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United Kingdom House of Lords Decisions

You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> International Power Plc v. Healy and Others, Formerly National Power v. Feldon and Others and National Grid Company Plc v. Mayes and Others [2001] UKHL 20; [2001] 2 All ER 417; [2001] 1 WLR 864 (4th April, 2001)
URL: http://www.bailii.org/uk/cases/UKHL/2001/20.html
Cite as: [2001] ICR 544, [2001] 1 WLR 864, [2001] OPLR 15, [2001] IRLR 394, [2001] 2 All ER 417, [2001] WLR 864, [2001] UKHL 20, [2001] Pens LR 121
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International Power Plc v. Healy and Others, Formerly National Power v. Feldon and Others and National Grid Company Plc v. Mayes and Others [2001] UKHL 20; [2001] 2 All ER 417; [2001] 1 WLR 864 (4th April, 2001)

HOUSE OF LORDS

Lord Slynn of Hadley Lord Steyn Lord Hoffmann Lord Clyde Lord Scott of Foscote

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

INTERNATIONAL POWER PLC (APPELLANTS) v. HEALY AND OTHERS (RESPONDENTS) (FORMERLY NATIONAL POWER PLC (APPELLANTS) v. FELDON AND OTHERS (RESPONDENTS)) NATIONAL GRID COMPANY PLC (APPELLANTS) v. MAYES AND OTHERS (RESPONDENTS)

ON 4 APRIL 2001

[2001] UKHL 20

LORD SLYNN OF HADLEY

My Lords,

    1. For the reasons given in the speeches of my noble and learned friends Lord Hoffmann and Lord Scott of Foscote, the text of which I have had the advantage of reading, I too would allow the appeals.

LORD STEYN

My Lords,

    2. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Hoffmann and Lord Scott of Foscote. For the reasons they give, I would also allow the appeals.

LORD HOFFMANN

My Lords,

The Electricity Supply Pension Scheme

    3. These appeals concern the validity of arrangements which two companies in the electricity industry made in 1992 and 1995 to deal with actuarial surpluses which had arisen in a pension scheme established for the benefit of their employees. The scheme is called the Electricity Supply Pension Scheme and was established in 1983 when the industry was in public ownership. It replaced two schemes which had been established at the time of nationalisation in 1947 and, as we shall see, perpetuated certain ancestral features. After privatisation in 1990 the scheme was substantially amended to become, in effect, separate schemes for a number of "groups" corresponding to the various companies (and their subsidiaries) which had succeeded to the assets and liabilities of the former state-owned corporations. Each operated by reference to the same instrument and with unitised holdings in a single trust fund, but with its own employers and members. The amended scheme contains many provisions designed to ensure that the assets and liabilities of each group are kept separate and that so far as possible they operate independently.

    4. The scheme is funded, contributory and fixed benefit. Benefits are defined by the rules and not related (as in the case of a money purchase scheme) to the value of the fund. On the contrary, it is ultimately the responsibility of the employer to ensure that the fund has enough money to pay the benefits. Members contribute 6% of pensionable salary to a trust fund upon which their benefits are secured. The employers, under various heads, contribute the rest. The provisions for the employers' contributions are, by modern standards, unusual, because they do not simply contribute whatever may be from time to time considered necessary to keep the scheme fully funded. Instead, they contribute various sums which are in theory fixed without reference to the state of the fund. At periodic intervals a valuation is made by the scheme actuary and arrangements are made to deal with any deficiency or surplus which may be disclosed. I say that in theory the employers' periodic contributions have no reference to the state of the fund but the scheme provides for voluntary contributions and in practice the actuary advises the employers as to the amount of voluntary contributions needed to avoid a deficiency at the next valuation. As we shall see, the actuary may also advise on measures to reduce a prospective surplus.

    Dealing with a surplus

    5. These appeals concern the provisions for periodic valuation followed by arrangements to deal with deficiency or surplus. Clause 14(1) requires a triennial valuation in a form which enables the assets and liabilities of each group to be considered separately. Valuations were made under this clause as at 31 March 1992 and 31 March 1995. In 1992 the actuary certified a surplus of £258m in respect of the group of which National Power Plc ("National Power", now called International Power Plc) was the principal employer and £62.3m in respect of the group of which National Grid Plc ("National Grid") was the principal employer. In 1995 he certified a surplus of £73.7m in the National Power group.

    6. Clause 14(5) provides that if the actuary certifies that (on the assumptions there stated) there is a surplus in the fund, the principal employer of the group "shall make arrangements, certified by the Actuary as reasonable, to deal with the surplus". The clause requires that notice of the arrangements be given to persons performing various functions under the scheme, but the only express restriction on the arrangements which can be made is that they must be certified by the actuary as reasonable. The issue in these appeals is whether the arrangements made by National Power and National Grid were within the powers conferred upon them by the scheme.

    7. There are only two ways of dealing with an actuarial surplus. You can pay more money out of the scheme or you can reduce the amount of money coming in. Both National Power and National Grid decided to use part of the surpluses by paying out more money in the form of increased benefits for members and their dependants. They also decided to reduce the amounts which the employers paid in. There is no dispute about the payments for the benefit of members, which absorbed about a third of the surpluses. As the employers paid a standard contribution of twice that of the members (besides various additional payments) the result was that the part of the surpluses used to improve benefits was roughly in proportion to what the members had paid in. But some of the National Grid members objected to it using any part of the 1992 surplus to reduce the employers' payments into the fund.

    The Ombudsman's decision

    8. The members complained to Dr Julian Farrand, the Pensions Ombudsman. He upheld the complaints on two grounds. First, he said that in exercising any powers under the scheme, the employers had an implied obligation to act in good faith. This obligation exists by virtue of the relationship of employer and employee and requires that the employer should not exercise his powers for a collateral purpose or in a way which would destroy or seriously damage the relationship of trust and confidence with his employees: see Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589. The Ombudsman considered that National Grid had been in breach of this obligation by using a substantial part of the surplus in its own interest.

    9. Secondly, the Ombudsman noted that the way National Grid proposed to reduce its contributions was by treating certain accrued liabilities to the fund as discharged. I shall have to describe the nature of these liabilities in more detail later, but for the moment it is enough to say that they were not merely contributions which might become payable at some future date, depending (for example) on whether the employer was still in business, how many people were employed and what they were earning. They were actual debts payable to the fund, incurred to fund extra benefits for specific employees who had been made redundant. The Ombudsman then drew attention to the clause dealing with amendment of the scheme. By clauses 41(1) and (4), the employer had a wide power of amendment. But clause 41(2)(b) prohibited an amendment "making any of the moneys of the Scheme payable to any of the Employers". The Ombudsman said that the release of an accrued debt from the employer to the scheme amounted to paying him an equivalent in money. If such an amendment was prohibited, the draftsman must have assumed that no power to make such payments existed within the scheme. Clause 14(5) could not therefore be construed as conferring such a power.

    The High Court decision

    10. National Grid appealed against the Ombudsman's decision to the High Court. National Power, which had made similar arrangements in respect of the 1992 and 1995 surpluses, took the opportunity to issue a summons seeking a declaration that its own arrangements were valid. Both proceedings came before Robert Walker J.

    11. The judge held that the Ombudsman had interpreted the implied duty of good faith too strictly. The employer was not a trustee. He was entitled to act in his own interests provided that he had regard to the reasonable expectations of the members. The arrangements satisfied that requirement. On this point the members now accept that the judge was right.

    12. The Ombudsman's other ground remains central to the dispute. Robert Walker J. said that the employer's duty under clause 14(5) to make arrangements to deal with the surplus conferred a power in the broadest terms to do whatever he thought appropriate. It was not restricted by other provisions of the scheme, such as the limits on the power of amendment. It could include the repayment of money to himself. The judge therefore did not need to decide whether the discharge of an accrued liability amounted to a payment to the employer. On either view, the arrangements were valid.

    The Court of Appeal decision

    13. The members appealed to the Court of Appeal (Nourse, Schiemann and Brooke LJ). They differed from both the Ombudsman and the judge. They said that clause 14(5) conferred no power upon the employer to discharge his debts to the fund. The only way in which this could be done was by an amendment of the scheme. As there had been no amendment, the arrangements were invalid and the appeal was allowed. But, contrary to the views of the Ombudsman and the judge, the Court of Appeal were not inclined to think that the discharge of a debt was a payment to the employer within the meaning of clause 41(2)(b). It followed that the employers would be able to give effect to their arrangements by an amendment, which under clause 41 could be retrospective.

    The deeds of amendment

    14. The employers acted upon this suggestion and executed suitable deeds of amendment. Your Lordships have given leave, by consent of all the parties, for the question of their validity to be raised for the first time in this House.

    Does a release of a debt count as payment?

    15. My Lords, I think that the main question in these appeals is whether the arrangements to treat accrued liabilities of the employers as discharged out of surplus funds amount to a payment to the employers out of the moneys of the scheme. Once that question has been decided, the other arguments fall into place.

    16. The question is one of construction, to be answered according to familiar principles. The pension scheme background is of course very important. On the other hand, some of the matters put forward as relevant by Mr Inglis-Jones on behalf of the National Grid members seemed to me of marginal significance. For example, he said that the main purpose of the scheme was to provide pensions for the employees. That I would certainly accept. But then he said that it would be inconsistent with such a purpose to make payments or the equivalent of payments to the employer. In relation to a surplus, this does not seem to me to follow. A surplus is (by definition) money in excess of what is needed to effect the main purpose of the scheme. Next, Mr Inglis-Jones said that it must be borne in mind that part of the surplus was funded by contributions from the employees. Indeed, the whole of the funding may be said to be either their contributions or payment for their services. No doubt considerations of this kind have influenced the implication of an implied term of good faith, but they cannot displace the fact that the scheme confers the power to make arrangements upon the employer and no one else. In some schemes the power is more evenly distributed but in this one it is not. Mr Inglis-Jones's submissions would lead to the conclusion that the employer cannot act in his own interests, but the implied term does not go so far. Once it is accepted that he can act in his own interests, and that the extent to which he is doing so in this case cannot be criticised, I do not see the relevance of the way in which the surplus was funded.

    17. Mr Inglis-Jones then said that while it might be reasonable for the employer to suspend his future contributions, the release of accrued liabilities, or actual payment of money to himself, would imperil the security of the fund. An actuarial surplus, he said, was notional and evanescent, here today and (with the slightest change in assumptions) gone tomorrow. That argument, as it seems to me, is really an argument against doing anything about a surplus at all. From the point of view of the adequacy of the fund, there is no difference between paying money to the employer and paying it in the form of (for example) extra benefits to classes of employees. Both result in there being less money in the fund. Clause 14(5) in my view does not require the employer to be sceptical about the actuarial certificate. Caution is a matter for the actuary in certifying the surplus and certifying the arrangements as reasonable. The employer's duty is simply to make them.

    The tax background

    18. In my opinion the most relevant background is the fiscal origin of clause 41(2)(b). Everyone agrees that it was taken over from the 1947 predecessor schemes and that it was inserted into those schemes to obtain Inland Revenue approval under section 32 of the Finance Act 1921. Mr Inglis-Jones told your Lordships that in his experience, dating back to before the regime was changed in 1970, the Revenue would not approve a scheme under the 1921 Act and its successor (section 379 of the Income Tax Act 1952) unless such a provision was included. It has been said on more than one occasion that many provisions in pension schemes and insurance contracts have to be construed against their fiscal backgrounds: see Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, 1610 and In re Landau (A Bankrupt) [1998] Ch. 223, 233. So I think it is important to consider why the Revenue insisted on provisions like clause 41(2)(b).

    19. Schemes approved under the provisions of the 1921 Act and its successor enjoyed great fiscal privileges. Money paid into the scheme by both employer and employees was deductible for income tax. Income from the investments of the scheme was exempt from tax. To prevent members from obtaining tax exemption twice over, the Revenue insisted that in principle they should take their benefits in the form of taxable annuities. In these circumstances, it is hardly surprising that capital payments out of the fund to the employer were anathema to the Revenue. They did not want the employer to be able to resort to a tax sheltered fund, either temporarily or permanently, for the purposes of his business.

    20. This fiscal purpose explains why the clause uses the words "making any of the moneys of the Scheme payable to any of the Employers". They are not the most natural way of describing the release of a debt owed by the employer to the scheme (compare In re Bank of Credit and Commerce International SA (No. 8) [1998] AC 214, 228-229.) The release of a debt is not a payment, although it does have the same economic effect, in the sense that it reduces the assets of the fund and increases those of the employer. Of course if it appears that the purpose of the provision is to prevent such an economic effect, i.e. to prevent any reduction in the assets of the fund for the benefit of the employer, then it may be reasonable to give the words a sufficiently wide meaning. The fiscal background shows however that the purpose was different. It was to prevent the employer from resorting to assets which had enjoyed the fiscal privileges accorded to the scheme. But debts from the employer to the fund which have not yet fallen due for payment have enjoyed no fiscal privileges. They are not deductible for tax until they have been paid and, at any rate until they have become payable, they cannot have earned any tax free income for the scheme.

    21. This background suggests that the words "making any of the moneys of the Scheme payable to any of the Employers" were not loose language intended to be applied to any transaction which, although not ordinarily so described, had the same economic effect. They were carefully chosen to exclude the release of debts owed by the employer. It is true that such debts, in common with most assets of the fund, are choses in action. Money (for example, deposits with a bank) usually consists of choses in action. But deposits with a bank represent money which has been paid into the tax sheltered scheme. Money owed by the employer has not.

    22. Confirmation of this construction may be found in clause 15 of one of the old schemes (the British Electricity Authority and Area Boards Superannuation Scheme), which corresponds to clause 14 of the 1983 scheme. It also provided for periodic valuations and the certification by the actuary of a deficiency or surplus. If there was a deficiency, the principal employer (which was then the British Electricity Authority) had to make arrangements by which it and the other employers contributed to the fund -

    "an annual deficiency contribution of such amount, and calculated to make good the deficiency over a period not exceeding 40 years from the date of the valuation, as the Authority may determine".

    23. A deficiency contribution was therefore an accrued debt owed to the fund and payable by annual instalments. If, however, there was a surplus at the next valuation, the authority had to make arrangements to dispose of it. Clause 15(4) of the old scheme, by contrast to the general terms of clause 14(5) of the present scheme, was specific about the arrangements which had to be made. In the first place, "the amount or the oustanding term of any existing annual deficiency contribution shall be reduced" up to the capital value of the available surplus. The debt was to be cancelled. This does not suggest that the Revenue or anyone else thought that the cancellation of a contribution debt amounted making the moneys of the fund payable to the employer.

    24. The language of clause 41(2)(b) was taken over by the 1983 scheme at a time when a new approval regime had been introduced by the Finance Act 1970 and the Revenue did not insist upon so absolute a prohibition on payments to the employer as it had before. But this certainly does not suggest that the language of clause 41(2)(b) was intended to have a wider meaning. I think it meant the same as it did before.

    25. I therefore agree with the tentative view of the Court of Appeal that the release of an accrued debt owed by the employer is not a payment to the employer out of the moneys of the fund. This is contrary to the opinion of Vinelott J in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1994] ICR 537, a decision which was very properly followed by the Ombudsman. It does not however appear from the report of that case that counsel drew the attention of the judge to the fiscal background. Instead, the judge was presented with an "ingeniously constructed balance sheet" designed to prove that the release of an accrued obligation did not have the same economic effect as a payment of money. Not surprisingly, he rejected the submission.

    26. This conclusion means that whether the Ombudsman was right in thinking that a prohibition on payments to the employer was a fundamental principle of the scheme or whether the Court of Appeal was right in thinking that the arrangements could be effected only by amendment, the employers had, one way or another, power to do what they did. The arrangements did not infringe any express or implied restriction on the powers of the employer. The only question is the formalities which should have been adopted. The judge's view was that the employers did not need to do more than give directions to the trustees. The Court of Appeal's view was that they should have executed a deed of amendment. This omission they have since remedied by the retrospective deeds executed since the hearing in the Court of Appeal.

    27. The members say, however, that they have a second string to their bow. They submit that the Court of Appeal was right in saying that an amendment was needed. And although it is accepted that an amendment could have been made at the time of the valuations, they say that it is now too late. It was prohibited by section 37 of the Pensions Act 1995, which came into force in April 1997:

    "37(1) This section applies to a trust scheme if -

    (a) apart from this section, power is conferred on any person (including the employer) to make payments to the employer out of funds which are held for the purposes of the scheme,

    (b) the scheme is one to which Schedule 22 to the Taxes Act 1988 (reduction of pension fund surpluses in certain exempt approved schemes) applies, and

    (c) the scheme is not being wound up.

    (2) Where the power referred to in subsection (1)(a) is conferred by the scheme on a person other than the trustees, it cannot be exercised by that person but may be exercised instead by the trustees; and any restriction imposed by the scheme on the exercise of the power shall, so far as capable of doing so, apply to its exercise by the trustees."

    28. There follow a number of statutory restrictions on the exercise of such a power by the trustees.

    29. The respondents submit that the new amendments would purport to confer upon the principal employer a power to "make payments to the employer out of funds which are held for the purposes of the scheme" and, the other conditions being satisfied, bring the scheme within section 37. The consequence is that by virtue of section 37(2), the power is exercisable only by the trustees and subject to the statutory conditions.

    30. It will be observed that section 37(1) uses the words "power…to make payments to the employer out of funds which are held for the purposes of the scheme". It uses the concept of a payment out of the funds of the scheme which is similar to that used by clause 41(2)(b) and which I have suggested was not intended to include the release of an accrued debt. The members say that the words should be given a wider meaning in section 37. Clause 41(2)(b) may have to be interpreted against a fiscal background but section 37 has nothing to do with tax. It is for the protection of the members. Therefore the concept of paying the employer out of funds which are held for the purposes of the scheme should be given a wide meaning to preserve the assets of the fund, including debts owed by the employer.

    31. I quite accept that section 37 does not have the exclusively fiscal background of clause 41(2)(b). Nevertheless, the language seems to me to show clearly that Parliament adopted the fiscal concept of payment to an employer out of the funds of the scheme. It substantially reproduces the language of section 601(1) of the Income and Corporation Taxes Act 1988, which imposes a 40% charge to tax "where a payment is made to an employer out of funds which are or have been held for the purposes of a scheme which is or has at any time been an exempt approved scheme." That section is plainly not intended to tax the employer on money which has never come into the scheme.

    32. One may ask why this more restricted concept should have been used in a statute designed for the protection of the members of the scheme. The answer, as it seems to me, is a recognition that, in a funded scheme, there are bound to be adjustments in the rate of funding. It is to be expected that the level of contributions by the employer may be increased or reduced from time to time. And although Mr Inglis-Jones sought to persuade your Lordships that the distinction between accrued and contingent liabilities was of great importance in pension law, I think that at least for this purpose it makes little commercial sense. It involves saying that, in the context of reducing a surplus, the employer cannot be released from debts which are accrued but not yet payable but can be released from paying contributions which are contingently due but (while the scheme is a going concern) virtually certain to become payable. No businessman, in estimating his ability to meet future liabilities, would make such a distinction. In my opinion the effect of section 37 is to protect only those funds which have actually been paid into the scheme. This strikes a sensible commercial balance between flexibility of funding and the interests of the members.

    33. Mr Inglis-Jones also relied upon section 40 of the 1995 Act, which treats debts due and payable by the employer to the fund as if they were loans to the employer for the purposes of regulations which prohibit such investments. This, he says, shows that debts from the employer are treated as assets of the fund. But I do not think that this casts much light upon the construction of section 37, which uses the concept of "payments" out of the funds rather than a reduction of its assets. In any case, we are not concerned with debts which were due and payable. The liabilities discharged out of surplus were debts due but not yet payable.

    34. My Lords, these conclusions are (subject to two subsidiary arguments to which I shall have to return) sufficient to dispose of the appeal. If an amendment was needed, it has been effected. The 1992 and 1995 arrangements have been validated. But the question of whether an amendment was needed is of great practical importance to the trustees administering the scheme. After future valuations, they will need to know whether they can, as they have in the past, act upon the instructions of the employer or whether they must insist upon an amendment. I would suggest that your Lordships should decide the question.

    Was an amendment necessary?

    35. I agree with the judge that the language of clause 14(5) is apt to confer upon the employer the power to make the arrangements which he considers necessary to deal with a surplus. The word "shall" in my opinion connotes not only a duty but also the power to discharge that duty. I do not think that it requires the employer to scratch around among the other provisions of the scheme to find specific powers. But I would not go so far as the judge in saying (as he did in paragraph 83) that the employer's powers were not intended to be restricted "either specifically by clause 41(2)(b) or by what the employer could do under other clauses of the scheme, or generally by the context and purpose of the scheme." I find it difficult to believe that the general words of clause 14(5) were intended to give the employer power, without amendment, to do something which would contradict the express provisions of the scheme.

    36. It may also be that, as the Ombudsman thought, the power is subject to implied limitations deducible from the context and purpose of the scheme. He said that there was an implied prohibition against paying the employer money from the fund. He derived this implication from clause 41(2)(b), which he said would make no sense if clause 14(5) conferred a wide power for the employer to pay himself out of surplus. The suggestion that clause 41(2)(b) was intended only to prevent payments otherwise than out of surplus was implausible. I think that there is considerable force in this argument, at any rate if one tries to construe the scheme as a consistent whole.

    37. Of course the fact that the scheme cannot be amended to allow something to be done does not necessarily mean that a limited power to do that thing does not already exist within the scheme: see Re Vauxhall Motor Pension Fund [1989] 1 PLR 31, 53. But such a prohibition is rather odd if the scheme already contains a very wide power. The trouble is that this scheme may not be altogether consistent. In the old predecessor schemes, there was no inconsistency because the equivalent of clause 14(5) restricted the powers of the employer to dealing with surplus in certain specified ways: cancelling liability to pay deficiency contributions, retaining it in the fund or reducing the employers' standard contributions. There was nothing anywhere in the old scheme which could be construed as a power to pay money to the employers. The new scheme created the difficulty by removing all the restrictions on what the employer could do about disposing of the surplus but leaving the prohibition on any amendment which would allow payments to the employer. My Lords, I do not intend to try to solve this puzzle because on the construction which I have given to making payments to the employer out of the fund, it does not arise.

    38. The real question, as it seems to me, is whether the arrangements which the employers made to relieve themselves of liabilities contradicted the express provisions of the scheme. For this purpose it is necessary to explain in more detail what they were.

    The employers' contributions

    39. The contribution liabilities of the employer are set out in clause 13(1). I quote the relevant paragraphs:

    "13(1) The Employers shall contribute to the Fund:

    (a) a monthly sum equal to twice the contributions for the time being paid by all Members respectively employed by them…and;

…

    (e) in respect of any Member who retires under Rule 16 or person who ceases to be a Member on leaving service consequent on reorganisation or redundancy before age 50 such amount as determined by the Principal Employer on the advice of the Actuary; and

    (f) any sums payable in accordance with paragraph (3) of Rule 44 or sub-paragraph (2)(b) of Rule 45; and

    (g) such further contributions as may from time to time be payable pursuant to the provisions of Clause 14(4) or may otherwise be determined by each Principal Employer for itself and its Participating Subsidiaries;

    Provided That the contributions (whether due and payable or prospectively payable) by an Employer under sub-paragraphs (a) to (f) of this paragraph shall be reduced or suspended (whether with retrospective effect or otherwise) to the extent of:

    (i) any overpayment made by an Employer pursuant to the proviso to paragraph (3) of Rule 44 as compared with the amount subsequently determined by the Group Trustees thereunder in such a manner as shall be agreed between the Group Trustees and the Employer having regard to the advice of the Actuary unless the Group Trustees otherwise determine; and

    (ii) any surplus certified by the Actuary pursuant to paragraph (2) of Rule 45 in such a manner as shall have been agreed between the Co-ordinator and the Employer having regard to the advice of the Actuary unless the Co-ordinator otherwise determines."

    40. Of these various heads, (a) is self-explanatory. I have omitted (b), (c) and (d), which played no part in the argument. But (e), (f) and (g) are so dense with cross-references to the rules that each requires some further explanation. The significance of the proviso I shall leave until later.

    Deficiency payments

    41. Clause 13(1)(e) refers to amounts to be determined in respect of members who retire under rule 16 or cease to be members on account of reorganisation or redundancy before age 50. Ordinarily, a member is not entitled to start drawing his pension until he reaches pensionable age. There are all kinds of exceptions and qualifications (such as retirement on grounds of ill-health under rule 15) but that is the general rule. Rule 16(1) entitles an employer to request that the group trustees start paying a pension to a member who, after ten years service, retires on or after the age of 55. Rule 16(2) provides for similar treatment for a member who is compulsorily retired on or after the age of 50 and rule 17(1A)(c) provides that a person who ceases to be a contributor before the age of 50 consequent on reorganisation or redundancy shall be treated as having retired when he reaches the age of 50.

    42. These provisions for the acceleration of benefits under the scheme naturally involve additional cost and the rules provides for a determination of the amount required to fund the extra benefits and for the allocation of that cost to the appropriate employer. The determination, as we have seen, is a matter for the principal employer of the group under clause 13(1)(e). The allocation, in the case of benefits under rules 16 and 17, is effected by rules 16(3) and 17(4), both of which provide that any additional cost, as determined by the principal employer, "shall be borne by the Employer who last employed the Member." Payments due from employers under clause 13(1)(e) have been called "deficiency payments" and I shall use that expression, although it must not be confused with the contributions required to make good a valuation deficiency under clause 14(4).

    Supplementary payments

    43. Clause 13(1)(f), so far as it refers to rule 44(3), deals with the cost of another form of increased benefit. (The other reference, to rule 45(2)(b), is not presently relevant). Rule 44(1), which was added by amendment in 1988, gives an employer a very wide power to direct the trustees to pay additional benefits, up to Inland Revenue limits, to "Voluntary Pensioners", a term which has meant in practice employees willing to accept early retirement and their dependants. Rule 44(3) gives the trustees power, acting on the advice of the actuary, to determine the amount to be contributed by the employer to secure the additional benefits. By rule 44(4) the employer may, subject to the approval of the trustees, pay by instalments the equivalent in value of the amount determined. These payments have been called "supplementary payments".

    44. Rules 16, 17 and 44 played an important part in the programme of voluntary redundancies introduced by National Grid, National Power and other successor companies after privatisation. National Power, for example, succeeded in reducing the numbers of its employees from 16,273 in 1991 to 5,139 in 1995. A significant inducement to employees to accept redundancy or early retirement was the offer of accelerated or enhanced benefits under rules 16, 17 or 44. The result was to create substantial liabilities to make deficiency and supplementary payments.

    Voluntary contributions

    45. Finally, I come to clause 13(1)(g), which is relatively straightforward. It comprises payments due under clause 14(4) to correct an earlier valuation deficiency (which do not feature in this case) and voluntary contributions made by employers on the advice of the actuary by way of addition to the standard payments due under clause 13(1)(a).

    The arrangements

    46. I can now explain the arrangements in more detail. National Grid decided to use £18.6m (or about 30%) of the 1992 surplus to improve benefits for members. It increased the lump sum death in service benefit to four times salary and made a 10% improvement in the future accrual rate for spouses' pensions. It gave effect to these improvements by making amendments to the scheme.

    47. The remaining £43.7m of the surplus was used, first, to reduce a 2.6% voluntary contribution under clause 13(1)(g) to 0.1% and, secondly, to fund deficiency payments under clause 13(1)(e). The first application, which was costed at £9.5m, is uncontroversial. The validity of the second is in dispute.

    48. At some time during 1992 the board was advised by the actuary that although the triennial valuation as at 31 March 1992 was not yet finalised, a substantial surplus would be shown. The actuary advised the board to stop making deficiency payments in respect of early retirements occurring after 1 December 1992. He considered that the company would be able to appropriate part of the expected surplus to such payments. The decision to stop paying was confirmed by the board on 25 February 1993. At that stage the valuation as at 31 March 1992 had still not been signed off but the actuaries were predicting that it would show, as it did when it was finalised a week later, a surplus of £62.3m. The actuary certified that the proposed arrangements were reasonable. The way in which they were implemented was that National Grid determined its contributions under clause 13(1)(e) at nil and instead notionally debited the allocated surplus with the amounts which would otherwise have been determined until the money ran out in March 1995. Thereafter National Grid resumed payments into the scheme.

    49. National Power decided to apply £86m of the £258m surplus certified in respect of the 1992 valuation to improving benefits for members. These included a 50% contribution holiday for three years to 31 March 1996, and increases in death in service benefits, children's allowances and spouses pensions. All of these were effected by amendments to the scheme. In addition, they directed the trustees to pay a 10% increase in lump sum benefits to deferred pensioners on retirement. This was not made the subject of an amendment on the ground that it involved a single non-recurrent payment.

    50. National Power applied the remainder of the 1992 surplus to extinguishing its liabilities for deficiency and supplementary payments. In 1993 it was paying these, in respect of employees who had already left, by monthly instalments. In the case of the deficiency payments, where the amount payable was a matter for its own determination, it had on the advice of the actuary been determining since April 1991 that the amount should be paid by instalments rather than a lump sum in respect of each employee. In the case of the supplementary payments, where the amount was determined by the trustees, it had agreed instalment payments with the trustees pursuant to rule 44(4).

    51. National Power's arrangements were made by the board on 1 April 1993. They decided to cease payment of deficiency and supplementary payments in respect of members who had already left service and to carry forward a notional fund of £39m to meet deficiency and supplementary payments in respect of employees who left afterwards. The actuary certified these arrangements as reasonable. They were implemented by direction to the trustees without any amendment of the scheme. The sum appropriated to such payments was exhausted by March 1994 and National Power then resumed making payments into the scheme.

    52. The arrangements in respect of the 1995 valuation were broadly similar. This time the surplus was £73.7m. The board decided to apply about £25m to the improvement of benefits for members. These included a continuation of the 50% contribution holiday for another three years and an increase in the children's allowances. These were incorporated into the scheme by amendments. The board also, without amendment, directed a 5% increase in lump sum benefits for deferred pensioners on retirement. The rest of the surplus was appropriated, as before, to funding monthly instalments of deficiency and supplementary payments in respect of employees who had already left and carrying forward sums to fund such payments in respect of employees who retired afterwards. In addition, National Power reduced its own standard contributions to 10.5% for the three years from 1 April 1996 to 31 March 1999. All this was done by notification to the trustees without an amendment of the scheme. Again the actuary certified the arrangements as reasonable.

    53. The question therefore is whether, consistently with the provisions of the scheme, the employers were entitled to direct the trustees that they should treat their liabilities for deficiency and supplementary payments as discharged out of surplus funds. The members say that this contradicted the scheme. Clauses 13(1)(e) and (f) required the payments to be made and the effect of the arrangements was that the payments were not made. The employers say that the payments were made; not, it is true, out of new money but out of surplus which the rules placed at the employers' disposal, by analogy with the case of a trust fund over which the employers had a power of appointment. On this construction, there has been no contradiction of the rules. Both constructions are conceptually possible. The correct choice depends upon the language of the scheme and the practical consequences of choosing one construction rather than the other.

    Linguistic arguments

    54. The Court of Appeal, in coming to their decision that an amendment was needed, were impressed by the proviso to clause 13(1), which I quoted earlier. It provides for a suspension of contributions payable by the employer under paragraphs (a) to (f) "whether due and payable or prospectively payable", to the extent of any overpayments the employer may have made under rule 44(3). The Court of Appeal said that this express provision for the extinguishment of accrued liabilities showed that the employer could not have such a power by virtue of clause 14(5).

    55. This is an argument of the expressio unius variety. I think that such arguments are often perilous, especially when applied to a patchwork document like the pension scheme. The fact that a specific provision is made in one place may throw very little light on whether general words in another place include the power to do something similar. The proviso deals with the correction of specific overpayments, whether the fund is in surplus or not. It does not help one to decide whether the employer can appropriate a surplus to the discharge of what would otherwise have been his accrued obligations. In any case, the proviso was introduced by amendment in 1988 and cannot have changed the meaning of clause 14(5), which has been in the scheme since its inception. I should add that neither counsel for the members supported the reasoning of the Court of Appeal on this point.

    56. If any help can be derived from the terms of clause 14(5), I think it may rather be found in the provision that the arrangements must be certified by the actuary as reasonable. By contrast, the power of amendment does not have to be certified as reasonable. Subject to the clause 41(2) prohibitions, the employer can just go ahead and do it, whether the scheme is in surplus or not. This does suggest that clause 14(5) confers a separate power, subject to its own conditions.

    Practical arguments

    57. More important than these linguistic points, as it seems to me, are the practical consequences of insisting that the arrangements should be made by amendment. The operation of the pension scheme should not be encumbered by unnecessary technicalities. On the other hand, if the amendment procedure provides some important safeguards for the members or the trustees, that might be a good reason to construe the scheme as requiring the employer to adopt it.

    58. For this purpose it is necessary to examine the power of amendment in more detail. Clause 41 provides:

    "(1) Any provision of the Scheme (including this Clause) may be amended (whether by alteration, deletion or addition and whether prospectively or retrospectively) in accordance with and subject to the following provisions of this Clause; Provided That no amendment shall be made which would affect its Approval or prevent such further amendment of the Scheme as may be required to maintain its Approval and Status.

    (2) Any amendment to the Scheme shall be void to the extent to which it would otherwise have the effect of:

    (a) altering the main purpose of the Scheme from that of providing Benefits for Members on Retirement;

    (b) save as authorised or required by enactment from time to time, making any of the moneys of the Scheme payable to any of the Employers;

    (c) reducing any Benefit payable to a Member or payable or prospectively payable to a Beneficiary."

    59. There follow a number of other restrictions on the amending power designed to protect the vested rights of various classes of members or other beneficiaries.

    60. Clause 41(3) and (4) provide respectively for two kinds of amendment. The first, under clause 41(3), is an amendment of the whole scheme by all the principal employers acting together. This power is not subject to consent or approval by anyone. The only requirement is that it has to be done by deed and, under subsection (8), notified to each subsidiary employer, the scheme trustee and the group trustees. The second kind of amendment, under clause 41(4), is by a principal employer to amend the scheme solely in relation to its own group. This is subject to a clearance procedure to make sure that the amendment will not have any impact upon the rights and liabilities of other groups or the approved status of the scheme as a whole. The amending deed must be notified to the scheme secretary (appointed by the co-ordinator, a company which represents all the principal employers) and does not take effect until the secretary has given a clearance notice (if he considers that the amendment is within the powers of the clause and will not prejudice the scheme) or, if he is of the contrary view, a dispute procedure has resolved the matter in favour of the amendment. The dispute procedure is between the amending employer and the co-ordinator, representing the other principal employers. The members and trustees are not involved. As between employer and members, therefore, an amendment (whether under rule 41(3) or (4)) is entirely a matter for the employer, subject to the restrictions in clause 41(2). The notification and dispute machinery in clause 41(4) is only for the protection of the other groups.

    61. It follows that, so far as the members are concerned, it does not in the least matter whether an application of surplus by an employer which falls outside the prohibitions in clause 41(2) is made by amendment or not. The argument that an amendment was needed only had substance when combined with the argument that such an amendment would have been prohibited by clause 41(2)(b). Deprived of that support, as the Court of Appeal thought it was, it becomes for the members a matter of pure technicality. That is demonstrated by the fact that the employers have been able to validate the arrangements simply by the execution of a deed of amendment.

    62. The other persons interested in whether the amendment procedure is used are the trustees. They administer the fund and need clear directions on how to do so. This is essentially a practical question. If the arrangements are to endure for any length of time, an amendment is the most convenient and accessible way of recording them. That is why most of the improvements in benefits for members were embodied in amendments. On the other hand, single payments credited to a particular class of pensioners were not made the subject of an amendment. Counsel for the trustees told us that they saw no administrative difficulties in acting upon directions to make such payments. Likewise, there were no problems about the directions to debit surplus with the deficiency and supplementary payments which would otherwise have been payable by the employers.

    63. The high technicality of the argument for the members on this point is shown by the fact that Mr Inglis-Jones, with his great experience of the way pension funds are administered, said that it would be perfectly acceptable for the employers to use surplus to create a reserve out of which to pay their future contributions. No amendment would be necessary. But he said that it was quite wrong to use surplus to discharge accrued liabilities. In my view, this distinction is unjustified. No doubt in the wake of the decision of Vinelott J in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1994] ICR 537 the distinction was very important, because the discharge of an accrued liability was treated as a payment out of the fund to the employer. But once that construction is abandoned, as I have suggested it should be, the distinction ceases to matter. For the reasons I have already given, it makes no business sense and therefore should not form the basis of what can be no more than an empty technical rule. In my view, therefore, it was a matter of pragmatic choice for the employers as to whether the arrangements made under clause 14(5) were embodied in scheme amendments or not.

    Payment by instalments

    64. That leaves two subsidiary arguments. The first was advanced by Mr Steinfeld for the National Power members in relation to the cancellation of the monthly instalments of accrued deficiency payments. He said that National Power was not entitled to decide unilaterally to pay these sums by instalments. A lump sum should have been paid in respect each redundant employee on his retirement. Therefore, if National Power had acted properly, the money would have been safely inside the scheme and protected from repayment, either by an implied restriction on the powers of clause 14(5) or by section 37 of the 1995 Act. To allow the instalments to be cancelled would be to allow National Power to take advantage of its failure to pay the money when it fell due.

    65. Several answers to this submission were canvassed in argument but in my opinion the shortest is that I cannot see why National Power was not entitled, on the advice of the actuary, to determine that it would pay deficiency payments by instalments. Rule 13(1)(e) says that it shall pay "such amount as determined by the Principal Employer on the advice of the Actuary". Clause 47(e) provides that a singular word shall include the plural and there seems no contrary context in this case. The determination is made on actuarial considerations and from an actuarial point of view, any lump sum can be translated into an appropriate stream of periodic payments. Mr Steinfeld relied upon rule 16(3), which provides that the "additional cost" of the rule 16 benefits should be borne by the employer who last employed the member. "Cost", he said, means the whole cost, not a series of instalments. But rule 16(3) is concerned with the allocation of liability, not the determination of the amount. The "cost" is whatever amount or amounts may be determined by the principal employer under clause 13(1)(e).

    66. The judge thought that the employer could not decide to pay deficiency payments by instalments. There was no express power to do so, by contrast with the express reference to making supplementary payments by instalments which is found in rule 44(4). The Court of Appeal (at para. 22) agreed that rule 44(4) was a "decisive counter-indication" which ruled out a power under 13(1)(e) to pay by instalments.

    67. This is another expressio unius argument and in my view just as shaky as the last one. Like rule 44, clause 13(1)(f) was introduced by amendment in 1988, when clause 13(1)(e) was already in the scheme. So rule 44(4) can at most show what its draftsman may have thought clause 13(1)(e) meant. It cannot have changed its meaning from what it was before. Secondly, the situations contemplated by the two provisions are quite different. Under rule 44, it is trustees who determine the amount which the employer must contribute. If this is to be translated into what rule 44(4) calls "an amount equivalent in value, by way of instalments", then naturally the trustees must agree that it really is an equivalent in value. Under clause 13(1)(e), however, it is the employer who determines, on the advice of the actuary, what is actuarially necessary to provide for the additional cost of the rule 16 and 17 benefits. There is no reason why the need for such additional funding should not be expressed as instalments rather than a lump sum. So in my view National Power was entitled to make a determination to pay by instalments and there is no wrong of which it was seeking to take advantage.

    Nil determinations

    68. The last point concerns the machinery adopted by National Grid to apply surplus to the discharge of its obligations under clause 13(1)(e). As I have explained, they determined their contribution at nil and at the same time directed the trustees to debit the amount necessary to fund the benefits against the available surplus until such time as it was exhausted. The members say that the rules do not permit a nil determination. Clause 13(1)(e) requires the actual cost of the benefits to be determined.

    69. As a general proposition, this must be true. In the absence of an actual or forecast surplus against which an equivalent amount could properly be debited, it would not be right to determine the contribution at anything other than a genuine actuarial estimate of the cost of the increased benefits. I am sure that no actuary would give any other advice. But when the additional cost is debited against available surplus, the "nil determination" is no more than a book-keeping technicality. National Grid could just as well have "determined" its liability at the actuary's estimate of the cost of the benefits and then, instead of paying that amount, directed the trustees to treat it as discharged out of available surplus. The result would have been precisely the same and I do not think that the form of book-keeping should affect the validity of what National Grid did.

    70. Finally it is said that, on the advice of the actuary, National Grid began this practice, as I have described, before a surplus had been officially certified. The actuary considered that it was pointless to pay money into the scheme to swell what was bound to be a surplus. I think that just as there was power to determine that deficiency payments should be paid at a series of future dates by instalments, so there was power to determine that they should be paid out of future surplus. Whether this was a sensible and prudent thing to do was a matter for the advice of the actuary. But I see no objection in principle to the steps which the actuary advised in this case.

    71. I would therefore allow the appeal and declare that all the arrangements made by National Power and National Grid were valid.

LORD CLYDE

My Lords,

    72. I am in full agreement with the speech which has been delivered by my noble and learned friend Lord Hoffmann. On a proper construction of clause 41(2)(b) the release of a debt due by an employer is not the "making any of the moneys of the Scheme payable to any of the Employers". Nor does such a release fall within the wording of the corresponding language of section 37(1)(a) of the Pensions Act 1995. So far as the construction of clause 14(5) is concerned despite the apparently unrestricted language I agree that it should be construed as requiring that the arrangements should be made in accordance with the whole scheme, so that if a particular arrangement involves an alteration to the provisions of the scheme an amendment will be required, but if it does not, then it may be made without amendment. The question then is which, if any, of the particular elements of the arrangement innovate upon the scheme and in that regard I agree with the views expressed by my noble and learned friends Lord Hoffmann and Lord Scott of Foscote. I also agree that on a proper construction of clause 13(1)(e) payment by instalments in accordance with the actuary's advice are permissible. The matter of the nil determination in the National Grid case seems to me to be one of form rather than substance and subject to the actuary's advice the course taken is not objectionable

    73. I agree that the appeals should be allowed.

LORD SCOTT OF FOSCOTE

My Lords,

    74. I have had the advantage of reading a draft of the opinion of my noble and learned friend, Lord Hoffmann. I am in respectful agreement both with his reasoning and his conclusions but, in view of the importance of this case to those concerned with the administration of pension schemes, I propose to set out, in brief, my reasons for agreeing that the appeals in these two cases should be allowed.

    75. The first, and main, issue is one of construction of clause 14(5) of the Electricity Supply Pension Scheme. Clause 14(5) says that the relevant employer "shall make arrangements... to deal with such surplus..."

    76. There was considerable debate in the courts below and before your Lordships as to whether clause 14(5) merely imposed a duty or whether it conferred also a power to implement the arrangements that the employer desired to make. The provision confers power to "make arrangements". To that extent it is certainly a power-conferring provision. But it does not follow that it confers power upon the employer to amend the scheme. Clause 41 contains an express power to amend the scheme. The provisions of the scheme must be construed as a whole and, so construed, clause 14(5) cannot, in my opinion, be regarded as conferring on the employer a power of amendment free from the safeguards to which the clause 41 power of amendment is subject.

    77. In my opinion, to the extent that "arrangements" made by the employer under clause 14(5) are inconsistent with one or other of the provisions or rules of the scheme, the implementation of those arrangements requires the amendment of the scheme pursuant to clause 41.

    78. Accordingly:

(i) Arrangements made under clause 14(5) which involve altering the contribution obligations of either the employer or the employees under clause 13(1)(a) require, in my opinion, an amendment of the scheme.

(ii) An increase of the benefits payable under the rules, whether the increase takes the form of a lump sum one-off payment or any other form, requires, in my opinion, amendment of the scheme.

(iii) But the appropriation of surplus to meet accrued obligations of the employer under clause 13(1)(e) or (f) does not, in my opinion, require any amendment of the scheme. It was argued in relation to clause 13(1)(e) that the appropriation of surplus to meet an employer's obligation to make additional contributions to meet the extra cost to the fund of early retirements would be inconsistent with the terms of rule 16(3). If so, it would, consistently, with the principle I have expressed, require an amendment. In my opinion, however, the purpose of rule 16(3) was to identify which employer would have to bear the cost of an employee's early retirement. If there were adequate surplus in the fund, and a direction certified by the actuary as reasonable had been made under clause 14(5) for surplus to be appropriated to meet the cost of early retirement, no more would be needed. There would be no inconsistency between the clause 14(5) direction and the other provisions of the scheme. However, there is, in my opinion, no reason why a clause 41 amendment of the scheme should not release, or confirm the release, of an accrued but still unpaid liability in respect of contributions. I agree with Lord Hoffmann that the clause 41(2)(b) limitation on the power of amendment does not bar an amendment which releases an employer's accrued liability to pay contributions that have not yet been paid. I, too, regard British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Ltd [1994] 1 ICR 537 as having been wrongly decided on this point.

(iv) Arrangements made by the employer under clause 14(5) could take the form of a direction to the fund trustees, first, to set aside the surplus, or part of it, as a reserve fund, and, second, to appropriate the reserve fund in or towards payment of future contributions falling due under clause 13(1)(a). Directions of this character would not, in my opinion, require any amendment of the scheme unless the result were to reduce the current monthly contribution obligation of the employer to less than twice that of the members. If that were the result, an amendment of clause 13(1)(a) would be required.

(v) Arrangements made under clause 14(5) cannot take the form of a payment out of the pension fund to the employer. Absent an amendment to the scheme, the trustees could not justify making such a payment. And an amendment authorising such a payment would be barred by clause 41(2)(b).

(vi) The 5% increase in lump sum benefits on retirement provided by National Power as part of the arrangements for dealing with the 1995 surplus ought to have been included among the benefits confirmed by National Power's deed of amendment of 11 May 1999. But since no one objects to the payment of this extra benefit, the omission perhaps does not matter.

    79. As to the propriety of a clause 13(1)(e) determination of a sum to be paid by specified instalments, instead of the determination of a single lump sum, I can see nothing at all objectionable about it. The determination would necessarily have been made on the advice of the scheme actuary, who would be as well able to calculate the requisite sum to be paid by, say, five annual instalments as to calculate the requisite sum to be paid at once as a lump sum.

    80. And as to the determination of a "nil" amount to be paid in respect of an early leaver, provided the "nil" determination were accompanied by, and a consequence of, an appropriation directed under clause 14(5) of a suitable amount of surplus, I can see no reasonable objection to it. The appropriation would have had the consequence that nothing more was needed in order to cover the extra cost to the fund of the early retirement.

     81. I, too, would allow the appeals.

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