UK: National Grid - Whose Victory?

Last Updated: 4 March 1999
Article written by Scott Redpath and Tom Collinge, Pensions Lawyers at national law firm Hammond Suddards

The long awaited decision of the Court of Appeal on the treatment of pension fund surplus by National Grid and National Power has been hailed by some commentators as a victory for individual pensioners and a sharp reminder to employers tempted to "grab" fund surplus. The truth is not so simple.

Although the initial complaint to the Pensions Ombudsman that the employer had misused surplus was simple enough, at that time the legal pegs upon which these complaints were hung were far from settled. In the event, the Pensions Ombudsman decided for the members. On appeal, the High Court found for the employers. The Court of Appeal has again decided for the members. At each stage the law has evolved and each decision has a strikingly different complexion. The importance of the recent decision is that the legal principles have been reaffirmed and appear now to be settled.

The legal significance of the recent decision can be seen in two ways.

In narrow terms, a pension scheme's governing rules must be closely observed, since they provide a vital key to understanding an employer's powers, in other words, what the employer may or may not do. As trite as this reminder may seem, much of the Court of Appeal's decision emphasises this point. On this basis the Court held that the employer had misinterpreted the rules binding it. Indeed, it even suggested that if the rules had been followed, the employer might have amended them in such a way as to make their claim to actuarial surplus permissible.

Nevertheless, because of the particular rules of the schemes, there was scope for argument as to the nature of the employer's obligations to the members in relation to scheme surplus. The Court of Appeal held that the employer's obligations were not fiduciary, that is in exercising their powers over the scheme surplus, they did not have to consider the members interests above their own. This does not mean that the employer does not have to consider the interests of the members at all. Indeed, the employer must consider them, and the members are entitled to have their interests considered, not ignored. This is what is at the heart of the duty of good faith owed by the employer to the scheme members. The Court of Appeal has confirmed that this duty, raised a little more than ten years ago in the Courage case, is now a matter of "settled law".

In broader terms, the decision will have ramifications. The Court of Appeal has confirmed that pensions are a kind of "deferred pay" bringing pension provision more firmly within the ambit of the contract of employment. This link to the contract of employment has become much closer in recent years. The Court of Appeal has demonstrated this link forms an essential part of the way that the pensions promise must be understood - and perhaps even controlled by the Court. By bringing pensions more fully into the ambit of the contract of employment, it is possible that there is further scope for members to assert their entitlements under the pension scheme, not just as beneficiaries under the scheme but also as employees under their contract of employment. Employers may find this an unwelcome intrusion.

Part of the earlier High Court decision in Southwest Trains is also instructive for employers. Exemplifying the growing link between pensions and the contract of employment, this decision touched on benefit changes which arise from collective bargaining agreements. Where such an agreement has the effect that the contribution rate in the contract of employment diverges from the rate set out in the terms of the pension, it will be the agreement which takes precedence even if the deed were more favourable. The reason that benefit changes may arise quite properly this way is that the employees have, collectively, agreed to the alteration. This may give a message to some employers that their role in the pension arrangements has changed somewhat. It is not necessarily true that this is a change for the worse. This may be seen as another way of giving employers more control over their pension arrangements through the employment relationship.

What is starting to emerge is a new relationship between the parties to the pension scheme. To borrow a currently popular word this gives scheme members more of a "stakeholder" role. From the employers' point of view, new mechanisms are becoming available to agree changes in the benefits a scheme will provide. Furthermore, a new clarity and legal certainty will help them structure their strategy and actions when they contemplate changes to benefits and contributions.

While some employers may be comfortable with this, others will be more sceptical about the growing involvement of employment issues in pensions matters. They may take some solace in the fact that the Court of Appeal has clearly restated the principle that employers' powers under a pension scheme are not fiduciary in nature.

The effect of this is helpful. Following the initial decision in National Grid by the Pensions Ombudsman it had been feared that employers would be precluded from considering their own interests when deciding upon a strategy for the use of surplus. That contention has now been dismissed. In place of a ruling that might have dissuaded many employers from persisting with final salary schemes, there is a more subtle yardstick by which to measure employers' actions.

This is the reaffirmation of the relationship of confidence and trust between the employer and employee. It will take future pensions cases to define precisely where the limits to this duty lie, but the importance lies in the fact that employers have been permitted considerable scope to act in their own interests. So long as the duty to their employees is not breached, the continuing use of surplus to support commercial objectives is still quite permissible.

It may be premature to draw the line under National Grid quite yet. There are further hearings on the mechanics of implementing the judgment and at least one party is contemplating an appeal to the House of Lords. This flags up one more pertinent message from this long-running saga. The sheer cost of the actions to date has been in the many hundreds of thousands of pounds. While lawyers may be satisfied by the clarifications that the process has brought to the law, other observers may be less happy about this use of funds. A more positive outcome of the National Grid case would be if, capitalising upon the legal lessons, aggrieved parties were more inclined to use alternative methods to achieve the resolution of disputes. This could become a victory for all sides.

For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000

This article was first published in the March 1999 Hammond Suddards Money Marketing Newsletter

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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