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Title: Workshop: Pensions as a Contractual Right

ILS Conference September 2002

Workshop Introduction

This is a workshop session. The aim is to discuss the issues that arise in relation to pension benefits provided under occupational pension schemes. How far is there a contractual right for employees in relation to those benefits?

This is of particular relevance to employees in various situations:

• if the employer is seeking to change the pension benefits provided;
• if the employee wishes to bring a claim for the value of pension benefits on insolvency of the employer; and
• if the employee wishes to bring a claim for the value of pension benefits on termination of employment.

Perhaps surprisingly for what is an important part of the total remuneration package the answers to the basic contractual issues raised are unclear. They do not seem to have been particularly clearly addressed by courts or tribunals in any decided case.

Having said that, various principles of general application can be perceived. Some of the decided case law is clearly relevant.

We have identified 8 separate strands (see below). This paper gives some analysis of the issues that arise, including relevant case law etc.

But this is a workshop. We have not attempted to provide all the answers (even if we could), but instead to provoke discussion.

Please try to read this paper in advance. The workshop will benefit from a full discussion.

Not covered

This workshop session will not look at the following:

• the pensions element in unfair dismissal claims in an employment tribunal  for pensions lost – see Clancy v Cannock Chase Technical College [2001] PLR 175, [2001] IRLR 331;
• claims by part-time employees for pension benefits;
• pensions issues on maternity or parental or family leave;
• obligations under section 1 of ERA 1996 to give details of pensions in the statement of terms and conditions.

• collective bargaining relating to pensions – see UNIFI v Union Bank of Nigeria [2001] IRLR 712.

Strands

The strands we have identified are listed below

Background to pension schemes

There are a number of background issues which are relevant to the present pensions debate. Below we set out a short summary of these issues and a brief outline of some relevant concepts.

Types of Pension schemes

At the centre of the present pensions dispute is the final salary (or defined benefit, "DB") scheme. In broad terms a final salary scheme is a scheme in which the principal benefits are provided by reference to a proportion of the final salary of a member. This contrasts with a money purchase (or defined contribution, "DC") scheme where the benefits provided are not fixed in advance but are determined by the value of the fund at the time of retirement.

Funding

The funding of a money purchase scheme is relatively straightforward since all that is required is that the appropriate level of agreed contributions is made to the scheme for investment.

With a final salary scheme the position is starkly different. In practice regular actuarial assessments need to be made in order to assess the assets and liabilities of the scheme. This practice is supplemented by two competing statutory objectives:

• The first is the minimum funding requirement (MFR). In essence the MFR is a statutory standard which aims to ensure that final salary schemes are funded to a level where (broadly) the assets of the scheme will cover 100% of the liabilities calculated as the sum of the transfer values applicable if all members left pensionable service (i.e. no allowance for future pay rises). The transfer value is the amount estimated to give a better than evens chance that if invested will ultimately be able to fund the benefit.

• In addition there has historically been pressure to prevent a substantial surplus being built up in such schemes. This is achieved through the Inland Revenue removing tax concessions on schemes which are considered to be in substantial surplus.

As is clear from the above an employer who is responsible for balance of cost in funding a final salary scheme (over and above the fixed rate of employee contributions) is faced with uncertainty. A substantial slide in the value of investments may leave a final salary scheme with a substantial deficit in funding. The trustees will look to the employer to make up that deficit often over a relatively short period of time.

FRS17

Further difficulties have arisen because of the new accounting standard, FRS 17, which requires the employer to reflect scheme deficits and funding obligations in its accounts. In particular FRS17 will, when it comes into force, require employers:

• To value assets at market value (not an actuarially smoothed value that may not reflect actual market value – this has the effect of making the asset value volatile –it will change from day to day as the stock markets change);
• To value liabilities payable in the future by reference to corporate bond yields (i.e. assuming a lower rate of return that has historically been achieved by investment in shares – this has the effect of increasing the liability)

In some cases this will mean that company accounts will show reduced assets and increased liabilities when compared with the on-going funding valuation. This may have a dramatic impact upon the balance sheet and profitability of the company.

Contribution holidays

However the present funding crisis in final salary schemes should be seen in its historical context. By way of contrast many of the pensions disputes of the last 20 years have centred not on how scheme deficits should be managed, but with how a substantial surplus should be treated.

At the time many employees objected to the fact that employers were able to obtain a return of the surplus or alternatively take a contributions holiday in such circumstances. At the time the justification for such action was often the fact that in the bad times the employer would be responsible for making good any deficit in the scheme. Whether this was in fact the legal position depended largely on the wording of the relevant trust deed (see below).

All of the above factors also have to be seen in the legal context of a clash of cultures between trust and contract law concepts.

Facts:

The legal position will depend a lot on the actual facts of the case. What has actually been said or promised?

Specimen wording is as follows:

Employment contract/statement of terms

Scheme booklet

Commonly a booklet describing the pension arrangements is issued to members and prospective members. This is to comply with both:

• the disclosure obligations (placed on pension scheme trustees) under the Occupational Pension Schemes (Disclosure of Information) Regulations 1996 (SI 1996/1655);
• the obligation on employers to include in the written statement (under s1 ERA 1996) details of " any terms and conditions relation to pensions and pension schemes (s1(4)(d)(iii), ERA 1996).

It seems that generally such statements will be effective to mean that the terms of the booklet cannot give rise to legal rights (in contract or estoppel).

See ITN v Ward [1997] PLR 131 (Laddie J); Texon Pension Trustees v USM Texon (2000) 7 December (Lloyd J); and Redrow plc v Pedley [2002] 23 PBLR, [2002] EWHC 983 (Ch) (Sir Andrew Morritt, V-C).

It may be difficult for employees to show reliance on a booklet – e.g. Schmidt v Air Products [1995] OPLR 283 (Sup Ct of Canada).

But it is similarly unlikely that an employer will be able to rely on a booklet as giving rise to an estoppel etc to give smaller benefits than envisaged in the trust instrument: Redrow plc v Pedley [2002] 23 PBLR, [2002] EWHC 983 (Ch) (Sir Andrew Morritt, V-C) and Briscoe v Lubrizol [2002] IRLR 607 (CA) at para 101.

Trust Deed

Occupational pension schemes which are Revenue approved will, in the private sector have to be set up under trust. Usually there will be a trust deed and rules. These will describe the benefits and administrative provisions of the scheme in some detail. It is common for the pension scheme trust deed to include:

• an express provision entitling the Principal Employer (or a contributing employer) to terminate contributions to the scheme;
• an express provision allowing the employer to wind-up the scheme;
• an express power of amendment. Usually this is exercisable by the Principal Employer, perhaps alone or (more commonly) with the consent of the trustees of the scheme.

Can new hires be given different benefits to existing hires?

It has become increasingly common for the employer who has previously funded a final salary scheme for all employees to seek to draw a line under such provision by offering new hires membership of an alternative money purchase scheme. This approach has the obvious advantage of avoiding any possible breach of the express and/or implied terms of the contracts of the existing employees. It also avoids the crystallisation of the liability to make good any substantial deficit in the scheme (subject to arguments on the extent of the employer’s obligation to make up such a deficit).

This approach is not risk free however and raises a number of difficult legal issues. These can be identified in broad terms as follows:

• how do you treat existing employees who have an option to join the final salary scheme but have not yet exercised that option;
• is such a practice open to challenge by the new hirers; and
• will such a differential remuneration structure be open to challenge in the future.

Existing Employees

As has already been stated it is typical for employees to be provided with an option to join the company pension scheme in their contract of employment. What is nature of the employer’s obligation to individuals who have such a term of their contract but have not yet exercised the option to join?

On one view it is arguable that it would amount to a breach of such an express term for the employer to simply remove the option to join the final salary scheme and replace it with an inferior option to join a money purchase scheme.

Alternatively it could be argued that such action would be a breach of the implied term of trust and confidence if no warning of such a change was provided. In this context see cases such as Scally v Southern Health & Social Services Board [1992] 1 AC 294 (HL); Hagen v ICI Chemicals [2002] IRLR 31 (Elias J); University of Nottingham v Eyett [1999] ICR 721 (Hart J) and Outram v Academy Plastics Ltd [2001] ICR 367 (CA) which deal with the relevant obligations of the employer in this regard. These cases also draw the crucial distinction between:

• a duty to provide information (where a duty may sometimes arise);
• a duty to provide correct information if it is actually given; and
• the provision of advice (where no such duty arises unless such an obligation is undertaken).

The common law principles cited above are supplemented by the statutory regime regarding disclosure. This regime extends to not only members but also to prospective members of schemes in certain respects (see the Occupational Pension Schemes (Disclosure of Information) Regulations 1996 (SI 1996/1655)). Under the Disclosure Regulations the trustees are obliged to notify any proposed changes to the scheme (which includes to those eligible to join). The trustees must communicate to the members in advance "where it is practicable so to do". A failure to comply with such an obligation can lead to trustees being fined by the Occupational Pensions Regulatory Authority (Opra) could well lead to an allegation of maladministration which can be brought before the Pensions Ombudsman. In addition where such information has to be provided to the members of the scheme it would appear difficult for an employer to justify any failure to warn prospective members of the change.

It follows that consultation and warning in advance of any such change would appear to be both necessary and prudent.

New hires

As a matter of traditional contractual orthodoxy there would appear to be no obvious common law obstacles to an employer offering new hirers inferior pension arrangements. Parties are free to contract on terms as they see fit and the law has purported to turn itself against providing special rules for employment contracts (see Laws v London Chronicle [1959] 2 All ER 285).

Furthermore as has been made clear in the recent cases on equal pay there is no legislative support for fair wages as such (see Strathclyde RC v Wallace [1998] ICR 205).

In the circumstances it looks as if the only viable challenge from a new hirer would be based upon a breach of the implied term of trust and confidence. There is now judicial support for the proposition that it may be possible in certain circumstances for the implied term to provide rights and obligations which are in excess of underlying express rights (see Transco PLC v O’Brien [2002] ICR 721). However there has arguably been some retreat from an overly expansive development of this principle in Reda v Flag Limited [2002] UKPC 38, (2002) 11 July (PC).

It would appear that the prospects for a successful common law challenge by a new hirer faced with inferior pension terms look bleak. Furthermore the employer is clearly entitled to take into account its own interests in such matters (see Imperial Tobacco [1991] ICR 524). Against this background it would appear that any successful challenge in this area would require a significant advance in the scope of the implied term of trust and confidence.

A further obstacle to such judicial intervention may also be seen in the speeches of the House of Lords in Johnson v Uniysis [2001] ICR 480. The field of pensions and wages in general is now well regulated through statutory intervention and there is a strong argument that further judicial intervention in the field would not be warranted.

Future problems

Perhaps the most interesting aspect in this area relates to the possible future difficulties which may be faced by an employer who has provided new hirers with inferior benefits. Two possible challenges can be identified.

The first is an equal pay challenge. This could arise in sectors where one sex has traditionally been under represented in the workforce but where some inroads are made into that sector by the underrepresented group. In these circumstances the well established equal treatment principles will apply. Furthermore in the light of Preston v Wolverhampton NHS Trust [2001] ICR 217 any such liability is likely to operate from the date of the excluded membership.

In addition it is likely that further complications will arise with respect to any future legislation on age discrimination. Obviously any debate in this area is dependent upon the final structure of any future legislation but we have a considerable guide from the existing law on equal pay. It would appear that any aged based challenge would enjoy strong prospects of success on the issue of disparate impact. This is because it is almost inevitable that a new structure for new hires will be prima facie discriminatory since the requirements and conditions for membership of the final salary scheme will be impossible for those who were under working age at the time of the change to satisfy.

The focus in such cases is therefore likely to fall on justification issues. Much of this ground is yet to be covered in the existing part timer’s cases. Further problems for employers can be envisaged if we enter a new cycle of good fortune for pension providers with good investment returns, relaxation of revenue rules on annuities etc. which may undermine the economic base for any previous decision to close the relevant scheme to new entrants.

It follows that the action of an employer in providing new hirers with inferior money purchase benefits may leave it open to considerable future litigation risks. Unfortunately the real irony here is that such factors may encourage employers to level down their pension provision for all employees by winding up the final salary scheme and transferring all employees into money purchase benefits.

Do employers effectively reserve a right to amend/terminate pension benefits? Is this power construed narrowly?

The general rule is that benefits promised by employers to employees are (in notices etc.) generally taken to be contractual, unless the employer clearly states that they are discretionary or ex-gratia - e.g. Lee v GEC Plessey Telecommunications [1993] IRLR 383.

But this does not apply to mere statements of intent or vague policies – see e.g. Hagen v ICI Chemicals [2002] IRLR 31 (Elias J), Grant v South West Trains [1988] IRLR 188 and Taylor v Secretary of State for Scotland [2000] IRLR 502 (HL). See more recently Fontana (GB) Ltd v Fabio [2002] All ER (D) 70 (Jul) for a decision of the EAT that a purported promise to pay pension contributions at a particular level was too vague to be contractual.

A contractual term to provide benefits can also be implied in some cases – e.g. as a matter of:

• custom and practice –the comments of Elias J in Hagen v ICI Chemicals [2002] IRLR 31 at paragraph 73 and also Albion Automotive v Walker [2002] EWCA Civ 946 (2002) 21 June (CA); or

• by implication as part of the officious bystander test.

So we might expect that pension benefits are clearly contractual i.e. that the employer will promise that a particular level of benefits will be provided.

This is clearly possible. Clearly an employer can commit itself (in the contract of employment or elsewhere) to ensure that a particular level of pension benefit is ultimately provided.

Equally clearly, employers could make it clear that any pension benefit provided is discretionary or ex-gratia and no contractual entitlement to it arises.

However it seems that in practice most employment contracts that deal with occupational pensions do not go so far as to give an express contractual right. However neither is the provision of pensions made ex-gratia. Broadly, perhaps, the contract may contain a provision saying that the employee may join the relevant pension scheme but that the employer reserves the right to amend or terminate it. Employees will only get what the scheme provides in accordance with its terms (this may mean that there is not ultimately an obligation on the employer to fund the scheme to provide the benefits).

If the employer amends the pension scheme and so amends the benefits, is this a breach of the employment contract? As, in effect, has the employer (by use of a language such as the above) reserved the right to amend the pensions "promise"?

Will a court or tribunal be concerned that to uphold this would be taint amount to giving the employer a discretion to terminate what can be a large proportion of the employees total remuneration package? Conversely, would holding otherwise mean that employers were less likely to agree to undertake the (onerous) obligation to fund and provide some level of retirement provision?

The court could construe the employment arrangements so as (perhaps) to hold that there is not an unfretted right to amend or terminate a pension scheme:

• by construction of the particular documents – e.g. a right to join a particular pension scheme could be interpreted as a right to remain a member of that scheme (i.e. no termination) with benefits on the basis announced (i.e. no adverse variation);
• by implying a term into the employment contract on the usual contractual basis to the effect there will be no termination or adverse amendment. It seems unlikely that such a term would be implied;
• by holding that the power and the employer to amend or terminate the scheme is subject to the implied mutual duty of trust and confidence;
• by subjecting the power to imply constraints on the grounds of reasonableness etc.;
• by holding that a failure to meet the employee’s reasonable expectations is contrary to the provisions of the Unfair Contract Terms Act 1977 (UCTA 1977).

The employer will usually have the power, under the provisions governing the pension scheme, to vary the terms of the scheme (usually with the agreement of the trustees). Is the employee bound by such a variation? Has he (impliedly) accepted that membership of the scheme is on the terms of the scheme as amended from time to time?

There is some protection for the employee if the scheme requires the trustees to consent to any changes proposed by the employer (see below).

Whether an employer may exercise a unilateral right to terminate a scheme will depends on the terms of the scheme. In Cadoux v Central Regional Council [1986] IRLR 131, Lord Ross in the Court of Session held that such a termination was not a breach of contract. However, in Robertson v British Gas Corporation [1983] IRLR 302, the CA held that the employer, British Gas, could not unilaterally terminate a bonus arrangement agreed with a trade union and incorporated into the contract of employment in the words ‘Incentive bonus scheme conditions will apply to meter reading and collection work’. Robertson was distinguished in Cadoux on the basis that the bonus scheme had been agreed with the trade union (whereas the life scheme had not been so agreed with the trade union in Cadoux).

Amendment powers are often construed narrowly: Baynham v Philips [1995] OPLR 253; Brechin Bros v Kenneary (1992) 7 October (EAT); United Association for the Protection of Trade v Kilburn (1985) 17 September (EAT). "It is a strong thing to imply a term into a contract of employment when that term allows the unilateral variation of the contract" per Peter Gibson LJ in Securities Facilities Division v Hayes [2001] IRLR 81 (CA).

But an express clause can operate even though pay falls as a result – e.g. White v Reflecting Roadstuds [1991] IRLR 331 (EAT).

How are the employer’s powers affected by the implied mutual duty of trust and confidence (MDTC)?

The development of the implied term of trust and confidence is almost certainly the most significant development in employment law of the last 25 years (see Malik v BCCI [1997] IRLR 462).

It is of interest to note that much of the development of this term has occurred in the context of pensions and other financial benefit disputes - see Imperial; Clark v BET plc [1997] IRLR 348; Clark v Nomura [2000] IRLR 766 and Mallone v BPI [2002] IRLR 452 (CA).

These developments also dovetail with the greater willingness of the Courts to develop administrative law concepts in the private law arena (see for example the decision in Equitable Life v Hyman [2000] OPLR 101).

When considering the impact of the implied term of trust and confidence in this area it is worth emphasising that traditionally any interference by the employer with an employee’s remuneration has been viewed seriously by the Courts and will invariably be considered as being sufficiently serious to amount to a repudiatory breach of the contract of employment (see Cantor Fitzgerald v Callaghan [1999] ICR 639). Why then, it can be argued, should the position be any different where the remuneration in question is provided through the mechanism of a trust largely as a result of historical and revenue based factors?

With regard to the decision to close a final salary scheme trust and confidence potentially impacts in two distinct ways:

• as a fetter on the original decision to close the scheme; and
• on the procedure by which the scheme is closed.

Decision to close the scheme

These issues are closely allied to the points raised earlier relating to the power of the employer to close the scheme under the express terms of the contract. The essential question here relates to the extent to which the Courts will be willing to use the implied term to fetter what at first sight may appear to a wide express powers available to the employer.

There are numerous examples of cases in which the Courts have been willing to strike down an employer’s actions on the basis of the implied term of trust and confidence (Imperial being a classic case point – similar examples include United Bank v Akhtar [1989] IRLR 507; White v Reflecting Roadstuds Ltd [1991] IRLR 331 and McClory v The Post Office [1993] IRLR 159). To what extent will this approach be developed here?

This is obviously a difficult area and we only seek to offer some pointers here. A modern and developing technique of judicial control is the so called perversity test which has been developed in the context of good faith obligations in Nomura, Paragon Finance v Nash [2002] 1 WLR 685 (a Court of Appeal decision on changing interest rates under a mortgage) and Mallone. Of further interest is the apparent willingness of the Courts not only to look at the overall substance of the employer’s decision but also the reasoning process by which that decision was reached. What is the potential impact in this area?

Further issues arises from previous statements which may have been made by the employer which give rise to legitimate expectations on the part of employees that the scheme will continue to be funded. The Court of Appeal has previously made reference to the importance of an employee’s ‘legitimate expectations’ when upholding a decision that an employer had acted in breach of the implied term (see French v Barclays Bank [1998] IRLR 646). To what extent is this linked with the similar comments regarding legitimate expectations made by the House of Lords in Equitable Life?

Another area of interest relates to the willingness of the Courts to scrutinise the financial decisions and judgments made by the employer. It is well established that when considering whether any action amounts to a breach of the implied term of trust and confidence the Court has to recognise that the employer is entitled to take account its own financial interests arising from the operation of the scheme (see Imperial and the House of Lords in National Power v Healy [2001] 1 WLR 864).

It follows that there must be some assessment of these financial interests. However it is debatable as to what extent the Court will wish to investigate the financial position of the employer and the previous history of the scheme.

By way of example it is common for many of the employers which are now seeking to close such schemes to have taken contributions holidays in the past and/or to have removed the surplus from such schemes. At that time the employer would often have taken the point that their action was justified by reason of the fact that they would be obliged to make up any future deficit in the scheme should one arise.

To what extent could the Court take into account the employer’s financial motives – to what extent is there a difference between the employer which is seeking to close the scheme in order to boost its share price and the employer which is acting out of necessity to stave off insolvency and protect the employment of the scheme members?

Another important factor may well be the jurisdiction in which these issues are canvassed. An employment tribunal may feel far less inhibited in conducting a detailed investigation of the employer’s motives by reason of their experience of determining justification issues under the DDA and other forms of statutory protection which are underpinned by the value judgments of the industrial jury.

The importance of the jurisdiction question is emphasised by the fact that an appeal from an employment tribunal lies only on a point of law. The view has traditionally been taken that the decision as to whether there has been a breach of the implied term or not is a mixed question fact and law within which the factual element predominates (see Pedersen v Camden LBC [1981] ICR 674) and this may render it difficult to challenge a tribunal decision by way of appeal.

Way in which scheme is closed

The second way in which the implied term of trust and confidence is likely to impact on the decision to close a final salary scheme relates to the process by which the decision has been reached.

This question is closely linked to the issue of collective consultation in circumstances in which the employer resorts to the technique of blanket dismissals followed by offers of re engagement in order to remove (or seek to remove) any future contractual liabilities to its employees.

It appears strongly arguable that any high handed decision to close the scheme without warning or consultation would amount to a breach of the implied term of trust and confidence. In this context the following factors may well be relevant:

• the importance of scheme membership to the individual employee;
• the possibility that consultation may well lead to some form of compromise solution and reduce the detrimental impact on the employee;
• the extent to which the employee has a legitimate expectation that the scheme will continue to operate arising from previous comments or statements of the employer.

Consequences of breach

A further point of interest which requires clarification is the practical impact of a breach of the implied term of trust and confidence arising from a scheme closure.

• Does this mean that the employer’s decision is null and void?
• Is a distinction to be drawn between a breach which relates to the substance of a decision and one which is merely procedural?
• Can the employer seek to avoid the consequences of future liabilities by adopting the technique of blanket dismissals followed by re engagement?

It now appears reasonably well established that damages for breach of the implied term are not limited to the relevant period of outstanding notice under the contract (indeed Malik itself is a clear example of this). How does that principle impact here?

Is there a role for UCTA?

UCTA 1977 is principally concerned to restrict the extent to which civil liability for negligence or breach of contract may be avoided by means of exemption or exclusion clauses inserted in contracts.

An exclusion clause contained in a pension scheme would seem to be subject to the provisions of UCTA. The type of contracts excluded from the provisions of UCTA by para 1(e) of Schedule1 are contracts insofar as they relate to the creation or transfer of securities or of any right or interest in securities but it would seem arguable that the right or interest in relation to a pension scheme is in the underlying monetary obligation rather than in any securities that may happen to be comprised within the pension scheme. The provision in para 4 of Schedule1 stating that s2 of UCTA does not apply to a contract of employment expressly states that it does apply in favour of the employee.

Paragraph 1(a) of Schedule 1 provides an exclusion relating to ‘any contract of insurance (including a contract to pay an annuity on human life)’. It may be, therefore, that insured pension schemes could be outside the provisions of UCTA. There is no definition of the term ‘contract of insurance’ in the Schedule.

Negligence

If UCTA applies, then s2(2) prevents an exclusion or restriction of liability for negligence, except insofar as the term or notice satisfies the requirement of reasonableness. This may apply to trustees, but perhaps less obviously applies in the case of an employer in relation to actions in connection with a pension scheme. The contention that s 2 could be relied on by an employee to negate an express term of his employment contract was held by the CA to merit argument at a full trial in Johnstone v Bloomsbury Health Authority [1992] 1 QB 333 (a case concerning physical injury within s 2(1)).

'Deals as consumer'

Section 3 of UCTA applies where one of the contracting parties ‘deals as consumer or on the other’s written standard terms of business’. In an employment context, written standard terms of employment are frequently used. The Law Commission has pointed to a decision of the Court of Appeal in Liberty Life Assurance v Sheikh (1985) The Times 25 June to the effect that an employment contract can be the employer’s "written standard terms of business. The contrary was said by Morland J in Brigden v American Express [2000] IRLR 94 (not citing the Liberty Life case), but he held that section 3 applied anyway because the employee was dealing as a consumer.

Even if such terms are not used, it seems fairly clear that an employee is a person who deals as a consumer; see, for example, the comments on the provisions of UCTA applying to Scotland by Lord Ross in Chapman v Aberdeen Construction Group plc [1991] IRLR 505 at 508 (a decision of the Court of Session) and Morland J in Brigden v American Express [2000] IRLR 94.

The term ‘deals as consumer’ is defined in s12 of UCTA. Section 12(3) throws the onus on the employer to show that the employee is not dealing as a consumer. Section 12(1) states that an employee will deal as consumer if the other party makes a contract in the course of a business (normally an employer will be acting in the course of a business) and the employee neither makes the contract in the course of a business nor holds himself out as doing so.

It would seem clear that employees do not in fact make their employment contracts in the course of a business; it would not normally be described as being the business of an employee to sell his services to the employer. Business is defined to include a profession and the activities of the government or of a local or public authority (UCTA 1977, ss14 and 25(1)).

It may be that certain employers (eg a trust or charity) do not carry on business and hence do not come within UCTA (s1(3)).

If it is found that an employee is dealing as a consumer or on written standard terms of business, then s3(2) of UCTA may apply.

Reasonableness

Generally, if a contract term purports to exclude liability in all circumstances, it would seem unlikely that it would satisfy the requirement of reasonableness set out in s11 of UCTA.

Depending on the facts, it may well be argued by an employee that an amendment or termination of a pension scheme falls within s3 on the basis that it results in contractual performance by the employer which is substantially different from that which was reasonably expected. In effect this may amount to a statutory recognition of pension expectations.

In Zockoll Group v Mercury Communications (No 2) [1999] EMLR 385, 395, Lord Bingham MR pointed out that reasonable expectations seems to involve not just looking at the terms of the contract, but also at all the relevant circumstances. See also the decision of the House of Lords in Equitable Life v Hyman [2000] 3 WLR 529

In Paragon Finance v Nash [2001] EWCA Civ 1466 [2002] 1 WLR 685 at para 77, the CA held that section 3 does not apply if the effect of the change is to alter the contractual performance required by the other party. So a change increasing employee contributions is not within UCTA.

UTCCR

The Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) are the current enactment in the UK of the EU Directive on Unfair Terms on Consumer Contracts (93/13/EEC).

The Directive includes a recital that it does not apply to employment contracts and these were expressly excluded from the first set of UK regulations. This exclusion was (oddly) not repeated in the 1999 Regulations, but it seems to be accepted (at least by the DTi and the Law Commission) that employment contracts are outside the scope of UTCCR.

The reasoning for this view is not clear. The Law Commission working paper refers to the view taken by Chitty that an employment contract is not a consumer contract, but this seems odd in the light of the cases on UCTA, in particular Brigden v American Express [2000] IRLR 94 (see above).

A better view is that the UTCCR should be interpreted in the light of the underlying Directive (e.g. Litster v Forth Dry Dock [1990] 1 AC 546) or that the UTCCR are ultra vires if they go further than the underlying directive (see e.g. Addison v Denholm Ship Management [1997] ICR 770 at 785C).

If UTCCR were to apply to pension schemes (as opposed to the underlying employment contract) this would still give rise to interpretation issues. For example is the pension scheme a contract? See further the article: "The Unfair Contract Terms and Consumer Contracts Regulations 1994 – some thoughts on their possible application to pension schemes" by Dan Schaffer in Pension Lawyer No. 66 (September 1995).

What are the duties of the pension trustees?

If an amendment is to be made to the pension schemes, two issues are relevant:

• does the amendment power allow such a change?
• Who needs to agree the amendment.

Trustees

The Inland Revenue require (as a condition of tax approval) that private sector pension schemes are established as a trust.

Unapproved schemes have become more common since the advent in 1989 of the earnings cap (for new hires) on pay that can be pensioned through a revenue approved scheme. Unapproved schemes can be funded (Furbs) or unfunded (Uurbs). Funded schemes have funds set aside – usually this involves a trusts. Unfunded schemes are usually just promises by the employer (usually these will be contractual).

Trustees will be appointed and removed as provided in the trusts instrument. Commonly this allows the employer to appoint and remove trustees at will. It is unclear whether the courts would construe such a power as actually being fiduciary (David Pollard has long contended that it is not).

Commonly the trustee is a separate company. In this case the directors of the trustee company are often appointed and removed by the employer. But the trustee remains the company – the directors often think of themselves as being trustees, but the legal reality is that they are directors. – see HR v JAPT [1997] OPLR 123 (Lindsay J). In practice trustee directors usually act in the same way as individual trustees and this is usually a convenient shorthand.

The Pensions Act 1995 (ss16 to 21) contains provisions for one third of the trustees to be elected by the members unless the members have agreed (following a statutory consultation process) to alternative arrangements. Such alternative arrangements are common. The government legislated in the Child Support, Pensions and Social Security Act 2000 to change the rules so that all schemes would be required to have one third member elected trustees (or directors), but it seems that these provisions are now likely not to be brought into force (at least for another four years).

Many schemes include express provision for member election of trustees.

Scope of the amendment power

There may be express limits on the power of amendment. Usually these relate to changes that affect accrued rights or which would allow refunds to the employer. But sometimes they prohibit changes to prospective benefits as well – see Lloyds Bank Pension Trustees v Lloyds Bank [1996] OPLR 181; [1996] PLR 263 (Rimer J).

In addition, section 67 of the Pensions Act 1995 operates to limit amendments to scheme that effect broadly "accrued rights". These are defined as the benefits applicable as if the employee concerned had left pensionable service (s124, PA1995). Under s67 the accrued rights of an employee cannot be amended except with the written consent of the employee concerned and with the agreement of the trustees. Note that there is no provision under s67 for a dissentient minority to be bound by a consenting majority. This is an individual test.

A reference to accrued rights in a scheme restriction may not be construed the same way as s67. It may be construed as a reference to benefits based n ultimate leaving salary (not salary at the date of the change) – see Millett J in Re Courage [1987] 1 WLR 495, but contrast the British Columbia Court of Appeal in CASAW v Alcan Smelters (2001) 27 CCPB 209.

It is possible that the courts will imply a restriction that amendments must not reduce benefits retrospectively (at least I the absence of an express power). E.g. (in a non-pensions context) Baynham v Philips Electronics [1995] OPLR 253 (Latham J) at page 265E and Mallone v BPI [2002] IRLR 452 (CA). But contrast Doyle v Manchester Evening News [1989] PLR 47 and Gra-Ham Australia v Perpetual Trustees [1992] PLR 193..

Employer consent

Usually the trust instrument will envisage that the consent of the employer is needed for any amendment.

Even if unilateral (i.e. no need for trustee consent) it seems that this power is not fiduciary: British Coal v British Coal Trustees [1995] 1 All ER 912; [1994] ICR 537 (Vinelott J).

But it will be subject to the implied MDTC: mutual duty of trust and confidence (see above).

Trustees: fiduciary duties

Commonly the consent of the trustees will be needed for any amendment.

Once appointed (whether by the employer or by the members) it is clear that each trustee owes the same fiduciary duty to the scheme beneficiaries (and not to the appointor) – e.g. (in relation to company directors) SWCS v Meyer [1959] AC 324 (HL) and Kuwait Asia v National Mutual [1991] 1 AC 187 (PC).

Trustees owe fiduciary duties to the beneficiaries of the trust. The primary beneficiaries of a pensions trust are the members of the scheme – the past and present (and potentially future) employees. Spouses and dependants are often secondary beneficiaries (benefiting following the death of the member).

Often the employer is an express beneficiary as well –any surplus funds remaining on an ultimate winding-up of the scheme commonly pass to the employer (either expressly under the trust instrument or under s77(4)(b), Pensions Act 1995.

Given the employer’s statutory (and trust instrument) funding obligations to the scheme, it is likely that the employer will be considered to be a quasi-beneficiary of the scheme even in the absence of this resulting trust.

But the precise extent to which trustees have to consider the interests of employers as well as members/employees is unclear.

Assuming that the section 67 and amendment power issues can be resolved, how should Trustees exercise their discretion whether or not to agree to an amendment requested by the employer that would reduce benefits?

What factors should the trustees properly take into account in deciding whether or not to agree to the amendment?

There seems to be a wide view and a narrow view as to how far trustees can take account of the interests of the employer:

The wide view allows trustees to consider the interest of the employer as a beneficiary (or quasi beneficiary) under the plan;

The narrow view says that trustees must only act in the interests of the members (and contingent beneficiaries). This allows the employer’s interests to be considered only when that benefits the members.

Wide view

The wide view would, in effect, view the scheme as being for the purpose for assisting the employer and the members in providing benefits.

This means this would be legitimate for trustees to consider the interests of the employer (including the costs of running the scheme and a comparison with comparable benefits provided elsewhere in the industry) to do with competitiveness.

The widest exponent of this is probably Chadwick LJ in Edge v Pensions Ombudsman [2000] Ch 602; [1999] 4 All ER 546.

It is worth quoting extracts from that judgment in full.

It is worth noting that the Edge decision was in the context of a discussion of use of surplus – there was no question there of taking away past service benefits or reducing benefits. Should the remarks be viewed in that context?

Chadwick LJ did mention that the case involves the trustees putting forward proposals which the employers would be likely to find attractive: "they were entitled to take the view that half a loaf was better than no bread" – see extract from page 574 noted above.

To similar effect to Edge is the decision in New South Wales of Waddle LCJ in Lock v Westpac Banking Corporation (1991) 25 NSWLR 593; [1991] PLR 167. He stated that:

"It seems to me that…the trustees, while they had a duty to act in the interests of the members, were entitled to take into consideration the interests of the Bank…in considering whether or not to consent to the proposed amendment of the deed. If they were satisfied on reasonable grounds that the overall package was a resolution in the interests of the parties…which was fair to both the Bank and the members, they were in my own opinion entitled to consent…"

Note however that Westpac was again a case involving surplus.

For articles supporting a wide view on the question of duties owed to employers see:

• "The basic duty of trustees of superannuation trust – "fair to one, fair to all" by SEK Hulme QC in (2000) 14 Trust Law International 130,
• "The Duties of Pension Scheme Trustees to the Employer" by Edward Nugee QC in (1998) 12 Trust Law International 246.

Narrow view

A narrower view would be to regard trustees as mainly being concerned with looking after the interests of the members (and contingent beneficiaries). The argument then is that they should ignore the interests of the employers save insofar as it potentially has an adverse affect on the members.

The leading case here is probably the decision in Victoria of Beach J in Asea Brown Boveri [1999] 1 VR 144.

Beach J suggested (at the end of the judgment, page 161) that:

More recently, Elias J seems to have accepted counsel’s submissions that trustees would be expected to act in the interests of members in agreeing whether or not to wind up a plan: Hagen v ICI Chemicals [2002] IRLR 31. He was looking at a claim by Mr Hagen and other employees that they had been misled by ICI in relation to the pension benefits on offer following a transfer to Kvaerner. The ICI scheme could not be discontinued. The new Kvaerner scheme could.

Elias J held (at para 287):

In many situations, even if a narrow view is taken, the question remains whether the trustees could reasonably reach the decision that agreeing to the amendments is in the interest of the members. It may well be the case that if the trustees do not agree to the amendment, then there may well be a serious risk of a loss of support by the employers for the pension scheme.

The employer may indicate that it may consider other options (but will be mindful of not making a threat that could breach the implied MDTC). The employer’s powers could include winding-up the scheme – see for example on employer’s powers to terminate employment the recent decision of the Privy Council in Reda v Flag Limited [2002] UKPC 38, (2002) 11 July.

Is there an obligation to consult about changes under TULCRA?

It is now established that where an employer resorts to the technique of blanket dismissals followed by offers of re-engagement on inferior terms the collective consultation provisions set out in s188 of TULCRA will be engaged. This is because of the extended definition of redundancy which applies in this area (see GMB v Man Truck & Bus UK Ltd [2000] IRLR 636 and EC Commission v UK [1994] ICR 664).

It follows from the above that if the employer is seeking to proceed by way of blanket dismissals they will need to comply with the relevant consultation obligations. How will such provisions operate here? It is perhaps relevant to note that the EAT has recently taken a very robust stance on the consultation provisions and have emphasised that if the decision to dismiss has already been taken the consultation which follows may well be considered as being a sham (see Middlesborough BC v TGWU [2002] IRLR 332). It follows that the consultation should start at an early stage and certainly before the decision to dismiss has been taken.

The remedies provided for a breach of the consultation provisions are also potentially far reaching. The level of any subsequent protective awards may be substantial since the statutory cap on the amount of a week’s pay (e.g. for unfair dismissal purposes) does not apply.

Although this workshop is primarily concerned with the impact on the individual contract of employment it should be borne in mind that there may well be obligations on an employer to consult with recognised trade unions on pension matters (see further UNIFI v Union Bank of Nigeria [2001] IRLR 712 and the Occupational Pension Schemes (Contracting Out) Regulations 1996 (SI 1996/1172) which contain a requirement to consult with recognised trade unions in circumstances in which a material change in the relevant contracting out certificate is proposed – reg 4).

Does Tupe make a difference?

The two issues here are:

• what pension rights transfer under Tupe?: see Beckmann [2002] IRLR 578; and
• can pension benefits be varied even with employee consent?: Daddy’s Dance Hall [1988] IRLR 315 and Viggosdottir [2002] IRLR 425.

Regulation 5 of the TUPE Regulations generally provides for all the rights, powers, duties and liabilities of the transferor employer to be automatically assumed by the transferee. However, reg 7 excludes from this transfer rights under or relating to occupational pension schemes (though rights and obligations under or in connection with personal pension schemes do transfer). The exclusion does not apply to provisions which do not relate to benefits for ‘old age, invalidity or survivors’ (see below).

This is a fairly wide exclusion which could have the effect of reducing the rights of an employee in such circumstances. The employee would be left with his preserved rights under the vendor’s scheme with no corresponding pension rights as regards future service or any shortfall resulting from being treated as an early leaver in the vendor’s scheme in relation to past service.

The exclusion of pension obligations under reg 7 does not extend to the information and consultation obligations under regs 10 and 11. Accordingly information will need to be provided and employee representatives consulted about any measures to be taken in connection with a transfer in relation to pensions. Employees could have claims based on negligent misrepresentation if they are given misleading information about pensions (Hagen v ICI Chemicals [2002] IRLR 31).

The TUPE Regulations were enacted in order to bring into force Directive 77/187 of the European Community (the ‘Acquired Rights Directive’) dealing with ‘the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses’.

Article 3(3) of the Acquired Rights Directive does provide an exclusion for pension schemes, stating that the general obligation of the transfer of employment rights does not apply to:

Section 33 of the Trade Union Reform and Employment Rights Act 1993 (TURERA 1993) amended reg 7 of the TUPE Regulations (for transfers after 30 August 1993). The purpose seems to have been to bring Tupe into line with the Acquired Rights Directive. Any provisions in an occupational pension scheme that do not relate to benefits for old age, invalidity or survivors (eg perhaps a redundancy benefit found in certain public sector schemes) are treated as not being part of the scheme (so that liability for those other benefits will pass to the transferee).

However, it is unclear how far the limitation is itself limited. The question has arisen as to whether a pension benefit remains within the exclusion (as being an old age benefit) even if it is triggered by some other event - e.g. on a redundancy. The argument that the benefit remains a pension and so not within the limitation was accepted by the EAT in Frankling v BPS Public Sector Ltd [1999] ICR 347, but the High Court in the later case of Beckmann v Dynamco Whicheloe Macfarlane Ltd [2000] PLR 269 was not so sure and referred the issue to the ECJ.

The ECJ held in Beckmann that a right to benefits under a pension scheme payable on redundancy transfers under Tupe to a purchaser of a business. This was because the exclusion in Tupe (and the underlying European directive) for pension benefits relating to old age did not apply to benefits paid early.

The ECJ held that:

• The pension exclusion must be interpreted narrowly (see para 30 of the ECJ judgment); and
• "only benefits paid from the time that an employee reaches the end of his normal working life as laid down by the general structure of the pension scheme in question…. can be classified as old age benefits, even if they are calculated by reference to the rules for calculating normal pension benefits." (See para 31 of the ECJ judgment)

This case has now added to the uncertainty surrounding occupational pension schemes.

The ECJ decided that benefits payable by a pension scheme after age 50 on the redundancy of an employee are not "old age benefits". So the rights to those benefits did transfer and new employer was liable to pay them.

Following this case it seems that:

• Redundancy benefits under pension schemes transfer under Tupe.
• Other benefits payable before normal retirement may also transfer as well. By way of example, if a scheme gives a right to retire early, that right may also transfer under Tupe. This goes further than previously thought. The ECJ judgment is as opaque as always on this issue.
• Bizarrely, invalidity benefits and benefits for spouses and dependants probably still do not transfer.
• Employees who think they may benefit from this change may be able to claim even if the Tupe transfer was a long time ago. They may be able to claim even if they left employment in the last six years.
• The Government’s consultation on changes to Tupe probably needs to be re-thought.

Subject to this, it is clear that the exclusion in reg 7 is wide. It refers to liabilities ‘under or in connection’ with the employment contract. This was given a wide meaning by the EAT in Warrener v Walden Engineering Co Ltd [1993] IRLR 420.

Various challenges to the width of reg 7 have been made. However in Adams v Lancashire County Council [1997] ICR 834, the CA confirmed that reg 7 is effective and a proper transposition of the Acquired Rights Directive. There is no obligation on a transferee/purchaser to provide any occupational pension benefits following a TUPE transfer. The CA followed the decision of the EFTA Court in Eidesund v Stavanger Catering A/S [1996] IRLR 684.

In Ireland, Hamilton J in the Irish High Court held that the equivalent Irish Regulations enacting the Acquired Rights Directive were outside the powers of the Minister when they imposed an obligation on the transferee to ensure that the interests of past and present employees to old age benefits are protected – see Hamilton J in Re Castle Brand Ltd (25 March 1985, unreported).

So it seems that a contractual right to a redundancy pension (at least) transfers under Tupe and the ARD: Beckmann. But it is still not finally clear that this is the case if the obligation is not on the employer, but instead on a third party (i.e. the pension trustee). This point was raised by the EAT in Frankling [1999] IRLR 212, but as is usual skirted round and not addressed directly by the ECJ in Beckmann

Finally the English cases at least seem clear (up to the CA) that employees cannot agree to change terms and conditions that have passed under Tupe if the reason for the change is the transfer: Credit Suisse v Lister [1998] IRLR 700 (CA). But does this apply if the employer is instead exercising a unilateral discretion that could have been exercised by the previous employer. Logic seems to say yes, but this does mean that (rather bizarrely) a unilateral act is allowed, but one where employee consent is needed is not.

Can pay rises be made non-pensionable? Is continuing to work implied consent?

Future pay rises

There is a developing body of case law relating to the ability of the parties to the employment contract to agree terms which effectively override the underlying scheme rules. This issue arises typically as a result of pay negotiations where the employer seeks to categorise an increase in pay as being non-pensionable. The following principles can be gleaned from the existing authorities.

Employees can consent to lower benefits: South West Trains Ltd v Wightman [1997] OPLR 249, [1997] All ER (D) 137 (Neuberger J).

But consent may be invalidated by mistake if the employee is not aware that benefits are being reduced: Spooner v British Telecommunications plc [2000] OPLR 189, [2000] PLR 65 (Jonathan Parker J).

Pay needs to be contractual to be pensionable. If employer makes it clear that a non contractual pay rise is not pensionable, this will be effective even if the trust deed says that all pay is pensionable and if the employee expressly rejects the employer’s contention. The employee cannot cherrypick: Trustees of the NUS Officials’ and Employees’ Superannuation Fund v The Pensions Ombudsman [2002] PLR 93, [2001] All ER (D) 439 (Oct) (Lightman J).

In suitable cases consent can be given as part of a collective agreement: South West Trains Ltd v Wightman [1997] OPLR 249 (Neuberger J) or by trade unions: Henry v London General Transport [2002] IRLR 472 (CA) and Harris v Richard Lawson [2002] IRLR 476 9CA)..

Contrary agreement may be ineffective in relation to public sector schemes with benefits set out in legislation: R Thompson v North Tees and Hartlepool NHS Trust (2002) 25 April (Pensions Ombudsman: K00841) at para 22 (but reasoning for this is unclear).

Implied consent

Problems can arise in cases where the employer seeks to rely upon the employee’s implied consent to such a change. This may occur particularly where the true impact of the change may not be appreciated by the employee for some considerable period of time. The following legal issues arise:

To what extent can the employer rely upon the fact that the employee has continued to work as amounting to implied consent? What if the employee has been equivocal about the change? (see Rigby v Ferodo Ltd [1987] IRLR 516, HL). Does the position change because the impact of the change is not immediate? (see Jones v Associated Tunnelling Co Ltd [1981] IRLR 477, EAT).

If the employer’s arguments on express and implied terms fail can they rely upon arguments as to estoppel? (see Wightman, supra).

Further reading

1. Paper: "Pensions – a Contractual Right". by Duncan Buchanan at the Association of Pension Lawyers (APL) annual conference 2001 called Copy available on the APL website, www.apl.org.uk
2. Discussion paper: "Pension Rights and the Employment Contract"– from a joint meeting on 3 December 2001 of the APL and the ELA. Copy available on the APL website.
3. "Pensions in Peril? The decline of the Final Salary Occupational Pension Scheme" – a paper by the TUC (March 2002) – copy available on the TUC website.
4. Paper: "Pensions: an Employment Right" by Phillip Bennett of Slaughter and May at the APL Conference on 5 November 1998.
5. Paper: "Pensions - an Employment Right?" by Paul Stannard of Travers Smith Braithwaite at the APL Conference in 1992.
6. Extracts from Chapter on Pensions in the loose-leaf Tolley’s Employment Law by David Pollard (updated 2002).
7. Chapter on Occupational pensions by John Mesher in Sweet & Maxwell’s Encyclopaedia of Employment Law
8. Article: "The Unfair Contract Terms and Consumer Contracts Regulations 1994 – some thoughts on their possible application to pension schemes" by Dan Schaffer in Pension Lawyer No. 66 (September 1995).
9. Article: "Employers’ Powers in Pension Schemes: the implied duty of trust and confidence" by David Pollard (1997) Trust Law International 93.

Law Reports (Glossary)

David Pollard, Freshfields Bruckhaus Deringer

Nick Randall, Devereux Chambers

Contents

Introduction *

Background facts: *

Can new hires be given different benefits to existing hires? *

Do employers effectively reserve a right to amend/terminate pension benefits? Is this power construed narrowly? *

How are the employer’s powers affected by the implied mutual duty of trust and confidence (MDTC)? *

Is there a role for UCTA? *

What are the duties of the pension trustees? *

Is there an obligation to consult about changes? Under TULCRA or implied? *

Does Tupe make a difference? *

Can pay rises be made non-pensionable? Is continuing to work implied consent? *

Further reading *3

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