National Grid Company Plc v Laws/National Power plc v Feldon 1

Reference: (1997) OPLR 161, (1997) PLR 157, (1999) PLR 37, (2001) OPLR 15

Two pensioners in National Grid's section of the Electricity Supply Pension Scheme complained to the Ombudsman about an alleged misuse of the scheme's surplus. The scheme rules prohibit payments to an employer, or indeed amendments which would result in such repayments. Where a scheme valuation reveals a surplus, National Grid has power to make "arrangements to deal with the surplus". Trustee consent was not required, although the actuary had to certify that any arrangements are reasonable.

When a surplus was revealed in 1993, National Grid decided to use approximately 30 per cent on benefit improvements and the rest to reduce its future contributions to the scheme, including special contributions required to be paid in respect of enhanced early retirement pensions on redundancy. The trustees received legal advice that the employer's power to deal with the surplus was subject to the employer's duty of good faith to the scheme members but was non-fiduciary, ie the employer did not have to put the interests of the members ahead of its own interests.

The Ombudsman decided that failing to pay the additional contributions in respect of early retirement enhancements amounted to a payment to the employer, in contravention of the scheme rules. He relied upon the reasoning in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Limited [1995] 1 All ER 912, although in that case the contributions that were being cancelled were actually instalments of contributions already owed to the trustees in respect of earlier redundancies. By contrast, National Grid had only decided not to make contributions in respect of future redundancies.

The Ombudsman also held that where an employer has sole power to deal with surplus, this may give rise "to an obligation of good faith approaching a fiduciary duty which called for an exercise in the best interests of the scheme without preferring the Principal Employer's other interests." Accordingly, the Ombudsman ordered National Grid to make payment of all the contributions he felt should have been made up to the date of his determination.

The Court of Appeal reversed the High Court decision and held that the electricity companies could not unilaterally decide not to pay additional contributions in respect of enhanced early retirement benefits as required under the Electricity Supply Pension Scheme contribution rule. This was despite their wide and unilateral power under the rules to "make arrangements, certified by the Actuary as reasonable, to deal with" any surplus arising out of an actuarial valuation. However, the Court also took the view that the companies could have amended the rules of the scheme (which would not have required trustee consent) in order to allow themselves to cancel these contributions. The case is being appealed.

House of Lords
Acting on what the Court of Appeal had said, appropriate deeds of amendment were executed. On appeal, the House of Lords was also asked to consider the validity of these deeds of amendment. The House of Lords allowed the appeal. Lord Hoffmann said that the purpose of the rule which prohibited any amendment to the scheme to make scheme monies payable to the employer was to prevent the employer making use of assets which had already enjoyed a tax advantage, but debts from the employer to the fund enjoyed no tax advantage until paid. Therefore, the release of a debt owed by the employer to the scheme did not amount to a payment to the employer out of scheme monies and British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Limited was overruled. The provisions contained in the deeds of amendment did not infringe any express or implied restriction on the powers of the employers. As the proposed arrangements were permitted by the rules, it did not matter whether there was a deed of amendment or not, this was a matter of choice for the employers.

Pre-emptive costs order
The Court held that the appeals were in the nature of hostile litigation and neither the Trustees or the employer could be seen to be occupying neutral ground. This was the type of case in which a pre-emptive costs order could be made and there was evidence that the pensioners had an arguable case. Therefore, the interests of justice would be better served by making a pre- emptive costs order than by refusing it. The fact that not all of the Scheme members supported the two pensioners' stance, did not prevent the order from being made.

Main proceedings
National Grid appealed; National Power also joined in the proceedings to obtain a ruling on the way it had dealt with surplus. Robert Walker J analysed the various provisions within the National Grid scheme and eventually concluded that, in this specific instance, the employer could act in the way proposed. He held that the duty of good faith "does not prevent the employer from looking after its own financial interests, even where they conflict with those of the members and pensioners." The judge concluded that there was clearly no evidence to justify a conclusion that National Grid was in breach of its duty of good faith.

One argument in favour of the Ombudsman was that the rules seemed to provide that the surplus was at the unilateral disposal of the employer and so not subject to any bargaining between employer and trustees as occurs in many schemes where they both have to agree on the use of surplus. Robert Walker J suggested this might be alleviated by a somewhat broader interpretation of the obligation upon the scheme actuary in providing his certificate about the reasonableness of the way the surplus was dealt with. The scheme actuary had made it clear that the certificate was limited to the reasonableness of the actuarial calculations and that the amount of money dealt with did not exceed the surplus. Robert Walker J suggested that it also ought to cover the fairness of the employer's decision. However, he reluctantly made no decision on this point as none of the Counsel involved in the case put forward this construction.

Robert Walker J also endorsed the statement in Mettoy Pension Trustees v Evans [1990] 1 WLR 1587 that the court's approach should be "practical and purposive rather than detailed and literal".