Jefferies and others v Mayes and others High Court 10 June 1997 CH 1997-J-1348

The High Court has disappointed the members, pensioners and other beneficiaries of the Electricity Supply Pension Scheme who were hoping to receive improvements to their pensions. At the same time, the judgment makes life easier for employers hoping to use pension scheme surpluses for their own benefit rather than improving benefits payable to members.

The case concerned National Grid (whose Fund had a surplus of £62.3 million) and National Power (whose Fund had a surplus of £303.4 million). These surpluses were dealt with at a time when all of the newly privatised companies had put in train large scale redundancy programmes.

Voluntary redundancy was encouraged by enhanced pension benefits available under the scheme. Those enhanced benefits would, normally, be paid for by separate, additional contributions paid by the employers. Instead, they were used, in part, to improve pension benefits; in part, to reduce the employers' future contribution rates; and in part, to pay for these additional contributions which would otherwise be payable.

In the case of National Grid, the trustees recommended that half of the surplus should be used to improve benefits and half to reduce employers' contributions and to fund these deficiency payments. National Grid decided to split the surplus 70:30 in its own favour. In the case of National Power, the employer decided to split the surplus 2:1 in its own favour, to which the Trustees agreed. In both cases, although the Trustees had the right to be consulted, the ultimate decision was the employers'.

The case centred on an employer's rights and obligations when dealing with a pension fund surplus, and the specific powers and obligations given to the Electricity Supply employers under the wording of this scheme. The Pensions Ombudsman had decided that the action of the employers in these cases was unlawful but, following a trend which is becoming all too common, the Court overruled him saying the companies' actions were perfectly lawful.

The narrow argument, although it turned on the wording of the specific scheme, is still of significance. In short the Court decided that a power to "make arrangements" to deal with a surplus did not exclude the possibility of reducing employers' contributions or paying off a debt otherwise owed to the scheme by the employers.

The court found, however, that National Power should have paid for previous redundancy costs in a lump sum, and its decision to pay by instalments was "irregular". The National Power case has been re-opened on this point.

The wider argument is much more significant. The Ombudsman had ruled that, when dealing with this surplus, the employers' obligations to respect the interests of beneficiaries were almost the same as the obligations owed by the trustees of a typical scheme to its beneficiaries. That would mean that the employers had to make their decision acting in the best interests of scheme members.

The Court held, however, that although the employers had an obligation of good faith owed to the scheme's members, this was not as high as the obligations owed by a trustee which is to act in the best interests of scheme members.

The difference is that whilst the employers were obliged to exercise their powers with a view to the efficient running of the scheme, they could also consider their own best interests.

It does not follow that in all cases, employers will now be free to use scheme surpluses for their own interests. In this scheme, the ultimate decision how to dispose of a surplus lay with the employers. In many other schemes that power rests with the trustees. The most common provision makes this a joint decision and in such cases the employer will have to grant enough benefit improvements to the scheme's members to persuade the trustees that their consent should be given.

Arguments about pension scheme surpluses will be put on hold for a while. In their most recent valuations, most pension schemes have revealed a small surplus or, in some cases, a deficit. The judge made the point that some uniformity of approach is required: at the moment, each case turns upon the precise wording of the individual scheme's rules, and where they are obscure the destination of any surplus remains up in the air until a definitive ruling has been received from the Court.

The Pensions Act 1995 does not deal with this subject and the judge suggested that further legislation is required. The National Grid pensioners have lodged an appeal. A hearing in the National Power case, on the instalments point will be held within the next few weeks.

One law for the rich?

Clark v BET plc [1997] IRLR 348 (High Court)

A case for a chief executive whose annual salary was £490,000 may appear to have little relevance for trade union members - but the principles applied to calculate compensation can be put to wider use. The points of interest centre on entitlement to pay increases and bonuses.

Mr Clark's contract said that his salary "shall be reviewed annually and be increased by such amount as the board shall in its absolute discretion decide". This may amount to a commitment to make some increase, but at first sight it seems difficult to construct a contractual entitlement as no method for calculating any increase is specified and the employer is given "absolute discretion". One may have expected that there could be no entitlement to insist on an increase as the term was too vague.

Not so. The judge said that this term amounted to an obligation to make an annual upward adjustment. This was a contractual right which the employee could enforce. 
Mr Clark had been dismissed so the judge had to decide the increase which he would have received if he had remained employed. He said it would be a breach of contract for the employer to act capriciously or in bad faith and decide the increase should be nil.

Although this was in the context of a damages claim, it must also hold true for employees who remain employed and whose contracts contain a similar entitlement to a pay review. They are entitled to insist on a review, and insist it is carried out in good faith.

There may be important implications for employees who have transferred under the Transfer of Undertakings Regulations (TUPE) with contracts containing a similar term.

The position is different from a continuing contractual obligation to grant a pay increase in line with a national scale - see Ball v BET (covered in Issue 7 of LELR: Right to pay increases following a transfer) and Whent v Cartledge [1997] IRLR 153) - but the new employer inherits a contractual obligation to carry out an upwards review of pay, and must exercise its discretion in good faith. The court goes on to say that in any claim for damages for a failure to exercise the discretion, it should not be assumed that the employers would have exercised the discretion to give the least possible benefit.

The contract also contained a clause that Mr Clark would "participate in a bonus arrangement providing a maximum of 60% of basic salary in any year". The court had to decide what bonus he would have received, in order to assess his loss of income. The employers said he would have received no bonus at all or a bonus of 6%. The court said it would be a breach of contract for the employers to provide no bonus scheme or a scheme which made it impossible to achieve 60%. The court had to make a realistic assumption of the bonus Mr Clark would have received if the employers had fulfilled their obligation.

These considerations led the court to conclude that Mr Clark would have received pay increases of 10% per annum and a bonus of 50% of salary every year.

These are astronomical figures which few employees could hope to achieve, but the approach suggests that in assessing compensation for loss of a job, whether because of discrimination, unfair dismissal or injury, courts should not stick to the bare minimum increase which a contract appears to allow, nor should they assume that any discretion would be exercised in a way which minimises the payout.

These arguments could also be deployed by employees with similar contractual clauses whose employers decline to give any pay increase or bonus because of an exercise of discretion. This would seem to be of particular relevance if there has been a change of employer leading to a change of attitude.

There is no reason why these arguments cannot be deployed in favour of workers in all sectors who are "entitled" to discretionary pay increase or bonus. Subsequent cases will show whether this is so, or whether there really is one law for the rich...