International Power Plc v. Healy and Others, formerly National Power v Feldon and Others and National Grid Company Plc v Mayes and Others [2001] IRLR 394

In this case the Lords ruled that National Grid and International Power were permitted to use the surplus in the industry wide Electricity Supply Pension Scheme (ESPS) to augment benefits and provide enhanced early retirement and deferred pensions on redundancy.

The rules of the ESPS provided that no payment could be made to the employers out of the assets of the scheme. Faced with actuarial surpluses in the ESPS, the electricity companies made arrangements to reduce the amounts they paid to the scheme, by treating certain accrued liabilities to the fund as discharged. It was not a "pensions holiday" but paid to meet actual debts payable to the fund incurred to finance extra benefits for certain individuals who had been made redundant. The question for the Courts was whether the scheme rules permitted this, given that there was no explicit power to do so.

The employees and pension fund members objected to this use of the pension fund surplus. The Pensions Ombudsman upheld their complaint and found that the employer's duty of good faith had been broken when a substantial part of the surplus was applied in the employer's own interests. He also found that the contribution rules in the scheme created a debt on the employer and release of this debt was tantamount to the employer making a payment to itself and any amendment "making any of the moneys of the scheme payable to any of the Employers" was prohibited by the rules.

A High Court judge concluded that the arrangements were valid and that the implied duty of good faith did not prevent an employer from acting in its own interests. The Court of Appeal reversed this decision, finding that the rule preventing a surplus being paid to the employers did not empower the employer to discharge his debt to the fund. But they found that the scheme rules could be changed to allow a discharge of the debt from the surplus.

The employers appealed to the House of Lords, after making the necessary amendments to the scheme. The primary question was whether the power to make arrangements to deal with surplus included the discharge of employer's accrued debts and whether this amounted to a payment to the employers out of the scheme. It was concluded that preventing employers from accessing assets by way of discharging debts was not the same as paying assets from the scheme. It was held that using a surplus to fund redundancy contributions amounted to reducing a debt rather than making a payment. Importantly, this rejects the contrary view in British Coal Corporation v British Coal Staff Superannuation Scheme Trustees Limited. Once this issue was decided, it was clear that the employers had power to do what they had done.

The House of Lords did not rule on whether a surplus in a pension scheme will generally belong to an employer or to the beneficiaries. Until this issue is decided, what constitutes a legitimate use of a surplus will depend on individual schemes' rules and the way in which the courts interpret them. This case revolved around the relevance and interpretation of certain clauses in the scheme rules, and it is notable that these clauses are not typical of more modern sets of pension scheme rules. Nevertheless, it indicates how the Courts may regard the application of pension scheme surpluses. It seems that they will favour a flexible commercial view of how surplus can be applied.