OPDU Report 4 Article 3

Earlier this month, the Court of Appeal ruled in favour of the pensioners of the Electricity Supply Pension Scheme in the latest decision in the National Grid case. The decision does not, however, represent a general victory for pension scheme members over their employers in the continuing struggle to establish ownership of surpluses in occupational pension schemes. The Court of Appeal's decision was based wholly on the rules of the scheme in question and did not deal with surplus ownership. In the light of this continuing uncertainty, pension scheme trustees must be ever mindful of the duties they owe to scheme members, whilst at the same time considering the needs of principal employers, before agreeing to allocations of surplus.

The Facts
An actuarial valuation of the Electricity Supply Pension Scheme (the Scheme) undertaken in 1992 disclosed a substantial surplus. Under the Scheme rules, where there was an actuarial surplus in the fund, the employer was obliged to 'make arrangements' to deal with the surplus so that tax exemptions for the Scheme would not be lost. The National Grid implemented arrangements to reduce the surplus in 3 ways; first, by improving members' benefits, second, by reducing the employer's contribution rate and third, by using the surplus to fund redundancy payments which the company was bound to pay to the Scheme. The benefit improvements accounted for 30% of the surplus, whilst the arrangements for the benefit of the employer accounted for the remaining 70%.

In 1995, two pensioners complained to the Pensions Ombudsman that the National Grid had misused the surplus in the Scheme.

The Ombudsman's Determination
The Pensions Ombudsman found in favour of the pensioners. His decision was based not only on the provisions of the Scheme rules but also on his view of the duties of employers to the members of their pension schemes.

The Ombudsman found that the rules did not contain any authority for the employer to forgive himself from paying liabilities which were due and payable, especially as the rules contained an express prohibition against any amendments which might permit the employer to take monies out of the Scheme. Furthermore, the Ombudsman held that the rule obliging the employer to reduce surplus gave rise to an obligation of good faith approaching a fiduciary duty to exercise his discretion in the best interests of the Scheme.

The High Court's Decision
Mr Justice Walker overturned the Ombudsman's Determination. He found that the Ombudsman had erred not only in his construction of the terms of the Scheme, but also in the law relating to the obligations of employers. The Judge held that the limit on the employer's duty of good faith established in the case of Imperial Tobacco should not be extended and that an employer did not owe anything approaching a fiduciary duty to the members of the Scheme and could therefore properly consider his own interests.

The Court of Appeal
The High Court's decision has now been overruled. Although in its Judgment, the Court of Appeal referred to and approved a number of established pensions principles, such as the reasonable expectation of scheme members that any dealings with surplus will pay a fair regard to their interests (Re Courage Group's Pension Schemes), the Court's decision was based purely on the terms of the Scheme itself and no further guidance was given on the question of surplus ownership. Lord Justice Brooke said:

"The solution to the present problem lies within the terms of the scheme itself, and not within a world populated by competing philosophies to the true nature and ownership of an actuarial surplus."

The Judges found that the Scheme rules did not permit the National Grid unilaterally to forgive themselves the liabilities they owed to the Scheme in respect of the redundancy payments. However, by way of contrast with the Ombudsman's Determination, the Court held that there was nothing to prevent the employer implementing a rule amendment which would retrospectively sanction the employer's use of the surplus.

A further hearing is due to take place to consider the consequences of the Court of Appeal's ruling. It is also likely that there will be an appeal to the House of Lords.

Implications for pension scheme trustees
The duties of pension scheme trustees were hardly touched upon in the National Grid case because the trustees in question had very little involvement in the decision making processes of the Scheme. Both the High Court and the Court of Appeal commented on the outdated nature of the rules of the National Grid Scheme in which the employers were permitted to take more decisions unilaterally than in most modern pension schemes.

In schemes where the balance of power is more in favour of the trustees, they are likely to have a say in the application of surplus. In those circumstances, trustees should bear the following points in mind if it becomes apparent that there is a surplus in the scheme:

Trustees should familiarise themselves with the scheme rules. As has been demonstrated by the National Grid case, the terms of the scheme will ultimately determine what uses may be made of surplus funds.
Trustees should familiarise themselves with the scheme rules. As has been demonstrated by the National Grid case, the terms of the scheme will ultimately determine what uses may be made of surplus funds.
Where the scheme rules confer power on any person (including the employer) to make payments of scheme funds to the employer, as a result of the provisions of Section 37 of the Pensions Act 1995, this power has now been transferred to the trustees. If the employer requests a refund of surplus, the trustees must satisfy themselves that the payment is in the interests of all the members before deciding whether to exercise the power. Obviously, any substantial re-payments of funds to the employer which are not accompanied by considerable benefit improvements for members may leave the trustees open to accusations of breach of duty. Assisting the financial position of the employer may benefit current employees, but is unlikely to benefit pensioners or ex-employees. The interests of all members of the scheme must be considered.
Where there is no provision in the rules for payments of scheme funds to the employer and the employer seeks the trustees' consent to a rule amendment to enable a refund, the trustees must once again consider whether such an amendment will be in the best interests of the scheme members. The trustees must also consider the provisions of Section 67 of the Pensions Act 1995 under which amendments may not be made 'which would or might affect any entitlement or accrued right of any member'. In any event, the trustees are likely to have a duty to bargain for benefit improvements with the employer in return for agreeing to an amendment (see Lock v Westpac Banking Corpn).
In considering their duties to the members, the trustees can (and should) take account of the employer's interests. The employer is an ultimate beneficiary under a final salary scheme, as it may benefit on winding up. More importantly, if the employer receives no benefit from the over funding of a balance of cost scheme, it may decide to change the scheme to a money purchase arrangement or ultimately may terminate the scheme, which would certainly not be in the interests of the members.
Trustees should seek appropriate professional advice. If in doubt, trustees can always make an application to the Court for directions.

Conclusion
The Court of Appeal's decision in National Grid is far from ground breaking and is likely to be appealed. Pension fund trustees should, however, take the opportunity to refamiliarise themselves with the provisions of their schemes. Where dealings with surplus are being contemplated trustees should never lose sight of their overriding fiduciary duties to scheme members.

The recovery of scheme funds which have been wrongly returned to an employer is relatively easy where, as in National Grid, the employer is a major company in a strong financial position.The situation may be somewhat different if the employer has gone bust and the members have only the trustees to look to.

I S S U E 5 MAY 1999
Pension Scheme Surpluses and the National Grid Case by Catherine Shrimpton, Solicitor, Reynolds Porter Chamberlain
Earlier this month, the Court of Appeal ruled in favour of the pensioners of the Electricity Supply Pension Scheme in the latest decision in the National Grid case. The decision does not, however, represent a general victory for pension scheme members over their employers in the continuing struggle to establish ownership of surpluses in occupational pension schemes. The Court of Appeal's decision was based wholly on the rules of the scheme in question and did not deal with surplus ownership. In the light of this continuing uncertainty, pension scheme trustees must be ever mindful of the duties they owe to scheme members, whilst at the same time considering the needs of principal employers, before agreeing to allocations of surplus. The Facts An actuarial valuation of the Electricity Supply Pension Scheme (the Scheme) undertaken in 1992 disclosed a substantial surplus. Under the Scheme rules, where there was an actuarial surplus in the fund, the employer was obliged to 'make arrangements' to deal with the surplus so that tax exemptions for the Scheme would not be lost. The National Grid implemented arrangements to reduce the surplus in 3 ways; first, by improving members' benefits, second, by reducing the employer's contribution rate and third, by using the surplus to fund redundancy payments which the company was bound to pay to the Scheme. The benefit improvements accounted for 30% of the surplus, whilst the arrangements for the benefit of the employer accounted for the remaining 70%. In 1995, two pensioners complained to the Pensions Ombudsman that the National Grid had misused the surplus in the Scheme. The Ombudsman's Determination The Pensions Ombudsman found in favour of the pensioners. His decision was based not only on the provisions of the Scheme rules but also on his view of the duties of employers to the members of their pension schemes. The Ombudsman found that the rules did not contain any authority for the employer to forgive himself from paying liabilities which were due and payable, especially as the rules contained an express prohibition against any amendments which might permit the employer to take monies out of the Scheme. Furthermore, the Ombudsman held that the rule obliging the employer to reduce surplus gave rise to an obligation of good faith approaching a fiduciary duty to exercise his discretion in the best interests of the Scheme. The High Court's Decision Mr Justice Walker overturned the Ombudsman's Determination. He found that the Ombudsman had erred not only in his construction of the terms of the Scheme, but also in the law relating to the obligations of employers. The Judge held that the limit on the employer's duty of good faith established in the case of Imperial Tobacco should not be extended and that an employer did not owe anything approaching a fiduciary duty to the members of the Scheme and could therefore properly consider his own interests. The Court of Appeal The High Court's decision has now been overruled. Although in its Judgment, the Court of Appeal referred to and approved a number of established pensions principles, such as the reasonable expectation of scheme members that any dealings with surplus will pay a fair regard to their interests (Re Courage Group's Pension Schemes), the Court's decision was based purely on the terms of the Scheme itself and no further guidance was given on the question of surplus ownership. Lord Justice Brooke said: "The solution to the present problem lies within the terms of the scheme itself, and not within a world populated by competing philosophies to the true nature and ownership of an actuarial surplus." The Judges found that the Scheme rules did not permit the National Grid unilaterally to forgive themselves the liabilities they owed to the Scheme in respect of the redundancy payments. However, by way of contrast with the Ombudsman's Determination, the Court held that there was nothing to prevent the employer implementing a rule amendment which would retrospectively sanction the employer's use of the surplus. A further hearing is due to take place to consider the consequences of the Court of Appeal's ruling. It is also likely that there will be an appeal to the House of Lords. Implications for pension scheme trustees The duties of pension scheme trustees were hardly touched upon in the National Grid case because the trustees in question had very little involvement in the decision making processes of the Scheme. Both the High Court and the Court of Appeal commented on the outdated nature of the rules of the National Grid Scheme in which the employers were permitted to take more decisions unilaterally than in most modern pension schemes. In schemes where the balance of power is more in favour of the trustees, they are likely to have a say in the application of surplus. In those circumstances, trustees should bear the following points in mind if it becomes apparent that there is a surplus in the scheme: Trustees should familiarise themselves with the scheme rules. As has been demonstrated by the National Grid case, the terms of the scheme will ultimately determine what uses may be made of surplus funds. Trustees should familiarise themselves with the scheme rules. As has been demonstrated by the National Grid case, the terms of the scheme will ultimately determine what uses may be made of surplus funds. Where the scheme rules confer power on any person (including the employer) to make payments of scheme funds to the employer, as a result of the provisions of Section 37 of the Pensions Act 1995, this power has now been transferred to the trustees. If the employer requests a refund of surplus, the trustees must satisfy themselves that the payment is in the interests of all the members before deciding whether to exercise the power. Obviously, any substantial re-payments of funds to the employer which are not accompanied by considerable benefit improvements for members may leave the trustees open to accusations of breach of duty. Assisting the financial position of the employer may benefit current employees, but is unlikely to benefit pensioners or ex-employees. The interests of all members of the scheme must be considered. Where there is no provision in the rules for payments of scheme funds to the employer and the employer seeks the trustees' consent to a rule amendment to enable a refund, the trustees must once again consider whether such an amendment will be in the best interests of the scheme members. The trustees must also consider the provisions of Section 67 of the Pensions Act 1995 under which amendments may not be made 'which would or might affect any entitlement or accrued right of any member'. In any event, the trustees are likely to have a duty to bargain for benefit improvements with the employer in return for agreeing to an amendment (see Lock v Westpac Banking Corpn). In considering their duties to the members, the trustees can (and should) take account of the employer's interests. The employer is an ultimate beneficiary under a final salary scheme, as it may benefit on winding up. More importantly, if the employer receives no benefit from the over funding of a balance of cost scheme, it may decide to change the scheme to a money purchase arrangement or ultimately may terminate the scheme, which would certainly not be in the interests of the members. Trustees should seek appropriate professional advice. If in doubt, trustees can always make an application to the Court for directions. Conclusion The Court of Appeal's decision in National Grid is far from ground breaking and is likely to be appealed. Pension fund trustees should, however, take the opportunity to refamiliarise themselves with the provisions of their schemes. Where dealings with surplus are being contemplated trustees should never lose sight of their overriding fiduciary duties to scheme members. The recovery of scheme funds which have been wrongly returned to an employer is relatively easy where, as in National Grid, the employer is a major company in a strong financial position.The situation may be somewhat different if the employer has gone bust and the members have only the trustees to look to.

Pension Scheme Surpluses and the National Grid Case by Catherine Shrimpton, Solicitor, Reynolds Porter Chamberlain

Pension Scheme Surpluses and the National Grid Case
by Catherine Shrimpton, Solicitor, Reynolds Porter Chamberlain