International Power Plc v. Healy and Others, Formerly National Power v. Feldon and Others and National Grid Company Plc v. Mayes and Others

The House of Lords allowed the appeals and declared that the arrangements made by the employers (National Power and National Grid) for dealing with actuarial surpluses were valid. The court held that a release or discharge of an accrued debt owed by an employer to the pension fund is not the same as "making any of the moneys of the Scheme payable to any of the Employers" within clause 41(2)(b) of the scheme, and is not caught by section 37(1) of the Pensions Act 1995. Clause 14(5) of the scheme, which requires the principal employer to "make arrangements" to deal with a certified surplus, confers power to implement such arrangements; where an arrangement would contradict an express provision of the scheme an amendment is required, but the particular discharges and use of surplus in these cases did not contradict the scheme and therefore did not require amendment. The court also held that determinations to pay deficiency or supplementary obligations by instalments, and "nil" determinations accompanying an appropriation of surplus, were permissible when certified as reasonable by the actuary.

The appeals concerned the Electricity Supply Pension Scheme where actuarial surpluses were certified in 1992 and 1995 for groups of members associated with National Power and National Grid. The principal employers directed that part of the surpluses be used to increase member benefits and the remainder to reduce or discharge employer liabilities (deficiency and supplementary payments), and they gave directions to trustees accordingly. Some members complained to the Pensions Ombudsman, who upheld them on grounds that employers had breached an implied obligation of good faith and that discharging accrued debts amounted to paying moneys to the employer contrary to clause 41(2)(b). The High Court rejected the Ombudsman on the good faith point but upheld the employers' power to act; the Court of Appeal held that the discharge of accrued liabilities required amendment of the scheme and therefore the employers' directions were invalid. The employers later executed retrospective deeds of amendment and the matter came to the House of Lords by way of appeal.

Nature of the proceedings: complaints by members seeking to impugn employers' use of actuarial surplus and a declaration as to validity of employers' arrangements.

Issues framed:

• whether releasing or treating as discharged accrued employer debts amounted to a payment to the employer out of scheme moneys under clause 41(2)(b);
• whether clause 14(5) confers a power (as well as a duty) on the principal employer to make arrangements to deal with a surplus and, if so, whether those arrangements require a formal amendment under clause 41; and
• the effect of section 37 of the Pensions Act 1995 on arrangements made to appropriate surplus to employers' obligations.

Court's reasoning (concise): The court undertook a constructional analysis informed by the pension and fiscal background. It concluded that clause 41(2)(b)'s prohibition was directed at payments of scheme moneys that had enjoyed fiscal privileges and therefore did not extend to the release of accrued debts not yet paid into the scheme. Section 37(1) of the 1995 Act was held to adopt the same fiscal concept of a "payment out of funds held for the purposes of the scheme" and to protect only funds actually paid in. Clause 14(5) does confer a power to make arrangements, but arrangements inconsistent with other express provisions would require amendment; the arrangements made here did not contradict the scheme's terms. The court also accepted that actuarial determinations could be expressed as instalments and that "nil" determinations tied to appropriation of surplus were book-keeping devices and permissible when actuarily certified as reasonable.

The court therefore validated the employers' historic arrangements and allowed the appeals; it noted the practical importance of clarifying whether trustees must insist upon formal amendments in future valuations.

Appeal allowed. The House of Lords held that (i) the release or discharge of accrued employer debts does not amount to "making any of the moneys of the Scheme payable to any of the Employers" in clause 41(2)(b), nor does it fall within the concept in section 37(1) of the Pensions Act 1995; (ii) clause 14(5) confers a power to make arrangements to deal with a surplus, subject to the requirement that any arrangement inconsistent with the scheme requires amendment under clause 41; and (iii) the particular arrangements (including instalment and nil determinations, and directions to debit surplus with deficiency/supplementary payments) were consistent with the scheme and thus valid. The retrospective deeds of amendment validated the arrangements in any event.

The complaints were first considered by the Pensions Ombudsman (Dr Julian Farrand), who upheld the members' complaints. The matter went to the High Court (Robert Walker J.), which rejected the Ombudsman's finding on good faith and upheld the employers' actions; the members then appealed to the Court of Appeal (Nourse, Schiemann and Brooke LJJ), which allowed the appeals holding that an amendment was required. The employers executed retrospective deeds of amendment and the issues were brought to the House of Lords on further appeal. (Neutral citation for this House of Lords decision: [2001] UKHL 20.)