referred to in all scheme valuations. At the end of the note Mr Taylor recorded his conclusions. He stated that it was becoming old fashioned to use a deferred annuity with profits contract to fund a final salary scheme and that it might be that the difficulties with the MFR were merely the catalyst in making Scottish Widows want to pull out of the deferred annuity with profits market. He continued thus:

"Having said all that one of the driving force [sic] behind the SWF's decision may be that the guarantees under the DA contract are good in the light of falling interest rates and possibly very low potential investment returns. These terms might well be worth revisiting as most people who are involved in DA contracts have forgotten what the original terms are."

On 7 April Mr Taylor left a telephone message asking Mr Blower to phone him but neither could recall with any accuracy the content of their subsequent discussion.

[24] On 9 April 1999 Mr Blower, acting on the instructions of WTL's board, wrote to Mr Edwards to ask for urgent advice on various options to reduce the burden on WTL of the pension scheme including a contribution holiday until June 2001. Mr Edwards spoke to Mr Blower on the telephone on 14 April and replied by letter dated 21 April 1999, advising that WTL could stop employer contributions immediately and have a contribution holiday until June 2001 but that thereafter the rate of employer's contributions would increase to 19.3 per cent. In his statement attached to that letter Mr Edwards stated that in his calculation of funding rates he had used the same method and assumptions as he had used in the last funding investigation. In a telephone call on 23 April Mr Blower discussed with Mr Edwards the need for a balanced statement of the pros and cons of switching to an MF contract and of the willingness of Scottish Widows to deal with the pension trustees without the assistance of an independent financial adviser.

[25] On 27 April 1999 Mr Edwards again wrote to Mr Blower about the possibility of a switch to a managed fund. He confirmed that Scottish Widows were happy to deal with the trustees directly rather than through an intermediary but stated:

"However, we are unable to provide you with two aspects of advice that you would normally receive from an intermediary, namely investment advice and advice on who to insure any risk benefits (e.g. death in service) with."

Mr Edwards enclosed with the letter a service charge quotation for administering the WTL scheme as a managed fund and explained that the charges were more transparent than under the then existing DAC. He explained that Scottish Widows gave a standard 3% enhancement if trustees switched their investments to a Scottish Widows managed fund and that they were considering offering an additional enhancement. He undertook to backdate that additional enhancement if the trustees decided to switch before Scottish Widows finalised their policy on that matter. He concluded the letter as follows:

"A Managed Fund will enable the Trustees to have greater investment flexibility. If you remain in the deferred annuity contract investment will in future be predominantly gilt based - this lessens the ability to match the Minimum Funding Requirement and the long term return may be lower than a contract predominantly invested in equities.

However, if there is a possibility of your scheme winding-up in the near future, you should consider retaining the existing deferred annuity contract. This is because under current financial conditions, it is very costly to buy out guaranteed benefits on the termination of a scheme. In the existing contract, you have already purchased these guarantees and these are currently worth slightly more than the surrender value of the contract."

Mr Gleaves did not recall being told of the terms of the letter and in particular that Mr Edwards had stated that he could not give investment advice. It was not clear from the evidence if any of the trustees saw this letter during 1999.

[26] WTL's directors considered whether to replace Willis with Barkers as their independent financial advisers. Mr Taylor attended a meeting with Mr Blower on 20 May 1999. At that meeting Mr Taylor said that he could discuss the pros and cons of a switch from a DAC to an MF contract and that he could clarify and negotiate with Scottish Widows. He explained that he had advised eighteen similarly sized or larger companies when they switched from an insured scheme to a managed fund. On the same day Mr Taylor wrote to Mr Blower to confirm that Barkers would act for WTL in relation to the pension scheme and that that would take the form of providing pensions advice on all matters relating to the scheme. By letter dated 21 May 1999 Mr Blower terminated Willis's appointment as broker and adviser to WTL. In a letter to Barkers dated 26 May 1999 Mr Blower summarised the terms of their appointment as financial advisers. He stated that they would "deal with WTL's pensions schemes, death-in-service and permanent health affairs including administration and advice." He continued:

"Specifically, you will advise on our best use of money including the presentation of a weighted argument as to whether or not to shift the main pension scheme to a 'managed' basis. We would expect this presentation and its follow-up to have enabled an informed board decision by 30 September 1999 (at the latest)."

[27] Thereafter WTL formally appointed Barkers as their financial advisers. Although in form the appointment was by the company, it was not disputed that in substance the directors of WTL in their capacity as trustees of the pension fund also appointed Barkers to advise them. Mr Taylor visited WTL's premises on 7 June 1999 for a meeting with Mr Blower. When there he briefly met Mr Gleaves for the first time. At the meeting with Mr Blower, Mr Taylor informed him that he had spoken to Mr Edwards who had said that he would be writing shortly "with the considerations surrounding the question of a switch to a managed fund." Mr Taylor advised that WTL would also have to consider issues such as the possible demutualisation of Scottish Widows, and a switch from a final salary scheme to a money-purchase scheme.

[28] The expected letter from Scottish Widows, to which Mr Taylor had referred, was dated 22 June. The contents of the statement which accompanied this letter, together with the advice which Mr Edwards gave at the meeting on 31 March 1999, are at the heart of the dispute between the parties. I therefore quote the statement in full. In the covering letter, addressed to Mr Blower, Mr Edwards said that the statement was the advice which the trustees should consider before deciding on the future investment strategy for the pension scheme and that the trustees should contact him if they had any questions about the exercise. The statement was as follows:

"I am writing this letter to the Trustees in my capacity as Scheme Actuary.

Statement to the Trustees of the W.T.L. International Ltd Retirement Benefits Scheme

IMPORTANT: INVESTMENT STRATEGY

Policy for matching the assets to the liabilities
I refer to today's letter from Scottish Widows about the future investment strategy for the assets backing the with profit deferred annuity policy in which you are invested. Here is my actuarial advice which you should consider before deciding on the future investment strategy for the Pension Scheme.

Please note that I am not able to give investment advice and this statement is restricted to a consideration of any constraints arising from the liabilities of the fund which might affect your investment strategy.

Recommendation
I recommend the Trustees consider urgently switching their assets to those which will offer a better match to the Minimum Funding Requirement (MFR) liabilities. This means moving to a fund with more equity investments than will apply under the likely future investment mix of the present contract, for example by switching to a managed fund type of investment. If you do not do this, there is a risk that deficits will arise in future because of adverse stockmarket movements. In addition, the costs of the scheme may well increase in future if no action is taken and I will recommend an increase in funding rates. I now discuss this in more detail below.

Conflict of Interest
I must let you know that I may have a conflict of interest in giving you this advice. Scottish Widows are my employer and they would like you to take action as soon as possible. Indeed, they are offering an incentive to assist you in reaching your decision provided you reach this within the next 6 months. I have considered whether it is proper for me to act in these circumstances and have concluded that I am able to give you advice appropriate to your circumstances without it being affected by a conflict. It is of course open to you to take independent advice and I am sure you will consult with your independent advisors before reaching a decision.

Background
Scottish Widows has given notice of a significant change to the investment policy for the assets backing the with profit deferred annuity contract in which you are invested. The current policy is to allow the Investment Managers a considerable degree of investment freedom and this generally resulted in a high equity investment backing for your contract. In practice this means that the investment returns achieved by this contract have been very good because of strong growth in equity investment markets. Unfortunately, such high investment returns cannot now be expected in the future. Because of this factor alone, the Trustees must consider switching their investments to those which offer the possibility of higher investment returns in future.

As well as considering the long term investment returns for the scheme, the Trustees must consider the MFR position. The MFR requires that a minimum amount of money is held in the fund. This amount is adjusted from day to day in line with the movement in a theoretical portfolio of "matching" assets. Provided the scheme is invested in those assets, there is little risk of divergence from the MFR position because of adverse movements in stockmarkets. However, being significantly mis-matched to the MFR is likely to cause problems in the future. This is because an adverse market movement could result in a deficit arising, and there are strict time-scales for recovering deficits from the employer. For example, if the value of the assets falls to below 90% of the value of the liabilities on the MFR basis, then the employer has to make up the shortfall within one year. This could result in a significant cash injection into the scheme at a time when the employer can least afford it. Assuming such volatility of contributions is not desirable, it is essential that the position is reviewed urgently.

There is another risk which the Trustees need to consider. If the scheme winds up then you may need to buy-out the members' benefits with an insurance company. It would be unfortunate if wind up occurred when stock markets were depressed relative to the cost of insurance as this would worsen benefits. The present insurance policy which you hold is reasonably matched to the liabilities of the scheme on wind up. However, as has been pointed out, this is now at the considerable expense of lower future investment returns. Therefore unless you expect the scheme to wind up in the near future, most Trustees would consider it appropriate to ignore the possibility of wind-up when deciding their investment strategy, and look to maximising investment returns, whilst controlling the MFR risk.

What options are available for the scheme?

Option 1
Do nothing - this means that in current financial conditions bonuses payable to your scheme will be much lower than in the past. Effectively, as far as the MFR is concerned, I will need to treat your scheme as if it were wholly invested in fixed interest securities. In practice, to have a reasonable match to the minimum funding requirement, you will need to hold a significant amount in equities. Therefore, this option would result in an unacceptably high risk of an MFR deficit arising, both from the point of view of the members as well as the employer. In addition, the long term costs of the scheme are likely to rise and I would need to recommend an increase in funding rates.

Option 2
The alternative is to transfer to a more suitable investment medium such as a managed fund. Because of the additional 5% enhancement Scottish Widows are offering (on top of the 3% enhancement which was previously available), this would result in an immediate improvement in the MFR solvency position of your scheme by 5%. In addition, it would then be possible to match the MFR as closely as required for example by investing in the UK equity tracker and fixed interest funds. However it would not be essential to match quite as closely as that and the Investment Manager might be offered some freedom for example to permit holdings in overseas equities and property.

If you switch to a managed fund with a free investment policy, I would not currently recommend any change to the long term funding rates for the scheme. However, separate from this exercise, we are reviewing our funding advice as a result of recent falls in inflation and interest rates, and my recommended funding rates may increase as a result. We will provide more information about this at the next funding review.

The next steps
I have given my recommendation in Paragraph 1 and I now await the decision of the Trustees. Before action is taken it should be discussed with the employer whose attitude to investment risk will also be important. If you need any further information please do not hesitate to get in touch.

Yours sincerely

Eric Edwards

Pensions Actuary

Fellow of the Faculty of Actuaries"

[29] This letter had been drafted by employees of Scottish Widows and had been checked by their internal legal advisers. It had been given to all the scheme actuaries in Scottish Widows whose schemes held a with profits contract. The scheme actuaries were told to consider whether the letter was appropriate to each of their schemes and if necessary amend it. Mr Edwards had considered the terms of the letter but did not amend it as he considered the size of the WTL pension scheme and the age range of its beneficiaries to be typical of such schemes. It was not clear from its terms that the letter was being sent to all pension schemes which had with profits contracts. The trustees were not aware that it was in that sense a standard form letter but thought it to be one which addressed the particular circumstances of the pension scheme.

[30] On the same day Mr R J Hyder, a pensions manager employed by Scottish Widows, wrote a letter to the trustees under the heading, "Important changes to your bond - request for your decision." In that letter he explained that the group pension contract was a with-profits contract which had been backed by an investment mix consisting mainly of shares and other "real" assets which had provided higher returns than fixed-interest investments. As a result the scheme had benefited through regular bonuses and terminal bonuses. He explained that, as a result of (a) the prospect of very low inflation for the foreseeable future, (b) the extent of the guarantees in the group pension bond, (c) changes in the valuation regulations and (d) changes to the taxation of pension funds, there were to be significant changes to the investment character of their bond. He stated:

"In order to match reasonably closely the guarantees in Group Pension Bonds, we are now having to invest the assets which we hold to back them mainly in fixed-interest investments instead of the previous wide mix of investments. This may make your bond much less suitable for your scheme than it has been. In particular it is, quite soon, likely to mean very low (or zero) bonuses under your bond for the foreseeable future."

He stated that their scheme actuary was aware that he was writing to them. He advised that it was likely that many schemes would be advised by their scheme actuaries that they should consider switching to a different investment vehicle because of the change in underlying investment mix. He explained that Scottish Widows were offering an enhancement of 8% of the transfer value of the bond to encourage the trustees to switch to its Managed Fund by the end of 1999. Mr Hyder also gave formal notice of changes to the terms on which pensions would be bought for future entrants to the scheme. Those changes included the removal of a guaranteed maximum premium for new entrants into the pension scheme. He concluded by asking for a response to his letter and advising that the trustees could discuss the options with their independent financial advisers or contact their scheme actuary.

[31] On 22 June 1999 Mr Edwards also wrote to Mr Taylor about Scottish Widows' review of the future investment strategy for the assets backing the DAC in which the pension scheme was invested. He enclosed a booklet on the Scottish Widows MF contract and stated that he hoped that Mr Taylor would be able "to support our approach and recommend that the client switches to our Managed Fund."

[32] On 23 June 1999 Mr Blower wrote to Mr Taylor sending copies of the two letters which he had received and asking when Mr Taylor would advise the trustees "re. 'Insured' to 'Managed'" (i.e. the possible switch from the DAC to the MF contract). He also asked that he advise the trustees on the financial implications of the possible takeover of Scottish Widows. On the same day he copied the two letters of 22 June from Scottish Widows to all of the trustees and suggested that they should hold a meeting when he had received advice from Mr Taylor. Mr Gleaves saw Mr Edwards's letter of 22 June at some stage and interpreted it as a recommendation to switch. He thought the advice from the scheme actuary was strong and should not be ignored. Mr Gleaves saw Mr Edwards as the main adviser of the trustees and explained that the trustees had relied on his advice for many years.

[33] On 23 June 1999 Scottish Widows and Lloyds TSB Group plc announced that they had entered into an agreement to transfer Scottish Widows' business to companies within the Lloyds TSB group.

[34] On 28 June 1999 Mr Taylor wrote to Mr Blower pointing out the six-month period in which the enhancements would be available as an incentive to switch and the need to consider the effects of the possible takeover of Scottish Widows. He suggested that they should meet to review the considerations which were relevant to the decision whether or not to switch. On 30 June 1999 Mr Taylor spoke on the telephone with Mr Blower. He agreed to find out whether a switch would affect the trustees' right to a windfall and to meet Mr Blower to discuss a switch to an MF contract. He also spoke to Scottish Widows on the telephone seeking information whether a switch from the DAC to the MF contract would affect the trustees' entitlement to compensation for the surrender of their membership rights.

[35] Mr Taylor met Mr Blower on 15 July 1999. He discussed both the proposals to switch to an MF contract and also various other matters relating to the pension scheme. He advised that the trustees should seriously consider a switch to an MF contract. He agreed to seek further clarification from Mr Edwards. He recorded in his note of the meeting that thereafter they should call a meeting of the trustees at which Mr Taylor would outline "all the issues including solvency margins, deferred annuity guarantees, potential change in the scheme from Final Salary to Money Purchase, the Scottish Widows enhancements and possible windfall as a result of the Lloyds/TSB takeover." Mr Blower asked Mr Taylor to see if he could persuade Scottish Widows to increase what they were offering as incentives to switch. In a letter dated 16 July 1999 to Mr Edwards Mr Taylor attempted to do so. He said that the trustees were seriously considering Mr Edwards's recommendations and that they would hold a meeting within weeks to make their decision. He stated that, on the investment side, unless the liability profile of the scheme was unusual, he would recommend that the fund be invested in Scottish Widows' Managed Fund. He requested certain information concerning the liabilities of the scheme and the past performance of the Scottish Widows' Managed Fund. He asked for confirmation that the windfall would be available to the trustees if the takeover occurred after the six months in which there were incentives to switch. He stated:

"Obviously you are recommending that the trustees surrender the With-Profits Deferred Annuity Contract. Is there any way of quantifying, or describing, what the trustees will lose in terms of guarantees?"

He also asked what would be the discontinuance value of the scheme if it were discontinued then or after the trustees had taken the transfer value and the enhancements (but not the windfall). In his evidence Mr Taylor explained that he had asked this question about the discontinuance position of the scheme as he saw it as a good measure of what the trustees might lose on making a switch.

[36] At some date in July 1999 Mr Stuart Thompstone, who was a director of WTL, became a trustee of the pension scheme on the retirement of Mr Christopher Wright. Mr Thompstone's responsibilities as a director were concentrated on the engineering side of the business and he had very limited experience of accounting and pensions. As a trustee he relied to a considerable extent on the views of Mr Gleaves and Mr Blower and took his lead from them. He had to be informed by his colleagues on the prospect of a windfall from the demutualisation of Scottish Widows and the possibility of a switch to an MF contract when he took up his duties as a trustee. He saw at that time Mr Edwards's letter of 22 June but he did not recall seeing the earlier correspondence or the exchanges in late June and early July.

[37] Mr Edwards wrote to Mr Taylor by letter dated 26 July 1999, responding to the enquiries in his letter of 16 July. He commented on the 3% enhancement. He enclosed an investment booklet of Scottish Widows' investment performance. He stated that Scottish Widows did not expect any trustees to make a switch until they were assured that any windfall would not be affected and Scottish Widows hoped to be in a position to give a guarantee soon. In response to the question as to what the trustees would lose in terms of guarantees he stated:

"Without doing detailed calculations and bearing in mind deferred annuities also provide a "mortality" guarantee, the typical guaranteed return of the deferred annuities already purchased is between 51/2% and 6%. The choice facing the Trustees is to fix into this guarantee (note as future bonuses will be low, they will get little more than this) or to move to an investment medium with no guarantees in the hope of greater future returns in the long run."

In relation to the effect of discontinuing the scheme he advised:

"There are two types of discontinuance. The key measure is the MFR position. It is this measure that determines whether there is any Debt on the Employer in a wind up. This compares the market value of the assets with the total scheme Transfer Values. This will improve by 5% immediately after the switch due to the additional enhancement available. However, another measure of discontinuance is the ability of the scheme to provide deferred annuity bonds. As mentioned earlier, the existing deferred annuities imply a guarantee of between 51/2% and 6%. This is a higher rate than is currently available in the open market from companies who provide deferred annuity bonds. Therefore, even after the 5% enhancement, the scheme would not be able to replicate the deferred annuity bonds it had held prior to the switch, leaving a less favourable position in the scheme's ability to provide deferred annuity bonds."

[38] As will appear from the discussion below, this is an important letter, not least because in the first quoted paragraph above Mr Edwards stated succinctly the choice which the trustees had to make in deciding whether to make the switch. Mr Blower understood what Mr Edwards said in this passage as did Mr Gleaves. In the second quoted paragraph Mr Edwards made it clear that the transfer value with the 5% enhancement would not enable the trustees to buy replacement deferred annuities in the current market. Mr Blower in his evidence accepted that he had not understood this point and could not recall whether he had asked Mr Edwards for clarification.

[39] On 28 July 1999 Mr Taylor sent Mr Blower copies of his letter of 16 July and Mr Edwards's reply of 26 July. In that letter he stated that the next step was to have a trustees' meeting at which he would explain the proposal which Scottish Widows were making. The purpose of the meeting, he stated, was that the trustees should understand fully the quite complex issues. Thereafter, there was a delay in progressing the proposal. The parties did not explore in evidence the reasons for that delay.

[40] On 5 October 1999 Kathy Fletcher, a pensions assistant employed by Scottish Widows, wrote to Mr Blower giving information which the trustees needed to complete their annual report. This included a statement of investment assets and notes on Scottish Widows' output to assist the production of scheme accounts. In those notes it was stated:

"The assets are held in a with-profits deferred annuity group bond. Contributions paid are used to purchase guaranteed amounts of pension payable in future to members of the scheme. These 'purchased pensions' are effectively the assets of the scheme. The intention is that there are sufficient assets, i.e. purchased pensions, to provide each member with their entitlement benefits, the scheme's liabilities, when they reach normal retirement age. As the contract is with-profits, bonuses are payable each year depending on the performance of the funds which back the contract."

The notes also described the statement of investment assets as follows:

"This statement shows the value of the assets held under the group bond with Scottish Widows. There may be other assets held elsewhere. The value is calculated using the 'premium value' method as prescribed in the guidance to accountants known as SORP1. Please note that it has no validity other than for accounting purposes. In particular, a different value is likely to be placed on the assets in the actuarial valuation.

Both this year's and last year's approximate value of assets held are shown. Due to the valuation method used the values are sensitive to movements in market interest rates. The net change is a result of the change in asset value and the income less expenditure."

The statement of investment assets was in the following terms:

"WTL International

Retirement Benefits Scheme

Group Bond No PW 1378

1999 1998

Value of assets held £3,150,100 £2,511,900

Notes:

(i) These figures are estimates of the amount which would be required to purchase the benefits secured under the Bond for members who have not retired. The estimates are based on financial conditions as at the appropriate 1 June and assessments of future changes. However they do exclude any allowance for benefits purchased by premiums due on those dates. The values are sensitive to long term market rates of interest, and do not represent the realisable (market) value of the bond at the date shown.

(ii) Market rates of interest fell during the scheme year covered by this statement. As a result the value of assets held between the dates shown above has increased. This is in addition to increases due to premiums paid or any other income to the fund.

(iii) The above figures include allowance for the value of benefits retained in the Scheme in respect of former members who have not yet retired."

[41] On 8 October 1999 Mr David Andrew, a pensions manager with Scottish Widows, wrote to the trustees. He advised them that Scottish Widows had made special arrangements to protect trustees who were members of the Society and who decided to switch their scheme's investment from the DAC before the proposed transfer of Scottish Widows' business to the Lloyds TSB Group took effect. Trustees who transferred their investment to a managed fund with Pensions Management (SWF) Ltd and thereafter retained that investment would be treated for the purposes of the membership compensation as if they had remained members at the date of completion of the proposed transfer. Thus the trustees received an assurance that a switch effected before the transfer of Scottish Widows' business would not deprive them of their entitlement to a windfall.

[42] On the following day (9 October 1999), Mr Taylor met the trustees to advise them on their future strategy. The meeting lasted between two and three hours. Mr Taylor prepared a detailed note of the meeting which he accepted in his evidence was an accurate summary of what had been discussed. No other witness challenged its accuracy. The trustees did not prepare any separate minutes of the meeting.

[43] The meeting proceeded as a question and answer session in which Mr Taylor answered ten questions raised by the trustees. Mr Blower thought that Mr Taylor had formulated the questions after speaking to him on the phone. On his meeting report, which he sent to Mr Blower on 21 October, Mr Taylor recorded that the purpose of the meeting was to consider and reach a decision on whether to switch from the deferred annuity with-profits contract to a managed fund.

[44] The first question which the trustees raised was "why should we switch to managed fund?" Mr Taylor's recorded answer was as follows:

"I) Mr Eric Edwards, the scheme actuary, recommends it.

II) A 5% enhancement (with a limited time scale) to transfer value is being offered.

III) An additional 3% enhancement to the transfer [value] is being offered if the Scottish Widows retain services investment for a five year period.

IV) Because of the proposed investment mix of underlying assets, under the deferred annuity with profits contract, it is less likely in future that the scheme will meet the minimum funding requirements (MFR). Failure to meet MFR requirements will mean that the employer will have to make good any under funding and that then becomes a debt on the company.

V) Costs of operating the scheme are transparent.

VI) Investment returns are transparent. Presently in the deferred annuity contract monies earned on the underlying scheme assets are not necessarily paid into the fund and vice versa.

VII) It is stated in the correspondence from the Scottish Widows that they are going to move the asset mix of their deferred annuity contract to be substantially Gilts. Historically using underlying assets of Gilts is a very poor way indeed to provide pensions, and in particular schemes which are equity based have shown a far better return.

VIII) The windfall to the trustees from the purchase of the Scottish Widows by Lloyds TSB will fatten the funding of the scheme meaning that even if the Scottish Widows managed fund performs badly there will be considerable 'fat' to withstand an initial poor investment return.

IX) Providing final salary benefits by means of a deferred annuity with profit contract is old fashioned. Admittedly fashions are flippant but, where the Scottish Widows actuaries have a discretion to decide what sort of return they give to their with profit deferred annuity contracts, the fact that there are very few policy holders in this category will probably mean that that discretion is ill used to the point that the returns will be very low indeed."

[45] The second question, which the trustees raised, was what was the downside of switching to a managed fund. Mr Taylor's recorded answer was as follows:

"I) The trustees must give up their right to certain guarantees in the contract namely

a. A guaranteed rate of return of 5.5%-6% on monies already invested (future guarantees are liable to be reduced).

b. Guaranteed annuity rates at retirement."

[46] The third question was "What does this mean?" to which Mr Taylor recorded the following reply:

"I) It means that in the event that inflation remains very low and as a consequence Gilt yields fall even more - historically Gilt yields are already at a 30 year low - then the guaranteed annuity rates may well kick in. Switching to managed fund means that these will be lost. A very low Gilt yield will lift the capital value of Gilts which might be reflected in the scheme rate of return, but that is at the discretion of the Scottish Widows actuaries. On the other hand such very low long term inflation will make equities (shares) very attractive and hence increase the value of equities, assuming that there is not a collapse in company profits i.e. a 1930's type of economic happening."

[47] Question 4 was "What are other trustees doing?" and Mr Taylor's reply was recorded as follows:

"I) Some are switching their final salary schemes to money purchase in which case a deferred annuity with profit contract is inappropriate as an investment vehicle. Most trustees of the final salary scheme will be following the Scottish Widows' advice.

II) Generally speaking the majority of scheme monies long ago left the 'insured' (deferred annuity with profit) route and moved to managed fund with startlingly good results, so far."

[48] The fifth question which Mr Taylor addressed asked him what he recommended and he recorded the following answer:

"I) On balance I favour a managed fund approach. If I could envisage number 3 above happening I would be a little less enthusiastic but then I am fairly cautious by nature.

As I have already said the deferred annuity with profit contract is being virtually abandoned by the Scottish Widows. Additionally whilst I appreciate the trustees' concerns and caution, since around 1970 the British economy has endured grotesquely high inflation, a revolutionary switch from manufacturing based industry to services, at least half a dozen Sterling crises, more recently a strong pound with a further unpleasant impact on the manufacturing side, and finally pension funds have had to endure over zealous Government interference and regulation as a result of Maxwell's criminal activities and yet most final salary schemes operating on a managed fund basis are still in quite good shape! The point here is that managed fund contracts have shown resilience, albeit in a long bull market."

In his evidence Mr Taylor confirmed that his reference to "number 3 above" in the first paragraph of this answer was to a 1930s-style slump.

[49] The next three questions asked about the recent performance of the Scottish Widows Managed Fund, whether the trustees would be locked in to Scottish Widows for five years in order to benefit from the offered enhancement, and whether the trustees would have to be more active in monitoring investment performance if they were to switch to a managed fund. Question 9 asked whether the trustees could lock into the existing guarantees. This would have involved leaving the trustees' existing investments in the DAC but making future contributions into a managed fund. Mr Taylor's answer was:

"I) Yes. It would be possible to make paid up existing benefits, and put new monies into a managed fund. However, the 5% enhancement would no longer apply. The 3% would."

It was correct that that possibility was available; but Mr Taylor was incorrect in his suggestion that the 3% enhancement would have been paid on funds retained in a DAC.

[50] The tenth and final question asked for assurance that the trustees would receive the windfall on the demutualisation of Scottish Widows if they made a switch. Mr Taylor then recorded the outcome of the meeting. The trustees agreed to reach a decision in principle within one week but stated that a decision to switch would be subject to Mr Taylor confirming the detail with Mr Edwards and also obtaining some plain English statements in writing on the windfall. Mr Taylor also recorded that the trustees should meet a member of the Scottish Widows' investment team to decide which managed fund to use and he agreed to help in that decision-making process.

[51] It appears that the discussion at the meeting on 9 October 1999 was the last occasion on which the trustees debated all of the considerations in the questions which Mr Taylor answered before they took their decision in principle. It was also clear from the oral evidence at proof that the trustees had differing levels of understanding of the relevant issues. Mr Gleaves understood Mr Edwards to have advised in favour of a switch. He considered that the trustees were being told that the risks were small and incentives were substantial. Nobody raised any objections to the proposed switch. Importantly, Mr Gleaves understood that one of the reasons for the switch was to replicate the previous balance of assets in the DAC, by maintaining a high proportion of the pension scheme's assets in equities. He understood the view that over the long term equities had performed better than gilts. He also understood that on switching the trustees would lose a guaranteed rate of return and also the mortality guarantee so that the risk of a member of the pension scheme living longer would fall on the scheme and not on Scottish Widows in future. He was also aware that there was a risk that the value of the assets in the MF contract could fall with a fall in the equity markets. He knew that the value of the DAC would hold up better in a falling equity market than an MF contract. He understood that the fund would be larger than before switch as a result of the incentives and that they would broadly make up for the lost guarantees.

[52] Of the other trustees, only Mr Stuart Thompstone gave evidence. I did not hear the evidence of Mr Mark Thompstone, whom WTL had dismissed since the events discussed in this action for an alleged conflict of interest. It was clear that of the trustees, only Mr Gleaves had a financial qualification and only he had a ready understanding of the principal issues which they faced. Mr Mark Thompstone and Mr Stuart Thompstone were engineers and businessmen who were principally involved in the operation of WTL's manufacturing business and its sales. Whether they came up to Mr Blower's description of them as manufacturing men usually covered in wood flour, it was clear from Mr Stuart Thompstone's evidence that (as I have mentioned) he had not been shown all of the documents which predated his appointment, including Mr Hyder's letter of 22 June 1999. He had no recollection of being shown Mr Edwards's letter of 26 July 1999. He relied heavily on the views of the other trustees after he became a trustee in July 1999 and was content to follow their lead. As a director of WTL since 1978 he had been involved in discussions about the company's contributions to the pension scheme but, by the time he took on responsibilities as a trustee of the pension scheme, his colleagues had been considering the proposal to switch for some time. He was shown Mr Edwards's letter of 22 June 1999 and understood him to be advising that the trustees should move their funds to an MF contract to get better growth in the future and to avoid WTL having to increase its funding of the pension scheme.

[53] Mr Stuart Thompstone understood the recommendation at the meeting of 9 October that the trustees needed to have a fund which was principally equity-based. He was aware of the incentives and the possibility of a demutualisation windfall. He was also aware that it was likely that under the DAC future bonuses would be reduced and might not be paid at all. He was aware that the switch involved giving up certain guarantees but he had no understanding of their significance and relied on the experience of the other trustees. Because he lacked relevant experience, he was anxious to know if the trustees of other schemes had made the same decision as he was being asked to make. It was clear from his evidence that Mr Thompstone attached weight to what he took to be Mr Edwards's advice but, mistakenly, he understood that Mr Taylor, in answering the questions discussed at the meeting on 9 October, was in large measure conveying Mr Edwards's views rather than his own.

[54] Mr Blower was not responsible for the decision as he was not a trustee. But he acted as administrator for the trustees and communicated to the trustees, either orally or by copying correspondence, the views of advisers such as Mr Edwards and Mr Taylor. As a result, his views are likely to have contributed to the understanding of the trustees. In his evidence he asserted that he relied principally on Mr Edwards's advice and much less on Mr Taylor's as the latter had only been involved with WTL for a short time. He asserted that he placed ninety per cent reliance on Mr Edwards and only ten per cent on Mr Taylor. He described Mr Taylor as providing back up, explaining and negotiating. While I discount to a considerable extent some of Mr Blower's more colourful expressions and also consider that his recollection of events materially understated the role which he on behalf of the trustees gave Mr Taylor, I accept that he and the trustees who gave evidence understood that Mr Edwards had recommended a switch from the DAC to an MF contract and that they attached considerable weight to what they believed was his recommendation.

[55] Thereafter some time passed before the trustees resumed consideration of the issue. While an agenda was prepared for a meeting of the trustees on 19 October 1999 at which it was proposed to discuss the effects of the demutualisation of Scottish Widows and the considerations relevant to the switch to a managed fund, it appears that the meeting did not take place.

[56] Nonetheless, on 3 November 1999 Mr Blower wrote to Mr Taylor to confirm that the trustees had unanimously agreed to move the pension scheme to a managed basis provided they received "written absolute confirmation" of satisfactory incentive sums and of their right to the demutualisation windfall before they formally agreed to the move. On 4 November 1999 Mr Taylor forwarded this letter and his note of the meeting of 9 October 1999 to Mr Edwards. He asked Mr Edwards to give the needed assurance about the windfall and to provide performance tables to enable the trustees to select the managed fund in which to invest.

[57] On 15 November 1999 Mr Taylor spoke with Mr Edwards by telephone. Mr Edwards explained that many trustees had requested further information about the windfall and that Scottish Widows were to send out a circular on that matter. Trustees proposing a switch would receive an individual letter with some sort of quantification of the windfall. He reminded Mr Taylor that one of the enhancements ended in December 1999 and that it was imperative to sign up by the year-end. Mr Taylor asked whether his interpretation of Mr Edwards's comments about the windfall were correct. Mr Edwards replied that Mr Taylor had "gone out on something of a limb but on the other hand BPI [i.e. Barkers] are paid to give advice."

[58] On 19 November 1999 Mr Taylor visited WTL's premises and met Mr Blower to discuss various matters relating to the pension scheme. They also discussed the fact that WTL had made an operating loss of £360,000 in the previous financial year and its proposals to eliminate loss-making. In relation to the proposed switch Mr Taylor explained that the trustees should wait for Mr Edwards to quantify the expected windfall but that he had passed on to Mr Edwards the trustees' instructions to proceed with the switch once the windfall was guaranteed. They also discussed the performance of the Scottish Widows' managed fund compared to other managed funds. Mr Taylor expressed the view that, while the Scottish Widows' performance was about 1% below median, that underperformance was not sufficient to alter the trustees' decision to invest in their managed fund.

[59] On 1 December 1999 Mr Edwards wrote to Mr Taylor in reply to his letter of 4 November. He enclosed with his letter the documentation to effect the switch to a managed fund and a brochure on the various funds within the Scottish Widows Managed Fund. He reminded Mr Taylor that the special 8% enhancement was available only until 31 December 1999. He also clarified the components of the proposed demutualisation windfall. One of the documents, which Mr Edwards enclosed and which was relevant to the switch, was a bulk surrender valuation which stated that the bulk surrender value of the scheme as at 29 November 1999 was £2,515,000. After Mr Taylor forwarded Mr Edwards's letter and enclosures on 2 December, the trustees asked him to obtain from Mr Edwards an explanation for the difference between that bulk surrender valuation and the value of £3,150,100 which was the asset value of the scheme for the purposes of the pension accounts (see paragraph [40] above). By fax dated 3 December 1999 Mr Taylor asked Mr Edwards to explain the rationale for the two figures and discussed the matter with him on the telephone four days later. On 7 December Mr Taylor telephoned Mr Blower to report on his discussion with Mr Edwards. In his note of the telephone conversation Mr Blower recorded in his own words Mr Taylor's report. He noted the explanation that the transfer value was the market value of the pension scheme and that the accounts measure of £3,150,100 was an estimate based on an accounting convention which was a spurious extrapolation from the DAC guarantees. In his evidence Mr Blower explained that he did not understand the difference between the two figures.

[60] Mr Edwards wrote to Mr Blower on 7 December to give a written explanation of the difference between the accounts value and the surrender value of the pension scheme. He explained the difference as follows:

"The value for the accounts was calculated on the premium value method. This is a method commonly used to value insurance policies in accordance with Accounting requirements as set out in their SORP (Statement of Recommended Practice). It is a notional value based on long term interest rates. It is calculated using current premium rates of the with-profit deferred annuities which make up the assets of your policy. In this sense, it is the amount of money which would be required to replace the guaranteed benefits if they were purchased today - the method looks to the future, and is very sensitive to the assumed rate of interest. The lower yields are, the higher the value will be.

Our surrender value basis aims to return to you the total of premiums paid by you, less claims outgo for pensioners and early leavers, less expenses, plus the investment return earned by the fund, plus a share of the miscellaneous profits of Scottish Widows - i.e. it aims to ensure that you receive a fair share of the Scottish Widows with-profits fund on surrender. Therefore, your surrender value was calculated having regard to what you have paid to Scottish Widows in the past. In that sense it looks backwards at what has happened in the past, rather than forwards (as was the case of the Accounting method). Therefore it is not surprising that the two values are entirely different."

Mr Edwards then gave an example to illustrate the differences between the two calculations. Mr Blower in his evidence explained that while Mr Edwards's advice was well meant, he again did not understand it. He opined that of the trustees only Mr Gleaves might have understood it. Mr Gleaves confirmed in his evidence that at some time in 1999 he had understood that it would cost the trustees £3.15 million to repurchase the benefits which were being surrendered. The other trustees may not have understood the figures but no-one asked Mr Edwards to clarify his advice.

[61] Mr Edwards copied this letter to Mr Taylor who telephoned him on 9 December to inform him of the trustees' concerns. In his note of that telephone conversation Mr Taylor recorded that the trustees had been worried by the letter and were scared that Scottish Widows were "shafting" them. Mr Blower explained in evidence that their concern was that the 8% enhancement was being applied to the transfer value and not the accounts value. While the trustees had these concerns and did not understand fully the difference between the accounts value and the surrender value, they did not ask Mr Taylor to obtain further clarification from Mr Edwards nor did they approach Mr Edwards directly for further advice. Mr Taylor also recorded that the trustees would make a decision on the switch at the board meeting on the following week.

[62] On 16 December 1999 the trustees resolved to switch the investment of the scheme assets to the managed fund policy operated by a subsidiary of Scottish Widows. On the same day Mr Blower sent Mr Edwards the documents needed to effect the switch and on 21 December 1999 Mr Colin Miller, a senior pensions administrator with Scottish Widows, wrote to Mr Blower to confirm that the surrender value enhanced by the 8% enhancement had resulted in the transfer of £2,745,564 to their managed fund department.

Subsequent events

[63] Thereafter, the trustees took advice from Mr Taylor and a colleague from Barkers, Mr John Wilkinson, on the investment of the demutualisation windfall of approximately £1.2 million. Mr Taylor prepared a report in May 2000 on the selection of a fund manager in which he advised the trustees to invite several fund managers to make a presentation to them. After the presentations, the trustees decided to invest the windfall, which they received in June 2000, with Fidelity Investments.

[64] In June 2001 Mr Edwards provided the trustees with a report on the actuarial valuation of the pension scheme at 1 June 2000. By then, the pension scheme's assets had been invested in unitised funds under an MF contract. In that report Mr Edwards stated the market value of the MF units to be £2,750,000 and certified that the contribution holiday for WTL and a one-year contribution holiday for the employees met the MFR. In his calculation of the ongoing funding level Mr Edwards made the assumption that there would be a 7% return on investments in the managed fund.

[65] Subsequently, WTL went into administrative receivership and the pension scheme went into winding up. The trustees discovered in the changed economic circumstances following 2000 that the pension scheme's continued exposure to equities had been disadvantageous and that the funds available to them in the winding up under the MF contract were less than they would have been had the DAC continued. But this proof was not concerned with the formulation and quantification of the trustees' claim in damages.

The pursuers' case

[66] In his submissions at the end of the proof, Mr Andrew Young QC did not insist on the assertion that the pursuers had suffered loss on the basis that the guaranteed maximum premium rates under the DACs were below market rates. Nor did he advance the argument of his actuarial expert, Mr Alan Goodman, that Mr Edwards had failed to explain the difference between the accounts value and the surrender value. He did not submit, in accordance with Mr Goodman's evidence, that the differential between the accounts value and the surrender value was a good measure of the value of the guarantees contained in the DAC which were lost by the switch. The abandonment of the latter argument is significant and I discuss it further in paragraphs [81] and [82] below.

[67] Mr Young's submission focused on the following assertions. First, he submitted that Mr Edwards had been unable to give independent advice because of a conflict of interest; Scottish Widows had a significant commercial interest in persuading their policyholders to switch from the DACs in order to avoid the risk that the guarantees in those contracts would come into operation.

[68] Secondly, he submitted that, because Mr Edwards had recommended the pursuers to switch from the DAC, he had gone beyond the normal role of a scheme actuary and came under an obligation (under paragraph 4.7 of the Professional Conduct Standards) in giving written actuarial advice to give sufficient information "about each relevant factor and about the results of [his] investigations to enable the client to judge the appropriateness of the recommendations and the implications of accepting them." Because Mr Edwards had recommended a switch, he was under a duty to take reasonable steps to ensure that the pursuers understood all the issues and risks of both switching and not switching.

[69] Thirdly, Mr Young argued that in the letter of 22 June 1999 Mr Edwards had placed too much weight on the risk of the pension scheme's assets failing to match the MFR when in reality the scheme was sufficiently funded on an MFR basis and was likely to be boosted by the membership compensation windfall from the demutualisation of Scottish Widows. The scheme was well funded for MFR in 1999 and Mr Edwards had expressed no concern in allowing WTL a two-year contribution holiday. The advice given in the standard letter of 22 June 1999 was not appropriate to the circumstances of the pursuers' scheme. Further, Mr Edwards failed to advise the pursuers on what in his view should be an appropriate equity/bond asset mix to match the liabilities of the scheme.

[70] Fourthly, he submitted that Mr Edwards failed in his duty to advise the pursuers on the value and importance of the guarantees included in the DAC which they would surrender if they switched to an MF contract. These were (i) the guaranteed rate of return on monies already invested, (ii) guaranteed annuity rates on retirement, also called "the mortality guarantee," (namely that Scottish Widows were bound to pay a fixed amount of pension for the lifetime of the member from his retirement date regardless of improvements in life expectancy) and (iii) the maximum guaranteed premium rates. He also failed to factor into the value of the DAC the contingency that annual and terminal bonuses might be paid after the assets underlying the DAC were changed, although Mr Goodman conceded that in 1999 any bonuses were expected to be minimal. The issue on which the pursuers needed to be advised was whether the returns on an MF would compensate for losing the guarantees under the DAC. While Mr Edwards had advised on the guaranteed rate of return in his letter of 26 July 1999 in response to a question from Mr Taylor, he had not advised or put a potential value on the other matters or on the likely rates of return on new contributions to the DAC to enable a comparison to be made with an expected rate of return under an MF. Mr Edwards, having embarked on giving investment advice, was under a duty to discuss with the pursuers what was an appropriate assumption for the rate of return under an MF.

[71] Fifthly, he submitted that Mr Edwards had failed to advise the pursuers on the third option, namely retaining the DAC but putting new contributions into an MF. He accepted that Mr Taylor had discussed the option at the meeting on 9 October 1999 (see paragraph [49] above), but asserted that the failure was relevant to causation as, without Mr Edwards's input, the option was not properly explained to the trustees.

[72] Mr Young submitted that, if it were established that the pursuers decided to switch in reliance on what he said was Mr Edwards's incorrect advice in relation to the MFR, that was sufficient to establish the needed causal link with their loss. Otherwise he accepted that the pursuers had to establish that if they had been properly advised they would not have surrendered the DAC. This they could have done either by retaining the DAC as before or by adopting the third option mentioned above. He pointed out that the trustees were cautious and were concerned about taking on extra responsibilities for monitoring the performance of an MF. He submitted that the evidence established that if the trustees had been properly advised (i) that the risk of incurring a deficit in relation to the MFR was low, (ii) on the value of the guarantees in the DAC and (iii) on the availability of the third option, they would have retained the DAC either in its entirety or, under the third option, for past contributions.

Discussion
(i) Legal structure

[73] The proof was concerned with two issues, namely (i) whether Mr Edwards had broken his contract or had been guilty of a breach of a parallel duty of care and (ii) whether any such breach of contract or breach of duty caused the pursuers loss.

[74] Counsel agreed that for the pursuers to succeed in relation to breach of contract and the parallel delictual duties, they required to meet the familiar tests of professional negligence in Hunter v Hanley 1955 SC 200. It was also agreed that the House of Lords in Bolitho v City and Hackney Health Authority [1998] AC 232 had set out the correct approach for the court to take when the evidence of professional experts adduced by each side was in conflict in relation to a practice which was a matter of professional judgement. In short, it is not the function of the court to prefer one school of thought held by responsible professionals to another. But a judge cannot conclude that a defender has not been negligent just because he leads evidence that other responsible professionals would have done what he did. That is because, in exceptional cases, the court may conclude that a practice, which responsible professionals support, does not stand up to rational analysis. Thus, where a judge is satisfied that a body of opinion, on which a defender relies, is not reasonable or responsible, he may find the defender guilty of negligence. Similarly, if the judge were to conclude that an expert's opinion was based on a mistaken or incomplete understanding of the facts or lacked a logical basis, he could reject the opinion supporting the defender.

[75] In relation to causation, Mr Young referred the court to the judgment of Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1 in which he derived a proposition from the decision of the Court of Appeal in Downs v Chappell [1997] 1 WLR 426. Mr Young submitted that, in relation to the advice about the MFR which Mr Edwards gave in his letter of 22 June 1999, the pursuers had to prove only that they had acted as they did because they had relied on incorrect advice, and not that they would have not acted as they did if they had been given the correct advice.

[76] In the circumstances of this case it is not strictly necessary for me to reach a firm view on whether Millett LJ's approach in Mothew (at p.11B-E) is correct, namely that there is a difference in the court's approach to causation between a case of negligently giving the wrong advice and the case of negligent failure to advise. For the reasons set out in paragraph [111] below, I am not persuaded that the pursuers have established that they would not have acted as they did if they had not been given the advice about the MFR which Mr Edwards gave in the letter of 22 June 1999. In other words, I do not find the needed reliance. But as Mr Young raised the argument, I express my views on it.

[77] I note that Millett LJ relied on the judgment of Hobhouse LJ in Downs v Chappell for his proposition in Mothew but Hobhouse LJ in Swindle v Harrison [1997] 4 All ER 705 (at p.728) pointed out that his decision was not authority for that proposition. The approach in Mothew has also been cogently criticised by Janet O'Sullivan in an article in (2001) 17.4 PN 272, and Geoffrey Voss has called for a reconsideration in (2001) Cambridge Law Journal 337. See also Jane Stapleton's article, "Cause in fact and the scope of liability for consequences" [2003] LQR 388.

[78] In our law causation is not solely a matter of common sense; nor is it simply a question of applying a "but for" test. It is well established that one has to look to the law to decide what losses are to be held to have been caused by a particular kind of breach of duty: South Australia Asset Management v York Montague [1997] AC 191. Questions of remoteness of damage, which are not relevant in this case, may also arise. But those are not the only considerations. It is not in my opinion sufficient to ask whether the proffering of incorrect advice caused a person to transact when otherwise he would not. When considering causation one must also ask whether the breach has caused loss for which damages are recoverable. It is trite that in contractual cases the court awards damages in order to place the pursuer in the position he would have been in if the defender had performed in accordance with his contract; in delict they are to place the pursuer in the position he would have been in if the defender had not breached his duty. See McBryde, "The Law of Contract in Scotland" (3^rd edition) para 22.91, Stair Memorial Encyclopaedia, Vol. 15, "Obligations" at para 891 (Professor F Davidson), and Thomson, "Delictual Liability" (3^rd edition) para 16.5.

[79] I consider that, in any enquiry into the causation of loss in the context where a person was under contractual and parallel delictual duties when providing advice or information, it is relevant to know what would have happened if the defender had not been in breach or at fault. This includes creating the appropriate hypothesis of what a defender would have done had he performed the contract or had he not been negligent. Merely to apply a "but for" test when asking whether a party would have entered into a transaction when negligent advice had been given does not answer the question whether the breach of duty caused loss for which damages are recoverable. That question requires the court to address what the pursuer's position would have been (in contract cases) if the defender had performed his contract, and (in negligence) if the defender had not been in breach of his duty. Where a defender was under a positive duty to act, such as where he was contractually engaged to give advice or information, the court must ask what would have been the advice or information which he would have given if he had performed his task with reasonable care. Further, it appears to me that the distinction between a failure to advise and giving incorrect advice may often be elusive in a particular case. It does not form a sound basis for different rules on causation. I therefore consider that it is not correct to ignore what the defender would have done in implement of his duty when analysing causation in this context. If Mr Edwards failed in his duty, the question of how the trustees would have acted if he had given proper advice on the MFR would therefore be relevant and would have to be addressed.

(ii) The abandonment of certain claims

[80] As I have said (in paragraph [66] above), Mr Young in his submissions did not renew two assertions which had featured in the evidence presented on behalf of the pursuers. The first was an assumption, which Mr Goodman made in his report dated April 2009, that the guaranteed premium rate available in the DAC was approximately 30 per cent lower than the market rate and thus had a considerable value. Mr Goodman had understood that in 1999 Scottish Widows were to increase their premium rates sharply to reflect market rates and that the premium guarantee in the DAC would preserve into the future an outdated and beneficial premium rate for existing members of the pension scheme. By the time he came to give oral evidence Mr Goodman had discovered that his assumption was incorrect and in presenting his report he invited the court to delete the passages in which this assertion was made or founded on.

[81] The second assertion was that by switching from a DAC to an MF contract the pension scheme had suffered an immediate loss of at least £400,000 which was the difference between the accounts value and the surrender value as enhanced (paragraphs [40] and [64] above). In his report Mr Goodman argued that the differential was at least £760,000 having regard to the two valuations as at June 1999 and that the differential could have been as large as £1.5 million if Scottish Widows' premium rates were below market rates. He asserted that the accounts value was a good measure of the actual value of the DAC, which included guarantees that were not replicated in the MF contract. Mr Goodman, although he accepted that the assumed difference in premium levels did not support the larger differential, did not depart from this assertion. He criticised Mr Edwards for describing the DAC as being worth "slightly more" than the surrender value. More significantly, several of the pursuers' witnesses gave evidence on the understanding that the pension scheme had suffered an instantaneous and substantial loss on switching and that inevitably coloured their evidence.

[82] The abandonment of these claims is in my opinion significant. In particular it is relevant both to the challenge that Mr Edwards had not advised the trustees in sufficient detail and also to my assessment of the trustees' evidence on causation. Before turning to the residual claims against the defenders, I must discuss the skilled witnesses who gave evidence and the challenge to Mr Goodman's expertise, which Mr Currie QC advanced on behalf of the defenders.

(iii) The expert witnesses and the challenge to Mr Goodman's expertise

[83] Mr Alan Goodman is a consultant in an actuarial and financial services consultancy who became a fellow of the Faculty of Actuaries in 1979 and has thirty five years experience in the financial services industry. He had senior management roles in pensions and marketing in Standard Life Assurance Company between 1980 and 1995, including acting as a regional actuary between 1981 and 1986. Since 1995 he has acted as a consultant. He has worked with scheme actuaries, trustees, contributing employers and independent financial advisers but has never acted as a scheme actuary. In preparing his report he consulted two actuaries, who had experience as scheme actuaries, to test his opinions.

[84] Mr Jonathan Punter is a consulting actuary. He qualified as an actuary in 1983 and became a Fellow of the Institute of Actuaries in 1985. He became a partner of a firm of consulting actuaries, Duncan C Fraser & Co, in 1985. Since 1988 he has been a partner in Punter Southall, a firm of consulting actuaries specialising in pension matters. His main professional experience has been in providing actuarial, consultancy and administration services to pension schemes in the United Kingdom and he is also regulated to provide financial advice by the Financial Services Authority. He has considerable experience in acting as a scheme actuary since the commencement of the Pensions Act 1995 and has acted in that role for up to twenty schemes at any one time.

[85] Mr Currie challenged Mr Goodman's qualification to act as an expert witness. He submitted that he did not have the necessary experience to give expert opinions on the duties of a scheme actuary in 1999, having never performed that role and having no experience in advising on the MFR. He criticised Mr Goodman for not being familiar with the professional guidance in GN 29 (the guidance note for actuaries advising the trustees of occupational pension schemes or a participating employer published by the Faculty and Institute of Actuaries) until he was involved in this litigation and for failing to disclose his reliance on other unnamed actuaries as sources of information on which he had relied. His misconceived reliance on the accounts value as a measure of the market value of the DAC and his incorrect assumption about the guaranteed premium rates in the DAC were, Mr Currie submitted, symptoms of his lack of understanding because he had never been a scheme actuary and had not provided actuarial advice on switching from DACs to MF contracts.

[86] I am satisfied that Mr Goodman was in a position to give evidence as a skilled witness and that he was not in any formal sense disqualified from that role. But the weight to be attached to his opinions on what a scheme actuary should or should not have done must be affected by his lack of experience as a scheme actuary. Mr Punter had more directly relevant experience as a scheme actuary. In addition, Mr Goodman's mistaken assumption about the guaranteed premium rates under the DAC and his incorrect reliance on the accounts value as a measure of the market value of the DAC materially weakened the authority of his opinion. But, as the House of Lords held in Bolitho, where a defender has the support of an expert body of opinion on a question of professional judgement, it is not the court's task to prefer one professional view to another. The court can only hold a defender to be negligent if it is satisfied that the professional view, which supports him, is not responsible or reasonable or is based on a misunderstanding of the relevant facts or is otherwise untenable. On that approach, which focuses on Mr Punter's evidence, as I discuss below, the pursuers' case fails.

(iv) The residual claims: the alleged breaches of duty

[87] I can deal briefly with the first issue on which Mr Young founds, namely the conflict of interest which Mr Edwards faced because Scottish Widows had a commercial interest in inducing policyholders to switch from their DACs. Mr Edwards did not deny the existence of a potential conflict of interest as a result of Scottish Widows' commercial interest. The letter of 22 June 1999 was in large measure a general letter which had been prepared within Scottish Widows and which had been reviewed by Scottish Widows' lawyers. Those lawyers' position appears to have been, and it was Mr Edwards's understanding, that there was no conflict such as to preclude him from advising the pursuers. This was because of the nature of the actuarial advice which he gave in the letter and because he would have given the same advice in any event. But it is, in my view, questionable whether it is for the person with the conflict to make that judgement. That there was, in Lord Upjohn's classic phrase, "a real sensible possibility of conflict of interest" (Boardman v Phipps [1967] 2 AC 46 at p.124B-C) is clear. The drafters of the letter of 22 June 1999 could have done more to specify the nature of the conflict and articulated why, nonetheless, it was considered within Scottish Widows that their actuaries who acted as scheme actuaries could properly give the advice which they did. The precise nature of the interest which Scottish Widows had in encouraging people to switch from DACs was not explored in any detail in the proof. It appeared that there was a concern that if interest rates continued to fall, the guarantees in the DACs would become onerous. Also Scottish Widows were subject to stringent obligations to maintain capital reserves to support the DACs which were not required in relation to MF contracts and tied up assets which might otherwise be more profitably used. The letters of 22 June 1999 did not discuss these matters. But it is equally clear that the pursuers would have been aware from the incentives which Scottish Widows were offering that they wished their policyholders to make a switch from the DACs promptly in the course of 1999 and to retain their business in an MF contract.

[88] It is not necessary for me to reach a firm view on whether Mr Edwards, in accepting the draft general letter which others had prepared as the basis of his letter of 22 June 1999, failed in any professional duty of disclosure such as paragraph 5.4 of the Professional Conduct Standards or paragraph 8 of the Memorandum on Professional Conduct. That is both because I am concerned with legal duties rather than professional duties as such and because there is, in any event, no direct causal link between any alleged failure to disclose a conflict of interest and the trustees' decision to switch. The pursuers' legal case against the defenders is that Mr Edwards gave them incorrect or inadequate advice and so caused them loss. There was no reliable evidence to suggest that the trustees would have acted differently if Mr Edwards had given them more detail of Scottish Widows' commercial interest in encouraging policyholders to switch from their DACs. I discuss causation further in the next section of this opinion.

[89] Mr Young's second challenge rested on the assertion that Mr Edwards went beyond the role of the scheme actuary in recommending that the trustees switch from the DAC. He therefore came under a duty to take reasonable steps to ensure that the trustees understood all the issues and risk of switching and not switching. The defenders argued strongly that Mr Edwards made no such recommendation but confined his role to pointing out that there was a danger of a mismatch between assets and liabilities which meant that the trustees should consider a switch. Mr Currie emphasised that Mr Edwards had repeatedly asserted that he could not give investment advice: see his letters of 27 April and 22 June 1999.

[90] There is no doubt that Mr Edwards did make it clear that he could not give investment advice and also that he did not recommend any particular managed fund as the appropriate haven for the switched funds. But the gravamen of the pursuers' case is not that he advised the trustees to invest in a particular fund which was in the event inappropriate but that (a) he overstated the threat of an MFR mismatch as a reason for making the switch and (b) he failed to inform them of the value of what they were surrendering if they decided to switch.

[91] I accept that Mr Edwards understood himself merely to be giving actuarial information to feed into the trustees' decision on the future investment of the pension scheme. But that is not how his advice came across to the trustees. While it is not possible to recreate precisely what Mr Edwards said at the meeting on 31 March 1999, it is clear that Mr Blower and Mr Taylor interpreted his advice to be that he was recommending that the trustees switch from the DAC. This advice was, as I have held in paragraph [18] above, in the context of WTL's wish for a contribution holiday. Against that background, the trustees reasonably understood the letter of 22 June 1999, when it recommended that the trustees give urgent consideration to switching their assets, as amounting to a recommendation to switch. I acknowledge that the letter stated that Mr Edwards could not give investment advice and that the statement was restricted to a consideration of constraints arising from the liabilities of the fund which might affect their investment strategy. But the thrust of the letter was to encourage a switch. This included the statement in the first paragraph under the title "Background" that the high investment returns of the past could not be expected in the future and "Because of this factor alone, the trustees must consider switching their investments to those which offer the possibility of higher investment returns in future." Having regard to what Mr Edwards had said at the meeting on 31 March 1999, the trustees were in my opinion reasonable in interpreting this letter as confirming a recommendation to switch. In context that was its meaning.

[92] The trustees did not know, and there was no reason why they should have known, that the letter was a general letter prepared within Scottish Widows for scheme actuaries to send to trustees in identical terms or substantially similar terms, unless a scheme actuary considered the terms to be inappropriate for a particular scheme. I note also that Mr Edwards saw the note of the meeting of 9 October 1999 in which Mr Taylor recorded as his first reason for switching to an MF the assertion that Mr Edwards, the scheme actuary, had recommended it. Mr Edwards did not correct that impression. While he was not under any obligation to do so, his inaction is consistent with the view that at the time he knew that he and other scheme actuaries in Scottish Widows through their advice were encouraging pension trustees to make the switch.

[93] I am satisfied that, having regard to the whole advice which Mr Edwards gave between March and December 1999, the trustees were entitled to interpret what he said as a recommendation to switch so far as actuarial issues were involved.

[94] It does not follow from that conclusion that Mr Edwards came under a duty personally to carry out detailed and expensive research into the valuation of the benefits of the DAC which would be surrendered on a switch. Nor do I see any basis for the assertion that Mr Edwards came under a duty, whether contractual or delictual, to give investment advice. While it would have been much tidier if the trustees had received Mr Edwards's advice in a less piecemeal manner than in fact occurred, he did not control the manner in which the trustees chose to approach their decision. Further, I am satisfied that over the months between June and December 1999 either Mr Edwards or Mr Taylor gave them information on the principal considerations which were relevant to their decision. Mr Goodman accepted that in his evidence, having regard to the totality of the advice which the trustees received. Mr Edwards was aware both that the trustees were taking advice from Mr Taylor and also of the nature of the advice which he gave. That advice included investment advice which was not dependent on Mr Edwards's views, as is clear from Mr Taylor's note of the meeting of 9 October 1999. Mr Edwards responded to Mr Taylor's requests for further information and, importantly, in his letter of 26 July 1999, neatly encapsulated the choice facing the trustees in the words which I have quoted above but which bear repetition:

"Without doing detailed calculations and bearing in mind deferred annuities also provide a 'mortality' guarantee, the typical guaranteed return of the deferred annuities is between 51/2% and 6%. The choice facing the Trustees is to fix into this guarantee (note as future bonuses will be low, they would get little more than this) or to move to an investment medium with no guarantees in the hope of greater future returns in the long run."

Subject to considering the challenge made to the adequacy of the description of the benefits of the DAC, which I discuss below, I cannot fault this description of the principal issue on which the trustees had to reach a decision.

[95] Mr Goodman and Mr Punter debated the proper characterisation of actuarial advice on the one hand and investment advice on the other. The characterisation is not however of central importance to the question of liability. In my opinion while there is a clear difference in the focus of the two types of advice, the boundary is porous as there is an overlap in the content of the advice when one has regard to the assumptions inherent in each type of advice. Advice on the allocation of assets in order to meet future liabilities is clearly actuarial advice just as advice on the particular funds in which to invest the assets is investment advice. But the actuary in advising on the allocation of assets in a matching exercise makes judgments about the relative performance of different types of asset in a similar way to an investment adviser. Thus when Mr Edwards in the letter of 22 June 1999 referred to switching investment to assets which offered the possibility of higher returns in future, he was, in the context of the letter as a whole, referring to the generally held view that, in the longer term, returns on equity investments usually exceed those on gilts. It was implicit in the letter that the replication of the asset mix, which the DAC had had in the past, held out the prospect of higher investment returns in future than those which would be obtained from the assets which would in future underlie the DAC. Advice in relation to strategic decisions on how to match future liabilities involves similar assumptions to those which are inherent in advice on appropriate investment decisions whether strategic, sectoral, or at the level of the selection of a specific fund for investment. While it was for the trustees on obtaining investment advice to decide whether they took the view that it was likely that equities would outperform gilts in the future, such a view was also implicit in the actuarial advice, which was not confined to the MFR.

[96] Mr Goodman opined that Mr Edwards had failed to comply with paragraph 4.7 of the Professional Conduct Standards, which stated:

"Written actuarial advice which makes recommendations to a client must include sufficient information and discussion about each relevant factor and about the results of the actuary's investigations to enable the client to judge both the appropriateness of the recommendations and the implications of accepting them."

It is important to observe that the guidance related only to written advice. The pursuers' complaint against Mr Edwards is not confined to the letter of 22 June 1999 but extends to his dealings with the trustees between March 1999 and their decision in December 1999. It is also significant that Mr Edwards made it clear to the trustees that he could not give investment advice. See his letters of 27 April and 22 June 1999 (paragraphs [25] and [28] above). Mr Edwards was aware of Mr Taylor's involvement as the trustees' financial adviser and he answered all of his questions. He also offered to answer any questions which the trustees or Mr Taylor might have. See his letters mentioned immediately above and also his letters of 22 June and 7 December 1999 to Mr Taylor, with which he sent copies of his letters to the trustees of the same dates. In this context I consider that Mr Edwards acted reasonably and did not fail in any duty to take reasonable steps to ensure that the trustees had a sufficient understanding of the issues which they had to decide.

[97] Mr Young's third ground of challenge was that Mr Edwards had overstated the urgency of the threat of an MFR mismatch in his letter of 22 June 1999. In my opinion the advice in relation to the threat of an MFR mismatch was strongly worded at a time when the pension scheme had an MFR surplus. But, as Mr Punter explained, a significant part of the value of the pension scheme in the 1997 actuarial valuation on an ongoing basis was attributable to the prospect of future bonuses which Scottish Widows' decision to alter the underlying assets of the DAC would remove. In particular, Mr Punter explained that, in the 1997 valuation, the value of £1,932,000 included £548,000, which was an allowance for future annual and terminal bonuses. The surplus of £522,000 in the valuation would therefore become a deficit of £26,000 if that allowance were removed.

[98] Mr Punter acknowledged that a deficit on an ongoing basis was not the same as an MFR deficit and that the pension scheme would have received further bonuses between 1997 and 1999. The exercise in relation to the 1997 valuation was therefore only broadly indicative of an alteration in the MFR position. But he pointed out that the contribution holiday between June 1999 and May 2001 would reduce the surplus available to the pension scheme. Thus he opined that the advice in relation to the MFR, which Mr Edward gave in the letter of 22 June 1999, was not inappropriate for the pension scheme and was advice which a reasonably competent actuary could properly have given. He explained that it was his practice to advise a client on what would be an appropriate mix of equities and bonds to meet the MFR in the future and that he would have done so had he been in Mr Edwards's position. But he observed that the ages of the members of the pension scheme were typical of many schemes in which an 80:20 or a 70:30 equity/bond mix was broadly appropriate for matching the MFR and that there was no failure in professional duty in not pointing this out. I see no basis for rejecting his view.

[99] Mr Young argued that the proposed demutualisation of Scottish Widows gave rise to the prospect of a substantial compensation payment for loss of membership rights which would be available to enhance the surrender value of the pension scheme. By November or December 1999 those advising the trustees would have had a reasonable idea of the likely size of the windfall. This, he submitted, should have caused Mr Edwards to revise his advice which he gave in the June letter. I am not satisfied that that is correct. At the time the trustees took their decision, the windfall was in prospect but there was no certainty as the members of Scottish Widows and the shareholders of Lloyds TSB Group plc had still to approve the proposed transfer of business. In the circumstances I see no basis for questioning Mr Punter's opinion that a reasonably competent actuary, exercising reasonable care, could have acted as Mr Edwards did in relation to his advice on the MFR.

[100] Mr Young's fourth challenge related to the alleged failure to advise properly on the value of the guarantees and other benefits within the DAC which would be lost on the switch. Those benefits were (i) the guaranteed rate of return, (ii) the mortality guarantee, (iii) the maximum guaranteed premium rates and (iv) the value of the contingency of future annual and terminal bonuses. I consider each in turn.

[101] Mr Edwards did not mention the guaranteed rate of return in his letter of 22 June 1999 but in his letter of 26 July 1999 to Mr Taylor he explained that he calculated the typical guaranteed rate of return at between 51/2% and 6%. In his evidence Mr Edwards explained that the calculation involved comparing a fixed amount of an already purchased deferred annuity with its surrender value and that, in stating the range, he had allowed for uncertainties including improvements in mortality. Mr Punter explained that he also had calculated the rate of return on the DAC and that his range was about 0.5% lower than Mr Edwards. There was therefore room within Mr Edwards's calculation for added value to be attributed to the other guarantees and contingencies.

[102] The mortality guarantee had the effect that if there were continued improvements in longevity beyond those for which Scottish Widows had allowed in their rates, it was Scottish Widows and not the pension scheme which lost out as the guaranteed annuity was payable for as long as the pensioner lived. Mr Goodman considered that Mr Edwards had undervalued this guarantee as the rate of improvement of longevity has been increasing and by 1999 people in the insurance industry were aware of this. Mr Edwards and Mr Punter challenged this assertion. As Mr Punter explained, in the 1990s Prudential plc and Legal & General Group plc were the only two major insurance companies in the market for the bulk buying of deferred annuities. The mortality assumptions which Legal & General used in 1999 were the same as those used by Scottish Widows and were not altered until 2002 when it was appreciated that the rate of improvement was increasing. Mr Edwards had made a forecasting allowance in his calculations which increased the cost of an annuity by a minor reduction of the discount rate in calculating the present value of future cash flow in order to reflect what was then known about the rate of improvement of longevity. It was only later that the industry appreciated the extent to which their assumptions as to the rate of improvement had understated the actual rate of improvement. In my opinion Mr Edwards is not open to criticism for using the assumptions which one of the leading companies in the market for deferred annuities was using, which were available in the current (June 1999) Legal & General Rules of Thumb on the bulk purchase of current and/or deferred annuities, and which were widely accepted in the industry at the time.

[103] The maximum guaranteed premium rate was a guarantee in the DAC that the premium for the purchase of a fixed amount of annuity would not exceed a specified figure. As I have mentioned, the maximum guaranteed premium rates in the DAC were generally abovethe market rates and Mr Goodman conceded that he had been wrong in his contrary assumption. See paragraph [80] above. But Mr Goodman argued that there was a residual value in the guarantee. Mr Punter produced calculations which showed that if an annuity was purchased for a member of the pension scheme when he was over sixty years old (or sixty two if he had a wife) the guaranteed rates under the DAC would be exceeded by the market rates. Until then, it was cheaper for the member for Scottish Widows to apply their market rate. Mr Edwards accepted that if interest rates fell further or if mortality improved significantly the guarantee might come into play at a younger age. But as it was the practice of Scottish Widows to allocate purchased annuities to members of the pension scheme when they were considerably younger, the circumstance in which the trustees were buying annuities for a member aged about sixty did not arise. On this basis it appears to me that very little value could properly have been attached to the maximum guaranteed premium rates in the DAC.

[104] The alteration of the assets underlying the DAC, as Mr Edwards stated in his letter of 22 June 1999, made it unlikely that there would be significant annual or terminal bonuses in the future. Mr Edwards was of the view that, as a result, no value or in any event very little value would properly be attributed to the contingency of future bonuses. Mr Punter supported that view. Mr Goodman in the event did not challenge the assertion that only limited value could properly be attributed to the contingency but maintained the position that it had some value. Whatever people thought in 1999, Scottish Widows continued to pay terminal bonuses, albeit at a much reduced level, for several years thereafter. I accept that some value could be attributed to the contingency of there being much reduced bonuses over a limited period of time. But I am not persuaded that that contingency had a material value which by itself, or in combination with the guarantees, undermined Mr Edwards's assessment of the guaranteed rate of return.

[105] I am supported in this view by the exercise, which Mr Punter undertook, to ascertain the cost to the pension scheme to replicate the benefits of the DAC by purchasing deferred annuities on the open market. As Mr Punter explained, the equivalent asset on the open market was a deferred annuity which was not with profit, because there were so limited prospects of future bonuses once Scottish Widows changed the assets underlying the DAC. Mr Punter used assumptions which were consistent with the Legal & General Rules of Thumb dated June 1999 and took out the expense loading to reflect the terms of the DAC. He calculated that the cost of securing on the open market in June 1999 the deferred annuities which the trustees held under the DAC would have been approximately £2.7 million. Mr Goodman did not dispute this calculation. The surrender value of the DAC at that date was approximately £2.4 million. If that sum were enhanced by the 8% incentive which Scottish Widows offered, the result would have been approximately £2.6 million. Thus Mr Punter pointed out that the differential between what Scottish Widows were offering on a switch and the value of the DAC as so calculated was approximately 4%. Mr Punter also expressed the view that Mr Edwards's statement in his letter of 27 April 1999 (see paragraph [25] above), that the guarantees were currently worth slightly more than the surrender value of the DAC, was within the acceptable range of professional advice.

[106] In this context I am not persuaded that Mr Edwards had a duty to carry out detailed calculations, such as Mr Punter did in preparing to give evidence in the proof, to establish the value of the guarantees. Mr Edwards was not asked to do so. Had he been so asked, it would have involved expense for the trustees and the information would not have contributed materially to the decision which they had to make. In my opinion Mr Edwards summarised the issue for the trustees pithily in the passage of his letter of 26 July 1999 which I quoted in paragraph [94] above. The pursuers have not established that the guaranteed rate of return of the DAC exceeded the range which Mr Edwards suggested. The issue for the trustees, against a background in which the assets underlying the DAC were to change and they in their capacity as directors of WTL did not wish to incur materially increased obligations to contribute to the pension scheme, was whether to retain those guaranteed benefits or to seek higher investment returns in the market without the benefit of the guarantees. While Mr Edwards did not advise the trustees of his assessment of the likely rate of return if the pension scheme's funds were invested primarily in equities, there was no certainty as to the future and the trustees could have obtained such an assessment from their investment adviser, Mr Taylor.

[107] In the circumstances I am not persuaded that Mr Edwards failed in his duty in not providing detailed assessments of the value of the guarantees and the likely return from equities.

[108] Mr Young's fifth challenge was that Mr Edwards had not advised the trustees of the third option, namely leaving the pension scheme's existing investments in the DAC and investing future contributions in an MF contract. He did not do so. But he was aware from Mr Taylor's note of the meeting of 9 October 1999 that the trustees had raised the issue and that Mr Taylor had advised them that they would not receive part at least of the incentives which attracted them. Mr Punter expressed the view that Mr Edwards was not under a duty to advise on this option. If the trustees had chosen this option, it would have exposed WTL to significantly increased contributions to the pension scheme. Had the trustees wished to consider the option further they could have taken up Mr Edwards's offer to give further advice.

[109] It would have assisted the trustees, who had difficulty in understanding the technicalities of the advice which they were receiving, if Mr Edwards had presented his advice more coherently in one document. But he is not to blame for the extended decision-making process. In any event, the trustees asked Mr Taylor to present the arguments for and against the switch at the meeting of 9 October 1999, which he did, and they thereafter instructed him to obtain answers to their queries from Mr Edwards. Notwithstanding his criticisms of Mr Edwards's advice, Mr Goodman accepted in his evidence that by the time they took the decision to switch, the trustees had been advised on the factors which were principally relevant to their decision.

[110] In summary, Mr Punter has defended Mr Edwards's actions convincingly. Mr Young has not persuaded me that there is anything unreasonable or irresponsible in his assessment of acceptable actuarial practice or that Mr Punter was under any error of fact in making that assessment. I do not regard as material the fact that Mr Edwards did not inform the trustees of the appropriate asset mix to match the MFR while Mr Punter would have done so. I accept that the trustees were or ought to have been aware that they were being advised to consider replicating the pre-existing asset mix in the DAC which was broadly typical of similar sized schemes. Having regard to the approach laid down in Hunter v Hanley and Bolitho the pursuers have not established that Mr Edwards was negligent in the advice which he gave the trustees.

(v) The residual claims: causation

[111] I do not accept Mr Young's argument that the pursuers have established a causal link between the alleged overstatement in the letter of 22 June 1999 of the urgency of the need to address the MFR position and the loss which the pursuers have sustained. If, contrary to my view, taking a decision in reliance on incorrect advice is sufficient to establish causation, as in Bristol and West Building Society v Mothew, even though the claimant would not have acted differently if properly advised, the pursuers' evidence in this case did not show such reliance on the advice relating to the urgency of the need to address an MFR mismatch. While I accept that the trustees thought that Mr Edwards was recommending a switch partly because of concerns over the MFR, and I have held that it was reasonable for them to interpret his advice in that way, it was clear from the evidence of Mr Gleaves, Mr Blower and Mr Thompstone that the trustees were attracted by the prospect of an 8% enhancement on switching and, in their capacity as directors of WTL, were keen to obtain a contribution holiday. Mr Gleaves in particular was aware that one of the main reasons for the switch was to replicate the exposure to equities which the pension scheme had had for a long time and which had been beneficial. I am not persuaded that the alleged overstatement of the urgency to address a potential MFR mismatch was at the forefront of the trustees' minds in reaching their decision. Mr Gleaves was aware of the prospect of demutualisation compensation and its likely contribution to a surplus in future years. The urgency for the trustees, if they decided to switch, was to do so by 31 December 1999 in order to gain the 8% enhancement of the surrender value. That and not any view on the immediacy of an MFR mismatch dictated the actions of the trustees.

[112] Further, if the pursuers had persuaded me that Mr Edwards had been negligent, I would not have been satisfied that the pursuers had established causation on what I see to be the correct basis, namely that they would not have switched if they had been properly advised.

[113] The trustees were not prepared to save money by moving from a final salary pension scheme to a money purchase scheme as the directors themselves benefited significantly from the status quo. Mr Blower described that proposal as "a non-starter." Mr Taylor advised them in his discussion paper of 22 March 1999 and at the meeting of 9 October 1999 that it was not ideal and was old-fashioned to fund a final salary scheme by a DAC. See paragraphs [12] and [44] above. As I have stated, the trustees were aware that the switch would allow the scheme to replicate its exposure to equities which had brought growth in the past. The trustees were keen to obtain the 8% enhancement and also were aware of the prospect of the demutualisation windfall. I accept Mr Blower's assessment that the third option was not a starter as the trustees wanted to gain the 8% enhancement. Again, as I have stated, the trustees in their capacity as directors of WTL wished to reduce the company's contributions to the pension scheme. In his advice to the trustees on 9 October 1999 Mr Taylor acknowledged the risk of higher contributions in the future if the pension scheme retained its investments in the DAC once its underlying assets had been changed.

[114] There was no clear evidence from the trustees or Mr Blower to support the view that the trustees would not have chosen to switch if (a) they had been advised that there was not an urgent threat of an MFR mismatch to prompt an immediate switch and (b) Mr Edwards had explained the value of the guarantees in the DAC in more detail. Mr Gleaves in particular was careful to say that certain things might have influenced him against the switch and did not assert that he would not have decided to switch. Mr Blower opined that the trustees were taking a short term view. But I am satisfied that Mr Gleaves understood the choice which the trustees faced and which Mr Edwards set out in his letter of 26 July 1999. See paragraph [94] above. He was aware that the trustees would lose the guarantees in the DAC on switching and that equity markets could fall. But he understood that the enhancements would make up for the risks. Both Mr Gleaves and Mr Blower were aware that in a falling equity market the DAC might retain its value better than funds in an MF contract and also that there was no guarantee that an MF contract would perform better than a DAC. They also understood the generally held view, which was probably more strongly held then than now, that in the long term equities provide a better return than gilts. In the circumstances, I am unable to hold, on a balance of probabilities, that the trustees would have decided to retain the DAC if Mr Edwards had given them the advice which the pursuers desiderated in their residual claims.

[115] Accordingly, if I had decided in favour of the pursuers on liability, their case would have failed on causation.

Other matters

[116] In the circumstances I do not need to address the argument which Mr Currie made, by reference to South Australia Asset Management, that the loss pleaded did not fall within the ambit of Mr Edwards's duty of care. Had it been relevant, I would not have determined the question at this stage as the parties accepted that they had not developed their pleadings on quantum once the court had allowed the limited proof.

Conclusion
[117] The pursuers fail in their action. I therefore sustain the defenders' second and third pleas in law, repel the pursuers' first plea in law and grant decree of absolvitor.