Establishment
Cases
Irish Pensions Trust Ltd. v. Central Remedial Clinic & Ors
[2005] IEHC 87
Kelly J.
THE ISSUE
The plaintiff is the trustee of the Central Remedial Clinic Pension and Death Benefit Scheme (the scheme).
As is usual in such schemes provision is made for the escalation or increase of pension payments to the members. That much is not in dispute. Neither is there any dispute as to the fact that the headline rate
OCCUPATIONAL PENSION SCHEMES
An occupational pension scheme is constituted as a trust. The beneficiaries of the trust are the present and future employees of the employer in respect of which the scheme is established who are eligible and who participate in it together with their dependants. The assets of the trust are contributed by both the employer and to a lesser extent the employee.
Retirement benefits under a scheme may be granted on a defined benefit basis or on a defined contribution basis.
In a defined benefit scheme the retirement benefit is based on a promise to pay a certain level of pension. The amount of such benefit is often based on the number of years a member has participated in the scheme multiplied by a fraction (usually one sixtieth) of the members final pensionable salary. Thus if a member has participated in a defined benefit scheme for thirty years his or her retirement benefit would be thirty sixtieths. The maximum retirement benefit which the Revenue Commissioners approve is forty sixtieths of final remuneration. The scheme which is the subject of these proceedings is a defined benefit scheme. It is therefore not necessary to deal in any detail with a defined contribution scheme save to say that such a scheme is not based on a promise to pay a certain level of pension but rather on the value of the member’s retirement account. That is made up of the benefits accrued to the investment of the contributions made to that account by both the employer and the employee.
REVENUE IMPLICATIONS
In order for a pension scheme to attract tax advantages it has to obtain the approval of the Revenue Commissioners as an exempt approved scheme pursuant to the relevant tax legislation. Crucial to the success of a pension scheme is the availability of tax reliefs.
Employees are entitled to tax relief on contributions made subject to certain limits and the employers contributions are not assessed as income of the employee. Normally an employer’s contributions are deductible for tax purposes as an expense in the year in which they are paid but this is not relevant to the scheme in suit because CRC is a charity.
The statutory regime for the approval of occupational pension schemes was formerly contained in Chapter II Part I of the Finance Act, 1972 and is now principally contained in Part 30 Chapter 1 of the Taxes Consolidation Act, 1997. Over the years the Revenue Commissioners established guidelines which indicated the conditions which must be met by an occupational pensionscheme before it could be approved. These guidelines were originally contained in a revenue publication called “Occupational Pension Schemes: Notes on approval under the Finance Act, 1972”. These notes were updated regularly. These guidance notes and the updates have now been superseded by a document known as the “Revenue Pensions Manual”. I will refer to all of these documents in the course of this judgment as “the Revenue Guidelines”.
DOCUMENTS
The 1972 Finance Act introduced a new regime for the tax treatment of occupational pension schemes. When that Act commenced the plaintiff had up to 2500 pension schemes which had to be converted in order to meet with Revenue approval under the new statutory regime. That involved either amending the documents to ensure the schemes would be approved schemes under the 1972 Act or re-documenting benefits. At the time of the 1972 legislation coming into force the plaintiff was then setting up approximately 15 – 20 new pension schemes per month.
For understandable reasons the plaintiff wished to have all its schemes documented on a standard basis. Accordingly it designed a series of documents which are referred to as “governing documents” which would be applicable for every scheme with which the plaintiff is involved. These documents consist of:-
a. An interim trust deed
b. A declaration of trust
c. A subscribers agreement form between the employer and the trustee
d. A deed of amendment
e. General rules
f. Members notifications (particularly explanatory booklets) given to members of the scheme from time to time.
g. Special rules
h. Additional special rules
The plaintiff executed an interim deed on 13th October, 1972, followed by a declaration of trust on 15th January, 1975, establishing what was known as the “IPT retirement benefits trust”. The declaration of trust was amended by a deed of amendment on 2nd August, 1977.
The purpose of the interim deed was to provide existing schemes of the plaintiff with a trust framework whose terms would ensure they could enjoy approval under the Finance Act, 1972, until such time as the declaration of trust was executed and approved. The declaration of trust consists of a set of standard terms for governing and administering any number of different pension schemes with individual scheme designs. It is a central trust to which many employers establishing pensionschemes with the plaintiff subscribed.
Under clause 1 of the declaration of trust the plaintiff “offers to act as trustee of schemes for the provision of relevant benefits as defined in s. 13(1) of the 1972 Finance Act arranged by any employers for the benefit of their employees and to establish trust funds for the purpose of securing benefits under such schemes”.
Under clause 2 of the declaration of trust an employer wishing to establish a pension scheme entered into a written agreement with the plaintiff establishing a pension scheme to be governed by and administered in accordance with the declaration of trust. The employer completes a form known as a “subscribers agreement form” and thus is established a separate plan for each employer. Hundreds of such plans have been established with the plaintiff over time. Each plan is established under the trust, such being a requirement for Revenue approval.
The documents constituting the scheme include a set of rules known as “the general rules” which are scheduled to the declaration of trust. These general rules contain enabling provisions in respect of inter alia admission to membership, contributions payable and benefits payable.
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During the period under consideration there were two forms of Revenue approval. The first was interim approval which would be given upon the establishment of a scheme subject to compliance with certain basic requirements. Final approval was given only when the Revenue Commissioners approved the scheme in its entirety. Such approval almost invariably occurred years after the obtaining of interim approval.
PENSION ESCALATION
Whenever a pension scheme is designed, one of the questions which falls for decision is whether cost of living increases should be awarded while pensions are in payment. In times of high inflation such as the 1970’s and 1980’s many employers wished to do what they could to protect pensioners from the effects of inflation. Understandably, however, they were not prepared to undertake an open ended liability to pay inflation linked increases. A variety of approaches were adopted. Some gave no pension increases at all. Others made a commitment in the scheme rules to providing annual increases which might be at a fixed annual rate or at a rate depending on the consumer price index or at a rate depending on pay increases granted to the employers currently serving employees. Other schemes opted to make no formal commitment to giving pension increases but rather provided for increases which were discretionary.
In some cases a combination approach was adopted. In such cases a scheme would typically provide for increases in line with the consumer price index but capped at a specified level, for example, 5%. Others might provide a guaranteed increase of, for example, 3% per annum but with discretionary increases if inflation was higher and the funding level of the scheme permitted.
Even with discretionary increases however, if there was an intention on the part of the employer to grant any such increases, it would have to be taken into account in calculating the contributions to be paid in respect of the scheme. If that were not done then the scheme would run the risk of having insufficient funds to provide pension increases.
Promised benefits require to be pre-funded. This is so even though the increases may not be granted until the member has retired and is in receipt of pension. A possibility that increases might be granted is normally recognised and contribution rates are fixed accordingly at the time when the member is in employment and contributions are being paid in respect of him.
The Revenue Guidelines made their position in relation to increases in pensions clear. These have been reflected in the general rules. I will have more to say on this later in the judgment.
ESTABLISHMENT AND ADMINISTRATION OF PENSION SCHEMES
The evidence satisfies me that in the establishment and administration of pension schemes a number of specific steps are typically taken. The first can be called the drafting process. That involves seven different stages. They are:-
(a) The plaintiff’s consultant meeting with the client for instructions,
(b) The completion of a subscribers agreement form to establish the scheme,
(c) The completion of a lead sheet by a new business consultant,
(d) The transmission of that lead sheet to the legal and administration department of the plaintiff,
(e) The drafting of explanatory booklets in consultation with the client,
(f) The review of and finalising of the explanatory booklets with the client employer,
(g) Thereafter drafting and finalising special rules.
Normally the legal and administration department of the plaintiff was responsible for drafting the special rules and the explanatory booklet for each scheme after the scheme consultant had taken instructions for the employer in respect of the schemes design. There were standard template documents for the explanatory booklets and special rules which were used by the plaintiff. The steps taken are set out in great detail in the affidavit of Mr. Molloy. I accept his evidence in that regard and it is not necessary for me to reproduce what he has to say in detail.
On the topic of increases in pensions and the Revenue Guidelines I am satisfied that during the 1970’s there was considerable discussion and indeed confusion within the industry about pension increases, the level they should be provided at and how they would be funded. It was recognised that employers could not give open ended promises in respect of escalation and that therefore increases would have to be capped. During the mid-1970’s there were discussions between the plaintiff and the Revenue Commissioners as a result of which it was decided that increases for a pension could be pre-funded up to 3%. Later it was obvious that 3% would be insufficient having regard to prevailing inflation rates. The approval of the Revenue Commissioners was sought to pre-fund for up to 5% increases. The Revenue Commissioners agreed with 5% pre-funding of increases provided that they were capped by reference to CPI increases if 5% was promised. This meant that employers could pre-fund for increases and could automatically pay fixed increases up to 3% even if the cost of living index fell below 3%. If however they wanted to pre-fund and pay increases of up to 5% a CPI cap had to apply.
As I have already pointed out under clause 4 of the declaration of trust, special rules may be adopted. Strictly speaking such special rules amend the general rules but they are more generally regarded as supplementary to them. Normally they were drafted some considerable time after the explanatory booklet and shortly before final approval was obtained from the Revenue. These special rules were usually drafted using a template document. Rarely did their drafting require direct contact with the employer because they were highly technical documents and so the employer did not need to have any involvement with them. Generally the special rules were not sent to members of the scheme because there was no requirement to do so. In any event their highly technical nature was unlikely to advance to any great extent the knowledge of the member of the scheme. Much greater attention was given to the explanatory booklet. That was so for two reasons. First, the explanatory booklet antedated the special rules and secondly, and more importantly, it was that booklet that was intended to inform members of the terms of the scheme and the benefits which they would enjoy thereunder.
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THE SCHEME
CRC began to establish retirement benefits for employees as far back as 1962. A trust deed was executed in respect of its first scheme in March of that year. Escalation rights were not mentioned in that trust deed and were not provided for as a benefit by CRC until after 1977.
Following the enactment of the Finance Act of 1972, CRC established the scheme with effect from the 1st December, 1974. It did so by virtue of a subscribers agreement form. Interim approval for the scheme was sought from the Revenue on 4th April, 1975. A second scheme was established from 1st June, 1975, which comprised the 1961 scheme and two further schemes.
In March 1977, at a meeting attended by Mr. Kenny it was agreed that CRC’s pension schemes which were then in operation should be merged and that 1st January, 1977, should be the effective date of this amalgamation. Rather than establish an entirely new scheme the merger was effected by winding up the 1975 scheme and transferring its members into the scheme.
Special rules had not been executed at that time and so final Revenue approval was not obtained. In April, 1979, the plaintiff wrote to the Revenue Commissioners stating that they were enclosing a subscriber’s agreement form and explanatory booklet which had been issued to members. The Revenue Commissioners were asked to confirm final approval of the scheme.
The Revenue Commissioners replied that a subscriber’s agreement form of the 1st April, 1975, had already been submitted to them (on 5th April, 1975) and that the form enclosed with the April, 1979, letter was an associated companies agreement form. The Revenue also pointed out that there was a discrepancy between the effective date as stated in the subscriber’s agreement form and the explanatory booklet. There was obviously a good deal of confusion which was contributed to by the fact that the scheme came about as a result of an amalgamation of a number of existing schemes.
The ultimate obtaining of Revenue approval was a lengthy process to put it mildly. Final approval was forthcoming on 10th November, 1993.
The scheme was governed by the plaintiff’s declaration of trust which was used for the operation of many schemes which I have already described earlier in this judgment. General rules 9 and 14.9 dealt with escalation rights. General rule 9 reads as follow:-
“Post Retirement Increases.
(a) Any pension in course of payment, whether to a member or to a dependant of a member, may be increased annually or at such other intervals as the trustee shall determine after the commencement of such pension by such amount as the employer with the consent of the trustee shall decide.
(b) Such pension increments shall be payable with the normal instalments of pension and shall terminate when the normal instalments cease.
(c) No part of any pension under this rule which exceeds the maximum members pension set out in general rule 14, such maximum being exclusive of that relating to post retirement increases, shall be capable of commutation under sub-rule (a) of general rule 6. In all other respects any pension under this rule shall be subject mutatis mutandis to the provisions of the rules as though it were part of the pension being increased.”
I have already set forth rule 14.9 of the general rules. It sets out the terms of the Revenue Guidelines applicable to escalation rights at the time when the general rules were adopted. Those Revenue Guidelines are today substantially the same as they were when the general rules were adopted in January, 1975.
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Insofar as the approach of Lawrence Collins J. may have differed from that of Rimer J. in the two cases from which I have just cited, I prefer the approach of Lawrence Collins J. It appears to me that bilateral transactions are substantially different to transactions which create rights for persons other than the maker of the instrument but which are not the result of a bargain. I can see good sense in drawing a distinction between the former and the latter. In the case of bilateral transactions some outward expression of accord or evidence of a continuing common intention outwardly manifested is required. In the case of a pensionscheme however, evidence of the intentions both of the trustees and of the employer is required but not necessarily of their agreement or accord. That approach makes sense having regard to the different nature of the transactions. It also appears to me to be in accord with the general approach which is taken to the construction of pension schemes. That approach is purposive rather than literal.
In Re Courage Pension Schemes [1987] 1 W.L.R. 495, Millett J. set forth the general approach to the construction of pensionschemes and in particular powers to amend them. He said:-
“Before I consider this question I should make some general observations on the approach which I conceive ought to be adopted by the court to the construction of the trust deed and rules of a pension scheme. First, there are no special rules of construction applicable to a pension scheme; nevertheless, its provisions should wherever possible be construed to give reasonable and practical effect to the scheme, bearing in mind that it has to be operated against a constantly changing commercial background. It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life. This is particularly the case where the scheme is intended to be for the benefit not of the employees of a single company, but of a group of companies…
Secondly, in the case of an institution of long duration and gradually changing membership like a club or pension scheme, each alteration in the rules must be tested by reference to the situation at the time of the proposed alteration, and not by reference to the original rules at its inception. By changes made gradually over a long period, alterations may be made which would not be acceptable if introduced all at once. Even the main purpose may be changed by degree.”
The approach of Millett J. was followed by Warner J. in his decision in Mettoy Pension Trustees v. Evans [1990] 1 W.L.R. 157. He accepted that the construction of a pension scheme should be practicable and purposive rather than detached and literal. He said that the scheme should be construed so as to give reasonable and practical effect to it and said:-
“That is in my judgment particularly so where, as here, the documents governing the scheme include not only documents such as the 1973 and 1978 booklets but also documents such as the memoranda of 1973 and 1976 and the deed of 1978, which were intended to have legal effect but were couched in very general terms.”
There is no doubt but that the court in approaching a claim to rectification is entitled to take into account the factual background and the surrounding circumstances. (See O’Neill v. Ryan [1992] 1 I.R. 166; Kramer v. Arnold [1997] 3 I.R. 43 and my own decision in Analog Devices B.V. v. Zurich Insurance, Unreported 20th December, 2002).
In his judgment in Mettoy’s case, Warner J. identified a number of special factors which formed part of the facts of that case. One of them was that what were described as temporary and imprecise documents were brought into existence for the purpose of satisfying certain statutory authorities. He said:-
“It would be inappropriate and indeed perverse to construe such documents so strictly as to undermine their effectiveness or their effectiveness for their purpose. I do not think that, in saying that, I am saying anything different from what was said by Lord Upjohn when in Re Gulbenkians Settlements [1970] AC 508, 522, he referred in the context of a private settlement to –
‘The duty of the court by the exercise of its judicial knowledge and experience in the relevant matter, innate common sense and desire to make sense of the settlors or parties expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it.’
What the court has to do here is to perform that duty in the comparatively novel and different context of pension scheme trusts.”
Whilst these cases were of course dealing with the question of construction of pension schemes it does appear to me that the purposive approach does have a bearing upon how a claim for rectification in the context of a pension scheme should be looked at. The approach of Lawrence Collins J. in the AMP case appears to me to be the one that I should adopt here in approaching the plaintiff’s claim. Such an approach is not merely more appropriate when dealing with a pension scheme as distinct from an ordinary bilateral arrangement but also appears to me to reside comfortably with the purposive approach.
In Re Courage Group’s Pension Schemes
[1987] 1 WLR 495, [1987] 1 All ER 538
Millett J
: ‘It is trite law that a power can be exercised only for the purpose for which it is conferred, and not for any extraneous or ulterior purpose. The rule-amending power is given for the purpose of promoting the purposes of the scheme, not altering them. Before I consider this question, I should make some general observations on the approach which I conceive ought to be adopted by the court to the construction of the trust deed and rules of a pension scheme. First, there are no special rules of construction applicable to a pension scheme; nevertheless, its provisions should wherever possible be construed to give reasonable and practical effect to the scheme, bearing in mind that it has to be operated against a constantly changing commercial background. It is important to avoid unduly fettering the power to amend the provisions of the scheme, thereby preventing the parties from making those changes which may be required by the exigencies of commercial life. This is particularly the case where the scheme is intended to be for the benefit not of the employees of a single company, but of a group of companies. The composition of the group may constantly change as companies are disposed of and new companies are acquired; and such changes need to be reflected by modifications to the scheme. Secondly, in the case of an institution of long duration and gradually changing membership like a club or pension scheme, each alteration in the rules must be tested by reference to the situation at the time of the proposed alteration, and not by reference to the original rules at its inception. By changes made gradually over a long period, alterations may be made which would not be acceptable if introduced all at once. Even the main purpose may be changed by degrees.’ and ‘So the main purpose of a club or pension scheme may be enlarged by appropriate amendments to the rules; and once it becomes too late to challenge the amendments, the enlarged purposes become the new basis by reference to which any further proposed changes must be considered.’
Venables & Ors v. HM Inspector of Taxes
[2003] UKHL 65
LORD MILLETT
My Lords,
In March 1997 the appellant taxpayer was assessed to income tax in respect of three payments totalling £580,591 made to him in July and August 1994 from the funds of his pension scheme. The assessment was made under section 600(2) of the Income and Corporation Taxes Act 1988 as amended by the Finance Act 1989. Section 600 provides:
“(1). This section applies to any payment to or for the benefit of an employee, otherwise than in course of payment of a pension, being a payment made out of funds which are held for the purposes of a scheme which is approved for the purposes of … (b) Chapter II of Part II of the Finance Act 1970….
(2). If the payment is not expressly authorised by the rules of the scheme … the employee … shall be chargeable to tax on the amount of the payment under Schedule E for the year of assessment in which the payment is made.”
It is common ground that the payments were made from funds which were held for the purposes of an approved pension scheme. The revenue claim that the payments were not “expressly authorised by the rules of the scheme” because, at the time they were made, the taxpayer remained a director of one of the participating employers in the scheme and so (it is said) had not “retired” within the meaning of the rules. It is not disputed that when the payments were made the taxpayer was still a non-executive director of a participating employer. The principal issue in this appeal is whether it follows that the taxpayer had not “retired” within the meaning of the rules of the scheme so that the payments were unauthorised (for nothing seems to turn, at least in this case, on the word “expressly”).
A secondary issue is whether, if the payments were unauthorised, they should be treated for tax purposes as if they had not been made. The taxpayer contends that if the payments were not authorised then, as one of the trustees of the scheme, he received and held them throughout as a constructive trustee on the trusts of the scheme. It is common ground that if the payments were not authorised then, unless they can be treated as not having been made (or at least not made “out of” the funds of the scheme), the assessment was properly made.
The proceedings
The taxpayer’s appeal against the assessment was dismissed by the single special commissioner on the ground that, although the taxpayer had “retired”, he had not retired “in normal health” as required by the rules of the scheme. On the taxpayer’s appeal and the revenue’s cross-appeal the judge (Lawrence Collins J) [2002] ICR 81 upheld the commissioner’s finding that the taxpayer had retired but reversed his finding that he was not then in normal health and discharged the assessment. On appeal to the Court of Appeal the revenue did not challenge the judge’s conclusion that he had been in normal health at the relevant time but continued to maintain that the taxpayer had not retired. The Court of Appeal [2003] ICR 186 allowed the revenue’s appeal and held that at the time the payments were made the taxpayer had not retired because he continued in office as a non-executive director. It also held that although the payments, being unauthorised, were made in breach of trust, they were not to be treated as if they had not been made.
The facts
The Fussell Pension Scheme (“the scheme”) was established by a Trust Deed (“the trust deed”) dated 25 September 1980 as an occupational pensions scheme for the benefit of directors and employees of Fussell Estates Ltd and other participating employers. The scheme was approved by the Commissioners of Inland Revenue with effect from the same date. At all material times it was an exempt approved scheme. On 26 May 1989 the terms of the trust deed were amended so that thereafter Ven Holdings Ltd (“the company”) was treated as the founder of the scheme in place of Fussell Estates Ltd. With effect from that date the participating employers under the scheme were the company and Fussell Estates Ltd. The taxpayer and a trust corporation were the trustees of the scheme. At all material times the taxpayer held approximately 20% of the shares in the company and the remaining 80% of the shares were held by a family discretionary trust of which the taxpayer was the settlor and one of the trustees.
The company, which had a number of subsidiaries, was engaged in the construction industry. The taxpayer, who was a carpenter by trade, was aged 53 in June 1994. In the early days he had worked on building sites, though he had not done so for many years. He had worked for the company for upwards of 30 years, and had for some time been an executive director and chairman of the company, in which capacity he worked about 30 hours a week and was paid some £25,000 per annum.
In March 1993 the group’s managing director retired and the taxpayer’s workload increased so that he worked nearly 50 hours a week. He became responsible for the day to day running of the group and, although never formally appointed as such, he undertook the functions previously performed by the group’s managing director. The commissioner described him as having “stepped into the gap” left by the retirement of the former managing director without any formality.
On 23 June 1994 a board meeting of the company took place at which it was resolved that the taxpayer:
“will be retiring as an executive director on 30 June 1994 to pursue other interests but will continue as an unpaid non-executive director.”
In a letter of the same date the taxpayer notified the other trustee of the scheme that he would be retiring from employment with the group from 30 June 1994 and that he wanted to take most of his lump sum pension entitlement from the scheme in the form of property.
The commissioner found that after 30 June 1994 the taxpayer was an unpaid non-executive director of the company and ceased to be an employee, not having even an oral contract. He now spent a large part of his time in the USA, buying a house in Florida in May 1996, though he returned to the United Kingdom from time to time. He was still a major shareholder and the remaining shares were held by a family trust which he had established. He naturally maintained an interest in the company’s affairs and continued to give advice – usually by telephone – to those now running the company, but he received no remuneration for doing so. He no longer visited building sites or normally attended the office. He was for the most part physically absent being, as the commissioner put it, “not an hour’s drive from the business, but on the other side of the Atlantic.”
The commissioner found that the taxpayer, who suffered from a heart condition, (i) was not in normal health on 30 June 1994 (as I have explained, this finding was reversed on appeal); (ii) did not retire from the office of managing director, because he had never been appointed to it; but (iii) did retire from employment with the company and from normal service on its behalf. When discussing the relevant statutory provisions the commissioner later recorded that it was “common ground” that the taxpayer was a director both before and after the 30 June 1994 and an employee before that date. This was not entirely correct. In the absence of any written contract of employment the revenue has not accepted that he was ever an employee of the company.
The Fussell Pension Scheme
The scheme was a contributory final salary pension scheme of a familiar kind. The trust deed recited that it had been decided to establish a scheme for providing “relevant benefits as defined in section 26(1) of the Finance Act 1970” for eligible “directors and employees” of participating companies.
Consistently with the recitals clause 3 of the trust deed provided that the funds of the scheme were to be held on trust for the provision of “relevant benefits as defined in section 26(1) of the Finance Act 1970” for eligible “employees”; and “employee” was defined as meaning:
“a person in the service of [the company] and includes a director”.
“Normal retirement date” was defined as the date stated in the rules applicable to the particular member. In the taxpayer’s case this was stated to be 13 December 2000, when he would be aged 60 and would have been a member of the company for 20 years. On retirement at normal retirement date a member became entitled to a pension in accordance with the rules applicable to him. In the taxpayer’s case he was entitled to elect to take part of his benefit in the form of a tax-free capital sum not exceeding 150% of his final remuneration.
Clause 2 of schedule F to the trust deed made provision for early retirement. This gave the trustees a discretion exercisable with the consent of the company:
“to award an immediate pension to a member who retires in normal health at or after age 50”.
The rules applicable to the taxpayer provided that with the company’s consent he might retire with reduced benefits at any time after age 50. It was, however, expressly stated that the trust deed governed the matter and that it would always take precedence over the rules.
The statutory provisions
It will be recalled that under the terms of the trust deed the fund was to be held in trust for the provision of retirement benefits as defined by section 26(1) of the Finance Act 1970 for the benefit of employees (which term included directors). So far as material section 26(1) of the 1970 Act defines “relevant benefits” as meaning:
“any pension, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or in anticipation of retirement, or, in connection with past service, after retirement or death, or to be given on or in anticipation of or in connection with any change in the nature of the service of the employee in question …”
The section also defines “employee” in relation to a company for the purpose of the relevant part of the 1970 Act as including:
“any officer of the company, any director of the company and any other person taking part in the management of the company”.
Was the taxpayer entitled to retirement benefits on early retirement in ill health?
This is no longer a live issue because the judge reversed the commissioner’s finding that, at the date of his retirement, the taxpayer was not in normal health. It would be remarkable if on its true construction the trust deed provided for a pension to be paid on early retirement to a member who was in normal health but not to a member who was in ill health. The trust deed continues in operation and will apply to members who take early retirement in future, so that the construction which the courts have placed upon it will affect others besides the taxpayer. In these circumstances I think that I should briefly explain why I consider that the trust deed does not have this effect.
The commissioner reasoned as follows:
(i) the rules make provision for discretionary benefits to be payable to a member on retirement at or after the age of 50 without any reference to the state of his health;
(ii) where there is a conflict between the trust deed and the rules the trust deed prevails;
(iii) the trust deed permits payment of benefits on early retirement only if two conditions are satisfied: (a) the member must have retired and (b) he must have done so in normal health;
(iv) early retirement on grounds of ill health is therefore a casus omissus.
Thus the commissioner treated the words “in normal health” as a qualifying condition which must be satisfied before a member can become eligible for benefit on early retirement. It is most unlikely that it was not intended to cover early retirement in ill health, since this is an a fortiori case; and the commissioner accordingly took it to be an inadvertent casus omissus. A more plausible construction of the words “in normal health”, however, is to treat them, not as words of limitation, but as words of exposition. Read in this way they refer to a member “who retires (even in normal health) at or after the age of 50.” Such a construction has the advantage, not only of producing what must have been the intended result, but also of eliminating any conflict between the rules and the trust deed. It would, moreover, accord with the principle (once known as “the rule in Jones v Westcomb (1711) Prec Ch 316”) that a gift on a contingency which does not occur nevertheless takes effect on the happening of an event which is a fortiori. Thus a legacy to a single woman if she survives her husband takes effect if she never marries: see Brock v Bradley (1864) 33 B 670; and a gift over in the event of a prior legatee having only one child takes effect if the prior legatee has no child: Murray v Jones (1813) 3 Ves & B 313. The further contingency arises by necessary implication to give effect to the evident intention of the grantor.
Was the taxpayer an employee?
The taxpayer was certainly an employee within the meaning of both the trust deed and the Finance Act 1970, since they both define the expression as including a director. The revenue accept that he was a director before 30 June 1994 and remained a director after that date. But they deny that he was ever an employee.
Whether the taxpayer was an employee of the company is a question of fact. The commissioner found that he was. He found in terms that the taxpayer “did retire from employment with the company” and that after 30 June 1994 he “was an unpaid non-executive director, and ceased to be an employee”. There was abundant evidence to support his conclusion, for the taxpayer had worked for the company for many years and latterly carried out the functions performed by a managing director, and was paid for doing so. Having regard to the nature of the company as a small family company, it is not surprising to find that he never had a written contract. There is no evidence to suggest that he was paid director’s fees; and the fact that he ceased to be paid anything when he became a non-executive director is strong evidence that he had been paid for the work he did as an employee and not for the responsibilities he undertook as a director. Given the hours he worked before June 1994 and the extent of his duties as a director of a small family company, it is far-fetched to attribute his remuneration to his office rather than his employment.
It should be borne in mind that the absence of a written contract and the character of the company as a small family company, while not irrelevant, are far from conclusive on the question. There is no rule of law which precludes even a sole or controlling shareholder from being an employee of a company, and the taxpayer was neither. While the degree of control is always significant and might on occasion be decisive, it is only one of the relevant factors to be taken into account in considering whether there is a genuine contract of employment. The fact that the person claiming to be an employee is the controlling shareholder and ultimately has the power to prevent his own dismissal does not prevent the existence of a genuine contract of employment: see Secretary of State for Trade and Industry v Bottrill [2000] 1 All ER 915 CA.
Did the taxpayer “retire”?
The Court of Appeal accepted the revenue’s argument that the taxpayer did not “retire” within the meaning of the 1970 Act. On a careful analysis of the provisions of the 1970 Act, it reasoned that “retirement” means “retirement from service as an employee” and did not extend to a change in the nature of the service as an employee. It then asked what is meant by “service as an employee” and answered it by reference to the provisions of section 26(1) of the 1970 Act, which defines “employee” in relation to a company as including any director of the company. Accordingly, it reasoned, service as an employee of the company must include service as a director of the company, and it followed that there is no retirement from service as an employee for so long as the person in question continues to hold office as a director.
Strictly speaking the question turns on the meaning of the word “retire” in the trust deed and not in the Finance Act 1970, but there is no material difference between them for present purposes and nothing turns on this. Both contain the critical definition of “employee”, which lies at the heart of the revenue’s case and the reasoning of the Court of Appeal.
I would for my part accept the reasoning of the Court of Appeal with the exception of the last step. In my opinion it does not follow from the fact that the word “employee” is defined to include a director that an employee who is also a director must retire from both his employment and his office as director before he can be said to “retire” within the meaning of the trust deed.
A definition clause is principally a drafting device employed to avoid unnecessary repetition and applies only for the purpose of construing the document or part of the document in which it is contained. Unfortunately the use of a definition as shorthand in this way sometimes causes ambiguity. It does so in the present case. The revenue’s argument assumes that its effect is that “employee” means “employee and director”, so that, as the Court of Appeal held, a person who is both an employee and a director does not retire unless he retires from both.
But this is not what the definition says. It says only that the word employee “includes a director.” This does not tell us unambiguously what words should be substituted for “employee” wherever that word appears. It may mean that we should substitute the words “employee and director” (in which case the member must retire from both); the words “either as employee or director” (in which case he may retire from either and receive the same benefits as if he had retired from both); or the words “whether as employee or director” (in which case he may retire from either and receive the benefits attributable to the position from which he has retired).
The ambiguity is, however, easy enough to resolve. The recitals to the trust deed explain its purpose as the provision of benefits to “directors and employees” of the company, and this cannot sensibly be confined to persons who are both employees and directors. It must mean persons in the service of the company whether as employees or directors. The underlying concept, therefore, is that of pensionable occupation whether as an employee or director. It follows that the word “retire” means “retire from the service of the company whether as employee or director”.
It is, therefore, not necessary that a member who is an employee and a director should retire from both positions. Under the terms of the trust deed benefits are related to final remuneration, so that unremunerated service is not a pensionable occupation. The fact that the taxpayer has remained in his non-pensionable occupation as a non-executive director cannot affect his right to benefit on retiring from his only pensionable occupation. But it would make no difference if he had received and continued to receive director’s fees. He would still have retired from his pensionable occupation as an employee, though benefit would have to be calculated without reference to his director’s fees.
The definition of “relevant benefits” in the 1970 Act (incorporated into the trust deed by clause 3) distinguishes between “retirement” and a “change in the nature of the service of the employee”, though for the purposes of the 1970 Act relevant benefits may properly be paid in either event. The trust deed, however, provides for benefit to be paid only on “retirement”. The Court of Appeal held that the effect of incorporating the statutory definition of “relevant benefits” into the trust deed was that a change in the nature of service does not constitute “retirement” for the purposes of the trust deed. By ceasing to serve as an employee and continuing to serve as a director, it held, the taxpayer had merely changed the nature of his service.
I am not at all convinced that the incorporation of the statutory definition into the trust deed for an entirely different purpose has this effect. But it is not necessary to decide this, for a proper appreciation of the meaning of the word “employee” disposes of the point. What is outside the scope of the word “retirement” in the 1970 Act is a mere “change in the nature of service whether as an employee or a director”. This is not what happened. The taxpayer ceased to be an employee altogether.
I reach this conclusion with some satisfaction. The Court of Appeal’s ruling would mean that under the trust deed as drawn a member who was an employee and a director and retired from service as both but was reappointed a director on the following day would have “retired” and be entitled to benefit, but a member who like the taxpayer retired from service as an employee but continued in office as a director without remuneration would not; and on finally retiring from his unpaid office as a director the latter would be entitled to benefit calculated by reference to his final remuneration, (quite possibly nil). These absurdities, moreover, would be the consequence, not of the 1970 Act or of any statutory restriction on benefit, but of the construction of the trust deed placed upon it by the Court of Appeal and the incorporation for a quite different purpose into the trust deed of a statutory definition of relevant benefits.
Were the payments made out of the trust funds?
This makes it unnecessary to express a concluded view on the second question, whether the payments were “made out of” the trust funds if they were paid in breach of trust to a trustee of the scheme in circumstances in which he came under an obligation enforceable in equity to repay them. It depends on whether it is sufficient that the payments were made to the recipient for his own use and benefit and were valid to pass the legal title to the money, or whether they must also have been received free from any legal or equitable obligation on the part of the recipient to make restitution. In short, it may depend on whether the determining factor is the payment or the receipt.
Conclusion
In my opinion the commissioner was entitled to find that the taxpayer was both a paid employee and an unpaid director of the company on 30 June 1994. On that finding I am satisfied that on the true construction of the trust deed he retired from service as an employee on that date even though he continued to be an unpaid non-executive director thereafter. If it had been necessary I would also have held that he was eligible to be considered for benefit on early retirement even if he was in ill health as the commissioner found him to be. It follows that the payments to the taxpayer were duly authorised by the rules of the scheme.
I would allow the appeal and discharge the assessments.
Cowan V Scargill
[1985] Ch 270, (1984) 128 SJ 550, [1984] IRLR 260, [1984] 3 WLR 501, [1984] 2 All ER 750
Sir Robert Megarry VC
‘The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries. This duty of the trustees towards their beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests. In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment.’
If trustees for social or ethical reasons fail to make an investement which would produce a better result, the would be subject to criticism. ‘In considering what investments to make trustees must put on one side their own personal interests and views. Trustees may have strongly held social or political views. They may be firmly opposed to any investment in South Africa or other countries, or they may object to any form of investment in companies concerned with alcohol, tobacco, armaments or many other things. In the conduct of their own affairs, of course, they are free to abstain from making any such investments. Yet under a trust, if investments of this type would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by reason of the views that they hold.’
however: ‘If trustees make a decision upon wholly wrong grounds, and yet it subsequently appears, from matters which they did not express or refer to, that there are in fact good and sufficient reasons for supporting their decision, then I do not think that they would incur any liability for having decided the matter upon erroneous grounds; for the decision itself was right.’
Trustee Solutions Ltd & Ors v Dubery & Anor
[2006] EWHC 1426
Approach to construction
The principle question of construction turns on the requirement that the document amending the rules must be either a deed (which is not suggested in this case) or “writing effected under hand”.
The rules of a pension scheme must be interpreted in a practical and purposive way. The fiscal background is also of importance. The ultimate question is what the words of the Scheme would mean to a reasonable reader with the background knowledge of the parties.
I was taken to the decision of Neuberger J in Bestrustees v Stuart [2001] Pens LR 283. Neuberger J was considering the requirements of a document that was said to have altered the rules in accordance with a power of alteration contained in clause 16 of the scheme under consideration in that case. Neuberger J said in para 33 of his judgment:
“I bear in mind that a pension scheme is likely to continue for a substantial period of time and that those most affected by them and entitled to protection from the trustees, the employer and indeed the Court, will be people who are comparatively poor, who will not have easy access to expert legal advice, and who will not know what has been going on in relation to the management of the Scheme. In those circumstances, it seems to me that protection of the beneficiaries requires the Court to be very careful before it permits a departure from the plain wording and plain requirements of the trust deed. Further, it is not as if this was a case where at the date of the trust deed there was a difference of identity between the trustees and the employer: they were the same person even then. Accordingly, I think the Court should be particularly careful before effectively overriding the requirement that there is some sort of written record which can be said to amount to an authority within the meaning of clause 16 of the definitive deed.”
In para 40 he said:
“I refer back to the point to which I have already made reference, namely, that bearing in mind that this is a trust, and bearing in mind the likely long life of this trust and the ignorance as to what has been going on on the part of the beneficiaries, it seems to me that the Court should not be too ready to waive a requirement of written documentation when the Scheme, and the trust deed under which it is set up, specifically require it. Of course, in this sort of case one often finds oneself treading the somewhat blurred line between requiring the terms of a particular deed to be complied with, while not being too pedantic and exacting in one’s requirements.”
I do not regard these observations as suggesting that the court has power to sanction any departure from the requirements of the deed as properly construed. An avoidance of pedantry, and the need to protect beneficiaries may well be powerful factors in choosing between rival constructions; but once the requirements of a valid means of alteration of the rules has been determined as a matter of construction, either a document satisfies those requirements or it does not. Nor do I think that Neuberger J can have meant that the court had power to waive requirements of the deed as properly construed. It is always open to the parties to a contract to waive one of its requirements, but that is a matter for them; not for the court.
Writing under hand
Mr Newman submitted that the ordinary meaning of “writing under hand” is signed writing. Miss Rich submitted that, at least in the context of the rules of the Scheme, all that is required is something evidential; and that there is no rational basis for requiring a signature as a substantive requirement of a document amending the rules. The phrase “writing effected under hand by the Trustees” is merely meant to point the contrast with deeds.
There are a number of cases that bear on this point, although none, of course concludes the particular question I have to decide.
The first is the decision of the Court of Exchequer Chamber in Everard v. Paterson (1816) 2 Marsh 304. The plaintiff sued on a bond. The bond was conditioned on performance of an arbitrators’ award “made in writing under their hands”. The pleading alleged that the arbitrators had made and published their award in writing; but it did not allege that the award had been made in writing under their hands. The Court of Exchequer Chamber held that this was a defective pleading because the award might have been in writing, but yet not under the hands of the arbitrators. Although Gibbs CJ did not explain the difference between the two expressions, I would infer that he considered that “under the hands” meant that the award had to be signed by the arbitrators.
In Waterson’s Trustees v St Giles Boys’ Club 1943 SC 369 the Inner House of the Court of Session considered a testamentary direction by the testatrix to give effect to any “informal writing under my hand”. At her death she left holograph directions, but they were not subscribed with a signature. The Court held that this document was not “under hand”. The Lord Justice-Clerk said:
“According to the normal acceptation of the words, a document “under my hand” means a document signed (i.e., subscribed) by me; and an informal document “under my hand” means a document signed by me which is defective either in form or expression, or in solemnities of authentication, or in both. For the purpose of determining whether a document is “under the hand” of the granter, the signature is more than a mere formality or solemnity, and its unique significance as the recognised and indispensable token of deliberate authorisation of a written document, whether formal or informal, has long been accepted by common usage. In this context the word “hand” is a synonym for “signature,” as in the once familiar phrases of the older testing clause “As witness my hand,” or “I have hereto set my hand,” and the term is still found in modern statutory phraseology in the references in the Stamp Acts to instruments and agreements “under hand only.” It is, of course, possible for a testator to make it plain that he is using this, or any other, expression in a special sense, and in such a case the settlement will provide its own vocabulary, and the special sense will prevail. But in the ordinary case the words used must receive their ordinary significance.”
This reasoning does not appear to me to have turned on any question peculiar to Scots law; but rather described the court’s understanding of the ordinary meaning of the words in the English language.
Electronic Rentals Pty Ltd v Anderson (1971) 124 CLR 27 is a decision of the High Court of Australia. A statute required a summons to be issued “under the hand and seal” of a justice. The summons under consideration had been signed but not sealed; so the question what was meant by the words “under the hand” did not arise for decision. Nevertheless, Windeyer J, with whom the other judges agreed, said:
“To be under his hand means, I take it, that it must bear his signature.”
In Technocrats Ltd v Fredic Ltd [2004] EWHC 692 (QB) Field J considered the requirements for an assignment of a chose in action contained in section 136 of the Law of Property Act 1925. He said in para 53:
“An assignment is only a legal assignment if it complies with s.136 of the 1925 Act. What that section requires is that there should be an “absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action.” As I have said above, none of the assignments executed before November 2003 was signed by Mr James personally; instead they were all signed in his name by his wife with his authority. Were those assignments “under the hand of the assignor”? In my judgement, they were not. In my opinion, these words should be given their plain and ordinary meaning, and so construed, they require that the assignor himself should sign the assignment. They do not admit of the possibility of someone other than the assignor signing in the assignor’s name.”
It is fair to say that in Technocrats the fact of signature was not in issue. The issue was the identity of the signatory. Nevertheless Field J was clearly of the view that “under the hand of” meant “signed by”.
To these references I would add only the entry in the Shorter Oxford English Dictionary (3rd ed) current at the date when the rules were adopted. The definition of “under the hand of” is “with the signature of”.
The one case in the contrary sense to which I was referred was the decision of the Court of Common Pleas in Chadwick v Clarke (1845) 1 CB 700. Mr Chadwick and Mr Clarke were both directors of an insurance company. The board resolved that a house in the City should be rented from Mr Chadwick for one year. A memorandum of agreement was prepared and agreed, but it was never signed. The memorandum recorded an agreement to let the house to the directors personally. Mr Chadwick then sued for one year’s use and occupation and sought to rely on the memorandum. Mr Clarke objected that it was inadmissible, because it had not been stamped; and his objection was upheld. Mr Chadwick was non-suited. The Court of Common Pleas upheld the objection. Tindal CJ was intriguingly “engaged on the crown jewels case”; so he did not give a judgment. The argument turned on a provision in the Stamp Act which required the stamping of:
“any agreement, or any minute or memorandum of an agreement, made in England, under hand only, or made in Scotland, without any clause of registration”
Coltman J said:
“One argument that has been urged on the part of the plaintiff is that no document can require a stamp unless it be signed, the words of the stamp act imposing a duty upon “any agreement, or any memorandum of an agreement, made in England, under hand only.” It appears to me, however, that that is not the meaning of the statute, but that the legislature, in using that expression, merely intended to denote instruments under hand only – that is, not under seal, – in opposition to instruments under seal. The words that follow, “or made in Scotland, without any clause of registration” shew this to be the true construction – an instrument with a clause of registration, in that country, having the same force as an instrument under seal with us.”
Cresswell and Maule JJ gave concurring judgments. Curiously, Chadwick v Clarke is the only authority cited in Halsbury’s Laws of England (4th ed) vol 13 para 138 in support of the proposition that:
“An instrument under hand only is a document in writing which either creates or affects legal or equitable rights or liabilities, and which is authenticated by the signature of the author, but is not executed by him as a deed.”
Although Chadwick v Clarke itself does not support the proposition in Halsbury, the proposition itself is, in my judgment, correct. As a matter of ordinary usage in the English language (and in particular ordinary English legal usage) an instrument under someone’s hand is an instrument that he has signed. Chadwick v Clarke is explicable by the context in which the phrase appeared in the Stamp Act in question; and in particular by the contrast between that phrase and the following phrase referring to Scottish forms of contract.
Is there any reason to construe rule 38 otherwise than in accordance with ordinary usage? In my judgment there is not. Elsewhere in the rules, the draftsman has used the expression “notice in writing” without the additional requirement of writing “under the hand” of a particular person. Indeed the phrase “notice in writing” appears in the concluding part of rule 38 itself. One would naturally expect the two different phrases to have different meanings. It is also the case that rule 38 refers to the “formal variation” of the rules; although it is fair to say that, depending on how the rule is punctuated, that phrase could be restricted to amendment by deed. I do not accept Miss Rich’s submission that there is no rational basis for requiring a signature as a substantive requirement of a document amending the rules. As it seems to me there are a number of possible reasons (each of which I would regard as being at least rational):
i) as a means of definitively authenticating documents amending the rules;
ii) as a means of preserving evidence of amendments long after trustees have ceased to hold office;
iii) as a means of reminding signatories of the importance of the decisions they are making;
iv) as a means of ensuring that the trustees act and are seen to act unanimously;
v) as a means of protecting the beneficiaries under the trust.
Nor do I consider that the supposed contrast between deeds on the one hand and instruments under hand on the other is helpful. At the date when the rules were adopted, a deed had to be signed, sealed and delivered. What is the contrast intended? Is it to dispense with only with sealing and delivery? Or is it to dispense with signing as well? If the latter, why refer to deeds at all? The most obvious contrast between a deed on the one hand and an instrument under hand on the other is to dispense with sealing and delivery, not signing.
In my judgment, it was a substantive requirement of a document amending the rules that it was signed by the trustees and by or on behalf of the company. Since, in my judgment, the court has no power to authorise a departure from the rules, or to waive one of their requirements, it follows that the rules have never been validly amended.
Mihlenstedt v Barclays Bank International
[1989] IRLR 522
Nicholls LJ
‘I do not think it is necessary to pursue these points of trust law. It is unnecessary to consider what might be the position under the law of trusts if the trust deed stood alone, and the plaintiff’s rights were to be found only within the four corners of the trust deed and the rules. It is unnecessary, because this is a case in which the plaintiff’s status as a member springs from her contract of employment with the bank. The bank holds out this pension scheme to its staff as a valuable part of the staff’s overall remuneration package. That being so, when one finds that under the rules of the pension scheme certain functions are entrusted to the bank, it is, in my view, necessarily implicit in the contract of employment that the bank agrees with the employee that it will duly discharge those functions in good faith. In particular, if a member of the bank staff will become entitled to payment of an ill-health pension if the bank is of the relevant opinion concerning the state of health of the employee, it is an implied term of the contract that the bank will properly consider a genuine claim by an employee that her health qualifies her for an ill-health pension. To my mind it is unthinkable that the position might be otherwise. …’
Bestrustees v Stuart [2001] EWHC 549 [2001] PLR 283, [2001] OPLR 341, [2001] Pens LR 283, [2001] EWHC 549 (Ch) Neuberger J
…..
The third period: 26th April 1994 to 22nd May 1996
The question here is whether the documentation executed in 1994, and in particular the announcement, was sufficient and effective to vary the definitive rules to the extent that they apparently purported to do.
It appears to me that in order to be valid, a variation to the definitive rules has to comply with clause 16 of the definitive deed. In her skeleton argument Miss Rich identifies six features of clause 16, and I gratefully adopt them. They are as follows: (1) the power is vested in the principal employer to authorise the trustees in writing to alter or add to terms and provisions of the definitive deed and/or rules; (2) subject to the proviso, such alterations or additions may have retrospective effect; (3) on such authorisation the trustees must “forthwith declare” any such alteration or addition, such declaration to be “in writing under their hands” in the case of the Rules, and under seal in the case of the definitive deed; (4) the trustees’ declaration is to have the effect of amending the definitive deed and/or the rules, with effect from the date of such declaration or from such other date, future or past, as is stated in the declaration; (5) any member affected by an alteration must be notified individually forthwith in writing of its effect; (6) exercise of the power is subject to the proviso in clause 16(1)(b), so that no amendment can operate so as to affect in any way prejudicially the accrued rights in respect of pension benefits accrued to any prospective beneficiary, subject to the exception of an amendment giving effect to legislation.
So far as the first requirement, the principal employer authorising the trustee, is concerned, it seems to me that it has an air of unreality about it where, as here, the principal employer and the trustees are identical, namely, the Company. As Miss Rich says, one can scarcely authorise oneself to do something as a matter of normal language. One simply does it. That accords with common sense. Nonetheless, it does seem to me that there must be some document recording the fact that the principal employer, in this case the Company, considered the proposed amendments and in some way authorised them, in its capacity as principal employer. The mere fact that the trustees and principal employer were the same person as at April 1994 does not alter the fact that there should be some document recording the approval or authority of the Company as principal employer.
In this connection, I bear in mind that a pension scheme is likely to continue for a substantial period of time and that those most affected by them and entitled to protection from the trustees, the employer and indeed the Court, will be people who are comparatively poor, who will not have easy access to expert legal advice, and who will not know what has been going on in relation to the management of the Scheme. In those circumstances, it seems to me that protection of the beneficiaries requires the Court to be very careful before it permits a departure from the plain wording and plain requirements of the trust deed. Further, it is not as if this was a case where at the date of the trust deed there was a difference of identity between the trustees and the employer: they were the same person even then. Accordingly, I think the Court should be particularly careful before effectively overriding the requirement that there is some sort of written record which can be said to amount to an authority within the meaning of clause 16 of the definitive deed.
Having said that, it appears to me that the document of 19th April does satisfy the requirement. It was signed by the Company Secretary expressly for and on behalf of the principal employer, and it referred to the fact that the trustees have resolved to make the alterations “with the agreement of the principal employer”. Although it is true that that record post-dated the apparent resolution referred to, it appears to me to have preceded the actual implementation of the decision, if there was such an implementation. The fact that it referred to the “agreement”, rather than the “authorisation”, of the principal employer seems to me to be playing with words rather than going to the substance of the matter. Accordingly, I consider that the first requirement identified by Miss Rich is satisfied.
So far as potential retrospectivity is concerned, the announcement is a little unclear whether it is intended to take effect from the date of the announcement or from 6th April. To my mind, the third paragraph of the announcement made it clear that it was intended to take effect from 6th April.
I turn then to the third requirement, namely the trustees “forthwith declaring”. There are two documents that could be identified as being such a declaration. The first is that of 19th April, and the second is the announcement of 26th April. Quite rightly, to my mind, Miss Rich rests her case on the announcement more than on the 19th April document. It seems clear on the face of it that the 19th April document is a document from the Company as “principal employer”, not as trustees. Mr. Hartwell’s signature is not stated to be for and on behalf of the trustees. It is true that there is somewhere for the trustees to sign, but it merely bears the stamp of Builders Accident Insurance Ltd, and there is nothing to record that this was a document intended to come from the trustees or purporting to bind the trustees.
The question as to whether the announcement is a sufficient declaration and amounts to a document under which the trustees “forthwith declare” any alteration “in writing under their hands” raises greater difficulty. It seems to me important to bear in mind, when considering this issue, that the announcement was sent to members of the Scheme, some of whom were receiving pensions, and most of whom were deferred members of the Scheme. They were individuals who were not legally qualified, and it is through their eyes, to my mind, that the document should be read. Although I do not find the point easy, I have come to the conclusion that Miss Lacey is right when she contends that such a person reading the announcement would not have thought it was a declaration as contemplated by clause 16 of the definitive deed. In the end, it seems to me that the argument centres around the sentence, “The formal Scheme rules are being amended with effect from 6th April 1994 to give effect to the changes”. As a matter of narrow syntax, the use of the present tense could be said to be consistent with the view that the Scheme rules are being amended by this very document. Indeed, to a foreigner unfamiliar with the different nuances of the present tense in the English language, that could well be how it might read. But it seems to me that a normal person with English as his first language, even a lawyer, reading the announcement, would have thought that it meant that, around the time this letter was being sent, the trustees were taking steps to amend the rules under a separate document. To a lawyer as well as to a normal lay person, I think that, rather than “the formal Scheme rules are being amended”, one would expect phraseology such as “the formal scheme rules are hereby amended”, if the announcement was intended to be the declaration itself.
Furthermore, if one looks at the features of clause 16 helpfully identified by Miss Rich, it appears to me that her case that the announcement was effective involves the announcement doing two things. That is not impossible, but it would be slightly surprising in the light of the way in which clause 16 and the definitive deed are drafted. Clause 16 envisages the alteration to the Scheme being made, and the members then being informed. Therefore, it seems to me as a matter of ordinary language, bearing in mind (a) the scheme of clause 16 and (b) how a normal recipient of the announcement would have read it, the announcement itself will not do as the declaration.
However, Miss Rich argues, one should not be too strict about a further requirement of a separate declaration, because the terms of clause 16 effectively requires the trustees to make the amendment and forthwith to declare it, if and when they are so authorised by the principal employer. It appears to me that it cannot have been intended that the trustees would have no power to refuse to do what the principal employer required, even if they thought it was unlawful or inappropriate. However, even assuming Miss Rich’s argument is correct, the mere fact that they were obliged to put into effect what the principal employer authorised them to do does not alter the fact that they still have to make the appropriate declaration before the alteration can be effective.
I refer back to the point to which I have already made reference, namely, that bearing in mind that this is a trust, and bearing in mind the likely long life of this trust and the ignorance as to what has been going on on the part of the beneficiaries, it seems to me that the Court should not be too ready to waive a requirement of written documentation when the Scheme, and the trust deed under which it is set up, specifically require it. Of course, in this sort of case one often finds oneself treading the somewhat blurred line between requiring the terms of a particular deed to be complied with, while not being too pedantic and exacting in one’s requirements. Miss Rich has put up a powerful argument as to why my analysis is too pedantic, but to my mind, as there is no document which can fairly be called a declaration satisfying the provisions of clause 16 of the definitive deed, I think that the announcement was ineffective because no declaration was made. It is, of course, possible that if individual pensioners altered their position in reliance on the announcement, they may have some sort of case in estoppel, but that, I think it is accepted, is a different matter. It does not go to the issue of whether or not the rules were amended.
In this connection, if (which I doubt) one can cast one’s eyes forward from 1994 to 1996, it seems to me that the conclusion is rather reinforced. The 1996 Rules purport to take effect from April 1994 and, therefore, if any document exists implementing the decision in 1994, that is it. The announcement should not have been sent until the implementation was effected, but there are problems with the view that the 1996 Rules implement what was stated in the announcement. Without going into much detail, Miss Lacey has identified various differences between the contents of the announcement and the contents of the new Rules change, which make it difficult to my mind to conclude that the rule change in 1996 reflected the decision as announced in 1994.
Some reference was made to the proposition that the Court should assume that that which had been reported as being done should be treated as having been done. However, in my view, that principle does not assist in this case any more than it assisted in Rimer J’s view in Harwood Smart v. Cors (2000) Pen LR 101.
So far as the fifth requirement is concerned, clearly if there was an alteration, then the beneficiaries were notified of it. That was the effect of the announcement.
As to the sixth requirement, there is a problem in the sense that the alteration was said to take effect from 6th April 1994, whereas, if made, it was only made on 26th April 1994. To a very small extent, a retrospective increase in the NRD for women from 60 to 65 would have affected those who clocked up a month of service between 6th and 26th April 1994. To that extent, therefore, it could be said that even if the announcement was effective to implement an alteration, it fell foul of the proviso to clause 16. If that were the only problem for the announcement being an effective alteration, I would have held that it did not prevent the announcement taking effect as an alteration, albeit only prospectively from 26th April.
In Thomas on Powers at page 434 there is this passage, which to my mind represents the law:
“In each case … the effect of an excessive execution of a power is either that such execution is good in part and bad in part, or, alternatively, it does not amount to an execution at all.”
The author then quotes from Farwell on Powers:
“Where there is a complete execution of a power and something added which is improper, the execution is good and the excess void. But where there is not a complete execution and where the boundaries between the excess and the execution are not distinguishable, the whole appointment fails.”
Thomas goes on:
“In order for the appointment to be valid, it must be distinct and absolute, and not so tied up with the whole series of limitations as to form one system of (inaudible) trusts.”
To my mind, the correct approach is not one of language – it is one of concept. One is, after all, here concerned with equity. I consider, therefore, that one looks to see what is the valid exercise of the power and what is the invalid exercise. The valid exercise, if there was an exercise of the power, was to effect a variation with effect from 26th April prospectively. The invalid attempted exercise was to effect a variation retrospectively to 6th April 1994. To my mind, conceptually those two components of the single exercise are easily separable one from the other. It seems to me, however, that one must not only ask oneself whether they are easily severable conceptually, but also whether there is anything in the exercise of the power which leads one to believe that, had the trustees been told that they were not entitled to exercise the power retrospectively, they would not have exercised the power as they purported to do prospectively at all, or, in the alternative, in the way that they did. In that connection, it seems to me that that approach is consistent with the approach of the Court of Appeal in Re Hastings Bass (1975) Ch25, to which I shall refer in a little more detail shortly.
In my judgment, both conceptually and as a matter of common sense, the invalid exercise of the power in 1974, if the power was exercised then, would and should be severable from the valid exercise of the power. Therefore, I would not have held that this particular aspect of the exercise of the power, if there had been an exercise, would have rendered it invalid.
In the event, however, I conclude that because there was no declaration of the trustees as required by the first definitive deed, there was no effective amendment to the definitive rules in 1994.
The fourth period: 23rd May 1996 onwards
The issue here relates to the effectiveness of the 1996 Rules. Two points are taken by Miss Lacey in relation to the 1996 Rules. First, that they purport to be retrospective to 1994 and, therefore, fall foul of the proviso to clause 16 of the definitive rules, essentially for the same reason as the announcement, if it had been valid, would have fallen foul of the rules in so far as it was back-dated to 6th April 1994. Secondly, but more centrally, that the 1996 Rules failed to comply with Barber, because of proviso 3 to clause 9(b), which effectively gives a penalty-free opportunity for retirement for women with the consent of the principal employer only before the NRD between 60 and 65, while denying that opportunity to men, who will need the consent of the trustee as well as that of the principal employer.
So far as the first point is concerned, I think it is perfectly fair in that the 1996 Rules should not have been retrospective to 1994, because that would have connoted an amendment disadvantageous to women retrospectively in a way that conflicted with the proviso to clause 16 of the definitive deed. However, it seems to me that my reasoning as to why the announcement, if it had amounted to an alteration, would have been valid, and could have been severed so far as it purported to be retrospective, also applies here. It is true that the retrospectivity was for a much more substantial period, significantly over two years, whereas in relation to the announcement it would have been some three weeks. However, I see no reason why conceptually and practically I should not permit a severance of the exercise of the power in this case. The invalid part of the Rule is excisable, and I am satisfied that it should be excised.
As to the second point, Miss Lacey’s point seems quite right in that the 1996 Rules, although they represent an improvement on the definitive rules so far as compliance with Barber is concerned, do not fully comply with the requirement of Barber. Miss Lacey’s contention is that, in those circumstances, the principle in Barber and Coloroll requires one simply to assume that the position continues, as it did from 17th May 1990, i.e. in respect of the second and third periods, because there had been non-compliance, as it was with Article 119. The position of men piggy-backing on the women’s rights as they were as at 17th May 1990 continues, runs the argument, and in effect one ignores the changes effected by the 1996 Rules.
I am not convinced that that is the right analysis. My analysis is as follows. The 1996 Rules represent an attempt to comply with the ruling in Barber, but the attempt did not quite achieve its end. The effect of the reasoning of the ECJ in Barber and Coloroll is not, in my judgment, that one proceeds as if that change in the Rules had never occurred. In my view, one gives as much effect as one can to the change, subject to the reasoning in Barber and Coloroll. In other words, I think that one treats the 1996 Rules as being effective, save to the extent that they unlawfully distinguish between men and women, and in so far as they do so distinguish, then one applies Coloroll, and the only proper way of complying with what was Article 119 is to grant to the persons in the disadvantaged class the same advantages as those enjoyed by persons in the favoured class. In other words, I think that the 1996 Rules are effective, save that proviso (3) to rule 9(b) applies as if the incorporated reference to the 65th birthday for men was a reference to the 60th birthday for men.
It is true that a completely literal reading of what the ECJ said in paragraph 36 of Coloroll can be said to point the other way. That paragraph is in these terms:
“As regards periods of service … before the entry into force of the measures designed to eliminate it, correct implementation of the principle of equal pay requires that the disadvantaged employees should be granted the same advantages as those previously enjoyed by the other employees.”
However, it seems to me that the essence of the reasoning of Barber and Coloroll is as follows: (a) There must be no discrimination on grounds of sex so far as pay is concerned; (b) Pay includes pensions received from or paid for by an employer; (c) Differential NRD on grounds of sex falls foul of this principle; (d) From May 1990, where there is such differential, it is unlawful and ineffective; (e) The unlawful aspects are disposed of by equating the right of the disadvantaged class with those of the advantaged class. In other words, in this case, neither men nor women employees need the consent of the trustee to retire after attaining the age of 60. In paragraph 36 of the judgment in Coloroll, the ECJ was not directing its mind to a variation in pension fund rules subsequent to Barber, which failed to give effect fully to that decision.
Accordingly, I think that, where there is a variation in the terms of the Scheme which do not quite achieve compliance with Barber but which potentially achieve it, both common sense and principle suggest that one should give as full effect to the variation as permitted by Barber, and to the extent that it is not permissible, the disadvantaged class should be accorded the same rights as the advantaged class. First of all, that conclusion appears to me sensible in that it gives as much effect as possible to changes which were carefully considered and implemented by the principal employer and the trustees. Secondly, I think that the result is more consistent with the approach of the ECJ in Barber and Coloroll. Thirdly, it would be a little odd if the ECJ’s ruling required different results where a change was effected after publication of the Advocate General’s decision in Barber, and where the change was made after publication of the decision of the ECJ itself. Fourthly, it appears to me that if my analysis is correct, there would be less uncertainty for members who have been informed of the amendments. Naturally, in so far as those amendments do not comply with law, the courts must step in, but it seems to me that minimum interference by the courts is desirable, because the expectations and understanding of the members who have been told of the changes should require minimum interference with what they have been told.
I should mention that it was argued on behalf of the Second Defendant Mr. Raines that the 1996 deed was ineffective, in so far as it required men to obtain the consent of the trustee for retirement between 60 and 65, by virtue of the principle laid down in Hastings Bass. That decision was most recently considered by Lawrence Collins J. in AMP U.K. plc v. Barker (2001) Pen LR 727, where he summarised the principle in paragraph 85, based on the decision of Warner J. in another pensions case Mettoy Pensions Trustees v. Evans (1990) 1WLR 1587 at 1624 in these terms:
“Where a trustee acts under a discretion given to him by the terms of the trust, the court will interfere with this action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account.”
Subject to the point that, for the reasons given in the next four paragraphs, Lawrence Collins J. thought that the word “would” should be replaced by “might”, he considered that statement represented the law.
In the present case it seems to me that if my reasoning is correct the Hastings Bass principle has no application. On the other hand, if the 1996 deed would otherwise be ineffective, then I reach the same result on the basis of the reasoning in Hastings Bass.