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IN THE SUPREME COURT OF JUDICATURE No CHANF 1998/0531/3

Royal Courts of Justice

Strand

London WC2

Thursday, 29th July 1999

B e f o r e:

LORD JUSTICE PETER GIBSON

LORD JUSTICE WARD

LORD JUSTICE CHADWICK

EDGE and Others

Appellants

- v -

PENSION OMBUDSMAN and Another

Respondent

(Handed down judgment

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

MR M HERBERT QC and MISS B RICH (Instructed by Messrs John Yolland of London) appeared on behalf of the Appellant

MR D UNWIN QC and MR J CLIFFORD (Instructed by Messrs Richards Butler of London) appeared on behalf of the Respondent

J U D G M E N T

(As Approved by the Court )

(Crown Copyright)

LORD JUSTICE CHADWICK: This is the judgment of the Court on an appeal from the order made on 5 December 1997 by the Vice-Chancellor allowing an appeal by the trustees of the Industrial Training Boards Pension Funds from a determination of the Pensions Ombudsman on a complaint made to him under Part X of the Pensions Schemes Act 1993.

The underlying facts are fully set out by the Vice-Chancellor in the judgment which he handed down on 5 December 1997 (reported at [1998] Ch 512). It is sufficient to rehearse them in summary form:

(1) Industrial Training Boards (“ITBs”) are corporate bodies established under the Industrial Training Act 1964 or its successor, the Industrial Training Act 1982, for the purpose of providing for the training of persons employed in the industries in relation to which, severally, they exercise their functions.

(2) The ITB Pensions Funds are administered by trustees under a scheme (“the scheme”) constituted by a definitive trust deed dated 20 July 1979. The purpose of the scheme is the provision of retirement and other benefits for employees of ITBs and successor bodies (“employers”) who are members of the scheme. The scheme is administered in accordance with rules. In the context of this appeal the relevant rules are those applicable to the Open Fund - that is to say, that part of the pension funds from which provision is made for the pension benefits to which members other than those who left service on or before 31 March 1982 (or after that date following changes made in consequence of the 1982 Act) are entitled.

(3) Rule 3 requires that the fund be constituted and maintained by means of contributions by members and employers in accordance with the rules. Rule 506 (in relation to members who commenced service after 31 March 1983) and rule 602 (in relation to members in service on 31 March 1983) prescribe the level of members’ contributions. Rule 10.1 prescribes the level of employers’ contributions. The effect of the rules as to contributions was described by the Vice-Chancellor, at [1998] Ch 512, 522E-F:

Rule 10.1 is in terms that are typical of so-called “balance of cost” schemes under which the employer’s contribution liability is to top-up the employees’ contributions so as to keep the scheme solvent. If and for as long as the scheme is solvent and the members’ contributions can keep it so, the employer does not have to make any contributions. But rule 506.4 (and rule 602.4) prevents this scheme from being a true balance of cost scheme. The employers’ periodic contributions must at all times be at least equal in amount to the members’ periodic contributions. If the members, or some of them, are contributing at the rate of 6 per cent. of salary, so too must the employers contribute at least at that rate.

(4) Rule 227.1 provides for the appointment of an actuary to the scheme. His duties include making periodic valuations of the fund and of the liabilities under the scheme and reporting to the employers and the trustees with such recommendations as he may think fit.

(5) Rule 203 requires that, if any periodic valuation by the actuary discloses a surplus or deficiency in the fund, the trustees shall request the actuary to certify, for the purposes of rule 10.1, the contributions payable by employers. But, as the Vice-Chancellor pointed out, at page 523B-C in the report of his judgment, the actuary is inhibited by rule 506.4 (and rule 602.4) in relation to the certificate which he can give if the periodic valuation discloses a surplus:

The actuary cannot certify a level of employers’ contribution which is lower than the level fixed for members’ contributions for the year. He can bring the employers’ contributions down to parity with the members’ contributions but no lower. Any greater reduction would have to await the next financial year when a lower members’ contribution rate for the forthcoming year could be prescribed and, consequently, a lower employers’ contribution rate could be certified.

(6) In or about March 1993 the actuary made a valuation of the open fund as at 31 March 1992. That disclosed a surplus of £29.9 million on an on-going basis; that is to say, on the basis that employers’ contributions would continue to be paid at a rate of 6 per cent of pensionable salaries until 1 April 1994 and thereafter at a rate of 12 1/2 per cent of pensionable salaries - those being the rates which had been fixed following his previous periodic valuation made as at 31 March 1989 - and that members’ contributions would be paid at the rate of 6 per cent of pensionable salary prescribed by rule 506.1. The actuary’s report included the following recommendations:

8.1 The result of the valuation shows that the fund is in a good financial position, with the assets being sufficient to meet the accrued and future liabilities and with a surplus of some £29.9m. being available. The bulk of surplus can be considered as available for contribution reductions, or benefit improvements, although it may be prudent... to carry forward some portion as a margin for possible adverse experience.

8.2 The employers’ contribution reduction already made is unlikely to be sufficient to conform with the Inland Revenue requirements under the Finance Act 1986. The employers and managing trustees should consider taking further steps to reduce the surplus.

(7) The problem to which the actuary was referring in paragraph 8.2 of his report arose under the provisions formerly contained in section 46 of, and Part II in schedule 12 to, the Finance Act 1986; which had been re-enacted as section 603 of, and schedule 22 to, the Income and Corporation Taxes Act 1988. Unless the actuarial surplus was reduced, the scheme - which was otherwise an exempt approved scheme for the purposes of Chapter I in Part XIV of the 1988 Act - would lose the exemption from tax which it enjoyed under section 592 of that Act on some part of the income from its open fund investments. This was explained to the trustees in a letter from the actuary dated 25 March 1993 and at a seminar held on 14 April 1993.

(8) At a meeting of the trustees held on 30 April 1993 it was decided to adopt the actuary’s report. It was further decided (i) to award additional years of service by way of credit to members in service on 1 April 1994, (ii) to reduce employees’ contributions by 1 per cent from 1 April 1994 until 31 March 2004, and (iii) to reduce the employers’ contribution rate from 6 per cent to 5 per cent from 1 April 1994 to 31 March 1999. The minutes record:

After substantial discussion it was unanimously agreed that no increase should be granted to pensions in payment apart from the cost of living increases already being paid.

Subsequently, on the advice of the actuary, it was agreed that the effective date for the payment of the reduced contributions should be advanced to 1 October 1993. The decision to put those proposals into effect was confirmed by the trustees, after further discussion, at a meeting on 9 July 1993.

(9) The proposals to which the trustees had agreed were estimated by the actuary to have the effect of reducing the projected surplus by £20.4m:

(i) Additional service credit to members in service £ 6.6m

on 1 April 1994

(ii) Reduction in employees’ contributions £ 2.9m

(iii) Reduction in employers’ contributions £10.9m

£20.4m

There would then remain a surplus of £9.5m as a reserve against future contingencies.

(10) In order to implement the steps agreed by the trustees at their meetings on 30 April 1993 and 9 July 1993 it was necessary to alter the rules of the scheme. A power to alter the rules is conferred on the trustees by rule 205. In the present context the power was exercisable only with the consent of three quarters in number of the employers. But, in any event, the proposals could not proceed unless the employers adopted the actuary’s report - rule 227.5. The consent of all the employers was obtained; and, on 17 August 1993, effect was given to the decisions of 30 April 1993 and 9 July 1993 by the execution of a deed of amendment. The deed made the necessary alterations to rules 506 and 602 (reducing the rate of employees’ contributions) and introduced new rules (as rules 511.2 and 607.2) providing additional service credit for members in service on 1 April 1994. The alterations to rule 506 enabled the actuary to certify the reduced rate of employers’ contributions under rule 10.1; which he duly did.

The trustees’ decision - implemented by the deed of 17 August 1993 - was explained to members in a letter (described as a “PEN letter”) sent by the chairman in August 1993. He wrote:

The Trustees have now received and considered the Actuarial Valuation of the Open Fund as at 31st March 1992. The Valuation revealed that there was a surplus of £29.9 million.

The Trustees considered very carefully the question of how the surplus should be used and details are given later in this PEN letter.

The Trustees have persuaded Employers that a substantial part of this surplus, amounting to £9.4 million, should be used for the benefit of members.

Future investment conditions are by no means clear and the Trustees have decided it would be prudent to retain £9.7 million (sic) as a reserve.

The Trustees hope that their decisions in relation to the surplus will encourage all employees to become and remain members of the Open Fund and support Employers to continue to provide continued employment for their current staff.

The letter set out details of the changes. It made no mention of the position of members who had left service (“pensioners”); nor, save in respect of the reduced contributions payable after 1 October 1993, of the position of those who would leave service before 1 April 1994. It did not do so, no doubt, for the reason that those members would not share in the increased pension benefits which would result from the award of additional service credit to those in service on 1 April 1994.

The August PEN letter brought a response from, amongst others, Mr Eric Nicholson, an employee of RTITB Services Limited - formerly the Road Transport ITB and one of the employers participating in the scheme. He pointed out that, as he was to be made redundant on 31 December 1993, after more than 25 years service, he would not receive the increased pension benefits to which he would have been entitled if he had continued in service for a further three months. He asked for consideration to be given to his case. The chairman of the trustees replied to the effect that the trustees’ decision had been taken in the knowledge of the effect that it would have on employees in the position of Mr Nicholson; and that his case could not be regarded as exceptional. Mr Nicholson wrote again, on 22 September 1993, complaining that the trustees’ decision was both unsound and unjust. He expressed the view that the effect of the decision was (in part) to distribute a surplus which had been generated largely by those in employment before 31 March 1992 to new employees who had not contributed to that surplus, at the expense of some who had done so.

The chairman sought to reply to the concerns expressed by Mr Nicholson and others in a PEN letter dated October 1993. He wrote:

When deciding how to deal with the surplus the main purpose of the Trustees’ policy was to maintain the viability of the Funds which depends to a large extent on the number of members who contribute to the Scheme. This section of the membership has fallen by over 700 since March 1990.

Against the background of recession some assistance to Employers which would enable them to retain staff and plan their budgets in the medium term was essential. The only way open to the Trustees to give such assistance was to further reduce Employers’ contributions. As the Funds’ rules contain a provision which prevents Employers’ contributions being reduced below members’ contributions, members’ contributions were also reduced.

. . .

The Trustees have to act in the best interests of everyone involved with the Funds. They have a balancing act to perform - instigating improvements to the Fund while not burdening Employers with unacceptable expense.

At their meeting on 15th October 1993 the Trustees reviewed the improvements in the light of your letters but decided that the improvements were fair and should therefore not be changed.

The PEN letter addressed two specific questions which must have emerged generally from the letters which had been received - and which had, in fact, been raised by Mr Nicholson:

The Trustees gave careful consideration to both these groups of members. However, all pensioners have gained from the benefit improvements which were granted during the time they were in service. These improvements have taken place at almost every previous valuation. In addition, all pensions are already index-linked and the Funds’ record of pension increases is well above average for even good occupational pension schemes. Our track record is detailed in the Trustees’ Report which you receive each year. Over the past 15 years the accumulated increases have had the effect of increasing pensions three-fold.

Members’ pensions will be increased in any event from 1st April, 1994 to reflect the annual rise in the Index of Retail Prices to October 1993.

The Trustees carefully considered the timing of the introduction of the Service Credit benefit as fixing a cut off date is always difficult. There are bound to be winners and losers.

In deciding the operative date financial factors had to be taken into account. Many of the additional members who would gain from an earlier operative date would be those who began to draw their pension before 1st April 1994. The additional benefit for those members is the most costly and backdating would have meant the formula for the Service Credit would have been less generous. In addition some members have left, or are about to leave, through redundancy and Employers would have been called on directly to meet the additional cost of the increased redundancy pension. This would be an unbudgeted financial burden on the Employers concerned.

So for all these reasons the Trustees did not favour backdating. Instead they agreed that the operative date should be the 1st April 1994 and this is in line with the operative date of the previous grant of service credit made in 1988.

The “increased redundancy pension” referred to in the penultimate paragraph is the more generous “compulsory retirement pension” payable under rule 518 to members aged 50 years or over who are dismissed (otherwise than for gross misconduct) or are obliged to retire before normal retirement date. The additional cost of a compulsory retirement pension is funded by additional contributions from the relevant employer. The effect of awarding additional service credit to those about to be made redundant would be to increase, perhaps significantly, the amount of the compulsory retirement pension to which such employees would become immediately entitled; and so to impose an unforeseen (and unforeseeable) burden on their employers.

That response did not satisfy Mr Nicholson. Following further correspondence with the chairman in November and December 1993, he made a complaint to the Pensions Ombudsman by letter dated 7 February 1994. The letter was written not only on his own behalf, but also on behalf of some 50 members of the ITB Pension Funds who were or had been employees of the Road Transport ITB or its successor RTITB Services Limited. By a letter dated 23 May 1994, addressed to Mr Nicholson’s Member of Parliament, the Pensions Ombudsman (then Mr M E H Platt) indicated that, having completed preliminary enquiries into the complaint, he was satisfied that the trustees of the ITB Pension Funds had acted in accordance with their powers, that there was no evidence of breach of trust or maladministration, and that the decision how to apply or reduce the surplus was not a matter which he could investigate further. That reflected his practice, as stated in paragraph 30 of the Pensions Ombudsman’s 1991-92 Report:

There are 3 areas that I decided early on were not appropriate for me to investigate in the ordinary way. The first is the exercise of trustees’ discretion. I do not see it as my function to intervene here. The only instances where I would consider an investigation would be where the trustees’ exercise of discretion had been in breach of a scheme rule or had been so arbitrary and irrational that no reasonable person would, on the facts of the case, have exercised discretion in that way.

That practice was re-affirmed in the 1992-93 Report.

On 1 September 1994 Mr Platt was succeeded in the office of Pensions Ombudsman by Dr Julian Farrand. In a press notice issued on 1 November 1994 Dr Farrand announced that he had completed his policy review of the exercise of discretion in accepting or rejecting cases for investigation. He proposed to relax what were there described as “self-imposed restrictions on jurisdiction ”:

Primarily this means that my office will no longer automatically exclude from investigation complaints which concern the disposal of scheme surpluses, the exercise of trustees’ discretions or the validity of actuarial calculations especially as to transfer values. It does not follow that such cases will necessarily see complaints upheld as there may very well be found to be no injustice caused or indeed any maladministration at all. Similarly, complaints will no longer be rejected rather than determined simply because the evidence available in support seems insufficient or unsatisfactory. . . . each complaint will now be considered on its own merits and I will only refuse to accept a case where the particular circumstances persuade me that an investigation would be inappropriate or unjustifiable. I am anxious that people should appreciate that their complaints are properly considered by this office.

Notwithstanding the assurance, in the press notice of 1 November 1994, that the new ombudsman would not reopen cases which had been dealt with by his predecessor under the previous guidelines, unless fresh evidence of maladministration could be produced, the new approach seems to have led to a decision to initiate a formal investigation into Mr Nicholson’s complaint against the ITB Pension Funds trustees. Mr Nicholson was so informed by letter dated 28 September 1994. The trustees were not told of the decision until 16 January 1995. By a letter of that date the chairman of the trustees was sent a copy of a document prepared by the Office of the Pensions Ombudsman (with input from Mr Nicholson) and described as “Summary of Complaint”, to which he was invited to respond within three weeks.

The complaints, as set out in the Summary of Complaint, were, in substance, these:

(1) The operative dates for the implementation of the changes, 1 October 1993 and 1 April 1994, had been chosen arbitrarily for administrative convenience. The effect was that the surplus generated by the contributions of members in service before 31 March 1992 was to be distributed to some employees who (having commenced employment since that date) had not contributed to that surplus; whilst others, who had contributed, would receive no benefit from it.

(2) The new rule 511.2 introduced a distinction between “members in service” and other members which was beyond the trustees’ powers of amendment and impermissible - in that it differentiated in favour of those in service on 1 April 1994 at the expense of the others.

(3) The amendments made by the deed of 17 August 1993 were ultra vires and invalid because they had the effect of varying the main purpose of the scheme - contrary to the prohibition in rule 205.1(a).

(4) The majority of the trustees who had decided upon the allocation of the surplus were themselves contributing members of the scheme and would thus benefit personally from their decision.

(5) The trustees had allowed the employers’ contributions over the previous three years to fall below the contributions made by members in service - in breach of rules 506.4 and 602.4.

(6) In allocating £10.8 million (in fact £10.9 million) of the surplus to the employers the trustees were making a repayment to the employers in breach of rules 205.1(b) and 602.4(b); and also rule 3.

The trustees responded to the Summary of Complaint on 9 March 1995. The Pensions Ombudsman made his determination some twenty eight months later, on 14 July 1997. There had been no oral hearing. The ombudsman rejected the specific complaints set out in paragraphs (5) and (6) above. He seems to have accepted that the amendments were within the power to alter conferred by the rules - and so, by implication, may be taken to have rejected the complaints set out in paragraphs (2) and (3). He made no finding on the complaint set out in paragraph (1) : that the effect of the trustees’ decision to confine the award of additional service credit to those in service on 1 April 1994 was that the surplus generated by the contributions of members in service before 31 March 1992 was to be distributed to some employees who (having commenced employment since that date) had not contributed to that surplus whilst others, who had contributed, would receive no benefit from it. But he considered the more general allegation of unfairness. He directed himself, at paragraph 29 of the determination, that the issues which he had to address were these:

Did the Trustees breach their duties or commit maladministration in the manner in which they dealt with the actuarial surplus? In particular:

(a) Did they breach their duty to act impartially as between the different classes of beneficiaries?

(b) Did they breach the duty not to put themselves in a position of conflict of interest?

He expressed his conclusion on the first of those points at paragraph 54 of his determination:

None of the Trustees acted in personal conscious bad faith . . . However, the decision of the Trustees at their meeting of 30 April, confirmed at their meeting of 9 July and given effect by a Deed of Amendment dated 17 August, was a breach of trust, and an act of maladministration. The Trustees breached their duty of impartiality, they did not act in the best interests of all the beneficiaries, and they exercised their power for an improper purpose. The injustice to the Complainants is manifest.

Accordingly the ombudsman determined that the amendments made by the deed of 17 August 1993 - that is to say, the benefit increases, reduction in members’ contributions and consequent reduction in employers’ contributions - were invalid. He directed that the scheme should be administered on the basis of the rules as they had been prior to the deed of amendment. He further directed (i) that the trustees should seek payment of the full contributions due in respect of the interim period, (ii) that the trustees “give proper consideration to recommending a set of benefit improvements which is fair as between all the classes of members and their dependants”, and (iii) that any benefits received by the trustees, as members, under the amended rules should be repaid to the funds.

That final direction gave effect to his conclusion, on the second of the two points which he had identified, that the trustees had acted in breach of their duty not to put themselves in a position of conflict. He reached that conclusion for the reason set out in paragraph 55 of his determination:

At the date of the decisions complained of, pension scheme trustees were prohibited from allowing any conflict of interest and duty and from receiving or retaining any profit, such as an increase in benefits from their trust. That this was the appropriate law appears to me confirmed by Section 39 of the Pensions Act 1995, which now disables the rule against Conflicts of Interest in similar circumstances. The application of this prohibition in cases such as the present would not mean that the exercise of the power to increase benefits was void or voidable, but merely that the trustees concerned would not themselves become entitled to the increased benefits and would have to account to the trust for any received. . . .

The reasoning which led the ombudsman to the conclusion that the trustees had acted in breach of trust may fairly be summarised as follows:

(1) The trustees, having accepted the actuary’s report and valuation could not require the employers to make contributions which were greater than 6 per cent of pensionable salaries for the period recommended by the actuary. Contributions from the employers above that level could not be justified because they were not needed in order to make due provision for the benefits secured by the scheme in respect of the members - rule 10.1. But nor could the trustees reduce the level of employers’ contributions below that level in the current year without an amendment to the rules. That was because the level of the employers’ contributions had to be greater than or equal to the contributions made by the members - rules 506.4 and 602.4 - and a change to the rate of contributions payable by members could only be made before the beginning of the contribution year. As the ombudsman put it, in paragraph 35 of his determination:

Thus, in allowing the Employers to continue to pay this minimum contribution, and with respect to whatever part of the surplus was absorbed by their so doing, the Trustees were not exercising a discretion, but simply following the rules.

(2) Some of the remaining part of the actuarial surplus could be treated as a reserve or provision against future contingencies; but there was a balance which had to be absorbed or reduced if the unfavourable tax consequences which would otherwise arise from the provisions in schedule 22 to the Income and Corporation Taxes Act 1988 were to be avoided. That balance could be absorbed or reduced by one or other, or by a combination of more than one, of (i) an increase in benefits, (ii) a reduction in members’ contributions, and (iii) a reduction in employers’ contributions (conditional on and in consequence of a reduction in members’ contributions). In practice the steps to be taken to absorb or reduce the actuarial balance needed the consent of the employers. Certainly the rule changes necessary to effect an increase in benefits or a reduction in members’ contributions during the current year required the consent of three quarters in number of the employers - rule 205.2.

(3) The consent of the employers would be obtained by negotiation. In those negotiations the employers could be expected to have regard to their own interests - which (in turn) could be expected to include a desire to maintain good relations with their employees - and the trustees would be required to negotiate on behalf of the employees, pensioners and their dependants. It was the duty of the trustees to further the best interests of the members and dependants “holding the scales impartially between different classes of beneficiaries”. The ombudsman explained his understanding of the “duty to act impartially” in paragraph 41 of his determination:

The Trustees’ duty to act impartially between the different beneficiaries does not equate with a duty to exercise their discretion on all occasions in such a way as to produce equal benefits of equal value to all beneficiaries. Nor does it even require that all beneficiaries receive some benefit from an exercise of a discretion. It is permissible to exercise a discretion in such a manner as to omit particular beneficiaries, or a class thereof. But the decision to exclude those beneficiaries must not be the result of undue partiality towards the interests of the preferred beneficiaries.

(4) The duty of partiality would be breached where the trustees could be shown to have no concern for the interests of the excluded beneficiaries. But it could also be breached where the decision to prefer a particular group of beneficiaries was taken for reasons which were not appropriate to the trust in question - see paragraph 42. The point is developed in paragraph 43 of the determination:

As partiality towards a group of beneficiaries can be the result not only of lack of regard towards other beneficiaries, but preferring one group for the wrong reasons, there is an overlap between the duty of impartiality, the duty to act in the best interests of all the beneficiaries and the duty to exercise a discretion fairly and honestly and for the purposes for which they are given and not so as to accomplish any ulterior purpose.

(5) The trustees had given three reasons for their decision to exclude pensioners, and others who would not be in service on 1 April 1994, from the increase in benefits consequent upon an award of additional years of personable service: (i) that the main purpose of the trustees’ policy was to maintain the viability of the funds by providing some financial assistance to employers so that they could retain staff at a time of recession - paragraph 44; (ii) that pensioners were already adequately provided for by past increases in benefits and by index-linking - paragraph 46; and (iii) that they needed to obtain the consent of the employers - paragraph 47. None of those reasons was sufficient to justify the decision.

(6) The main purpose of the trustees was to ensure that the scheme was as attractive as possible to the then current workforce of the employers, particularly those who would have escaped the impending wave of redundancies and might therefore be expected to give significant future service. The date from which members in service would qualify for an award of two additional years of personable service, 1 April 1994, was not chosen for administrative convenience. The main reason for that choice of date was:

. . . the desire to concentrate benefit increases on those who offered most future service to the Employers, and to avoid increasing the Employers’ liability to make additional contributions under Rule 518 in respect of those members who were made redundant in the period up to April 1994.

- paragraph 50. A collateral purpose was to provide financial assistance to employers, by reducing the members’ contribution rate which in turn allowed the employers’ contribution rate to be lowered - paragraph 51.

(7) In acting as they did the trustees did not exhibit the degree of independence from “those they represented” (meaning, we think, the employers and the members in service, by whom they were appointed) which is to be expected from trustees - paragraph 52. Further, as it was put in paragraph 53 of the determination:

They attempted to represent both sides of the negotiations at the same time, and make only such recommendations as they felt to be fair to ‘everyone involved with the Funds’. In so doing, they created a situation in which their conflicts of interest overwhelmed their duty to be impartial and represent the interests of all classes of beneficiaries.

The trustees appealed to the High Court on points of law, pursuant to section 151(4) of the Pension Schemes Act 1993. The appeal was heard by the Vice-Chancellor in November 1997. Mr Nicholson was not represented and did not appear at the hearing of that appeal. But the ombudsman was represented by counsel at the hearing and sought to uphold his own determination. The Vice-Chancellor allowed the appeal.

The first question addressed by the Vice-Chancellor - which he described as important and difficult - arose out of the directions which the ombudsman had given at the end of his determination: that the scheme be administered on the basis of the rules as they had stood prior to the deed of amendment and that the trustees should seek payment of the full contributions due, both from employers and from members, during the period between the date of the amendment and the date of his determination. As the Vice-Chancellor pointed out, at page 515B-D:

None of the employers nor any of the members was a party to the proceedings before the Pensions Ombudsman. No comment from any of the employers nor any of the members on the substance of the complaint or on the relief that might be granted was sought by the Pensions Ombudsman or given. . . . None the less his determination and the directions he has given, in setting aside as invalid the deed of amendment of 17 August 1993, have purported to deprive an unrepresented class of members of a benefit apparently validly given to them by the deed of amendment and to impose on the employee members and on the employers, all unrepresented, obligations to pay contributions at a level higher than those appearing from the scheme rules, as amended, to be applicable.

The Vice-Chancellor examined, in detail, the scope of the ombudsman’s jurisdiction and the nature of the proceedings he conducts when investigating complaints under Part X of the Pension Schemes Act 1993. He reached the conclusion (at page 519D-F) that, although section 146(1) of the Act conferred on the ombudsman power to investigate and determine “any complaint”, it would not be proper for the ombudsman to entertain a complaint or a dispute of fact or law except in circumstances in which those whose proprietary interests would be adversely affected by his determination of the issues had a fair opportunity to make representations in defence of their interests and in which they would be bound by his determination. Parliament could not have intended the ombudsman to entertain complaints which could only be remedied by steps which adversely affected those who were not bound by his determination or to determine disputes in circumstances in which his determination could not be effective. He said this, at page 520E-H:

In a case in which the maladministration complained of consists of an alleged breach of trust, the Pensions Ombudsman has no power, in my judgment, to direct remedial steps to be taken that are not steps that a court of law could properly have directed to be taken. The steps directed to be taken by the trustees in the present case must have been based on the premise that the deed of amendment was being set aside. But the beneficiaries under the deed, namely, the employee members, were not parties to the proceedings. The deed could not be set aside as against them. The setting aside of the deed would increase . . . the amount of the contributions to be paid by the employers. The employers . . . were given no opportunity to make representations. The Pensions Ombudsman did not treat them as parties. In these circumstances, and having regard to the respective positions of the employee members and the employers, a court could not, in my judgment, have ordered the deed to be set aside. A court could not have directed the trustees to take steps that could only be justified on the footing that the deed had been set aside. Nor, in my judgment, could the Pensions Ombudsman do so.

The Vice-Chancellor then turned to the question whether the ombudsman had been right to find the trustees guilty of breach of trust. As he pointed out, that was a question which had to be decided on the appeal before him, notwithstanding that he had reached the conclusion that the consequential directions given by the ombudsman could not stand in any event.

The Vice-Chancellor rejected the ombudsman’s reliance on a concept of “undue partiality”; and rejected his finding that the trustees had been under a “duty to act impartially” in the sense explained in paragraph 41 of the determination - which we have set out under (3) above. The Vice-Chancellor said this, at page 534B-D:

Bar the final sentence, I would fully agree with everything in paragraph 41. The last sentence, however, distorts, in my opinion, what has gone before. What is “undue partiality?”. The trustees are entitled to be partial. They are entitled to exclude some beneficiaries from particular benefits and to prefer others. If what is meant by “undue partiality” is that the trustees have taken into account irrelevant or improper or irrational factors, their exercise of discretion may well be flawed. But it is not flawed simply because someone else, whether or not a judge, regards their partiality as “undue”. It is the trustees’ discretion that is to be exercised. Except in a case in which the discretion has been surrendered to the court, it is not for the judge to exercise the discretion. The judge may disagree with the manner in which the trustees have exercised their discretion but, unless they can be seen to have taken into account irrelevant, improper or irrational factors, or unless their decision can be said to be one that no reasonable body of trustees properly directing themselves could have reached, the judge cannot interfere. In particular he cannot interfere simply on the ground that the partiality showed to the preferred beneficiaries was in his opinion undue.

The Vice-Chancellor found support for that approach in a well known passage in the judgment of Lord Justice Salmon in In re Londonderry’s Settlement [1965] Ch 918, at page 936:

Whether or not the court, if it knew all the facts known to the trustees, would have acted as they did, again I do not know - nor is it material. The settlement gave the absolute discretion to appoint to the trustees and not to the courts. So long as the trustees exercise this power . . . and exercise it bona fide with no improper motive, their exercise of this power cannot be challenged in the courts . . .

In relation to the suggested “overlap” between the duty of impartiality and the duty to act in the best interests of all the beneficiaries - to which the ombudsman had referred at paragraph 43 of his determination, the Vice-Chancellor said this, at page 535D-G:

Neither a duty to act impartially nor a duty to act in the best interest of all the beneficiaries describes, in my judgment, the nature of the duty on the trustees when considering what steps to take to deal with the surplus. They had a discretionary power to make amendments to the rules in order to provide additional benefits to members, whether pensioners or still in service. It was within their discretion to provide benefits to members in service to the exclusion of members no longer in service. They certainly had a duty to exercise their discretionary power honestly and for the purposes for which the power was given and not so as to accomplish any ulterior purposes. But they were the judges of whether or not their exercise of the power was fair as between the benefited beneficiaries and other beneficiaries. Their exercise of the discretionary power cannot be set aside simply because a judge, whether the Pensions Ombudsman or any other species of judge, thinks it was not fair.

The Vice-Chancellor then turned to the ombudsman’s criticisms of the matters which the trustees had said that they had taken into account in reaching their decision. He pointed out that the true question, in relation to those matters, was not whether the ombudsman thought they were sufficient to justify the decision; but whether they were matters to which the trustees were entitled to have regard at all. The ombudsman had applied the wrong test. He had asked himself whether, in the light of those matters, he thought that the decision was “fair”. The correct approach was to ask whether the matters were irrelevant; so that the trustees could be said to have acted irrationally or improperly in taking them into account. If the trustees were entitled to take those matters into account, then it was for the trustees - and not for the ombudsman - to decide what weight those matters should be given. In particular, it was for the trustees to decide whether the fact that pensioners were already adequately provided for by past increases in benefits and by index-linking was a sufficient ground for excluding them from further benefits. The fact that the pensioners were already adequately provided for (which was not challenged) could not be dismissed as irrelevant. The trustees’ decision to give weight to that fact could not be categorised as irrational or improper. Further, the trustees were bound to have regard to the fact that the employers’ consent had to be obtained. But it was for them to decide how far the employers could be pressed in negotiation. It was not for the ombudsman to substitute his own judgment for that of the trustees on a matter of that kind.

The Vice-Chancellor accepted that what he described as the ombudsman’s critical findings of fact were binding upon him. He summarised those findings - which we have set out under (6) above - as: (i) that the trustees’ main purpose was to ensure that the scheme was as attractive as possible to the then current workforce of the employers, particularly those who would have escaped the impending wave of redundancies and might therefore be expected to give significant future service; (ii) that the date from which members in service would qualify for an award of two additional years of pensionable service, 1 April 1994, was not chosen simply for administrative convenience; the main reason for that choice of date was the desire to concentrate benefit increases on those who offered most future service to the employers, and to avoid increasing the employers’ liability to make additional contributions under Rule 518 in respect of those members who were made redundant in the period up to April 1994; and (iii) that a collateral purpose was to provide financial assistance to the employers, by reducing the members’ contribution rate which in turn allowed the employers’ contribution rate to be lowered. He went on to say this, at page 537A-C:

Do these findings justify or require the conclusion that the trustees’ decision was taken in breach of trust? In my judgment, they do not. First, the proposition that the trustees were not entitled, when deciding how to reduce the £29.9m. surplus, to take any account of the position of the employers is one with which I emphatically disagree. The employers play a critical part in this pension scheme. They have to pay contributions sufficient to keep the scheme solvent. They have to employ employees who are willing to join the scheme and pay contributions. The £29.9m was an actuarially calculated figure based on future projections and estimates of the sums that would be coming into the open fund from employers’ contributions and from members’ contributions. It seems to me obvious that the continued viability of the respective employers was something that, in the interests of the pension scheme and its members as a whole, the trustees were entitled to want to promote. Otherwise, if one or more of the employers went into decline or collapsed, the financial projections, on the basis of which the actuarial calculations had been made, would become invalidated.

The Vice-Chancellor rejected, also, the criticism, in paragraph 53 of the ombudsman’s determination, that, in attempting to represent both sides of the negotiations at the same time and make only such recommendations as they felt to be fair to “everyone involved in the Funds”, the trustees had created a situation “in which their conflicts of interest overwhelmed their duty to be impartial and represent the interests of all classes of beneficiaries”. The Vice-Chancellor observed that the trustees’ attempt to make only those recommendations which they felt to be fair to both sides was exactly what responsible pension fund trustees ought to have done. As to the finding that the trustees had acted in breach of their duty to be impartial, he said this, at page 537F-H:

In my judgment the trustees, in deciding how to reduce the surplus, had no duty to be impartial as between members in service and member pensioners. They were entitled to prefer the former. They were entitled to recommend a package which included reductions in the future contributions that the employers would have to pay. There was, in my judgment, no evidence that in their attempt “to be fair to everyone involved with the funds” they were “overwhelmed” by any conflicts of interest between members in service and pensioners or between members as a whole and the employers. The Pensions Ombudsman’s conclusion is, in my judgment, a consequence of his attempt to put himself in the position of the trustees and himself to decide what was fair.

The Vice-Chancellor then considered what he had described as the subsidiary point - whether the fact that some of the trustees were employee members who would benefit both from the reduction in contribution levels and from the additional pension benefit led to the result that (even if the deed of amendment were otherwise valid) they could not take advantage of the reduction and would have to account to the pension funds for those benefits. He roundly dismissed the ombudsman’s conclusion that the equitable rule that a trustee must not allow himself to be placed in a position where his duty and interest were in conflict had the effect that, whenever the discretionary power of amendment was exercised so as to increase an existing benefit or add a new benefit, the member trustees must be excluded from that benefit. He said this, at page 539 A-D:

The pension scheme rules required there to be member trustees who were current employees of an employer participating in the scheme. The trustees as a body, including those member trustees, have a variety of discretionary powers entrusted to them by the rules. The power to fix the level of members’ contributions is one such power. The logic of the Pensions Ombudsman’s premise would be that if the members’ contribution rate were reduced, the member trustees would have to continue paying contributions at the higher rate. Otherwise they would be benefiting from a conflict of duty and interest and would have to account to the trust for the benefit. Another discretionary power is the power to amend the rules. The rules expressly contemplate that an amendment may materially affect “any benefit . . . of . . . members” (see rule 205.2), i.e. may increase, reduce, add to or remove any such benefit. This is a discretion which member trustees, as part of a body of managing trustees, may from time to time have to exercise. The notion that, when the discretionary power of amendment is exercised so as to increase an existing benefit or add a new benefit, the member trustees must be excluded from benefit is, in my opinion, quite simply ridiculous. The rules could not be taken to have intended so absurd a result. So why should equity intervene? Rules of equity were devised in order to produce fair and sensible results.

The ombudsman has appealed to this court. By his notice of appeal he contends, first, that the Vice-Chancellor was wrong in law to hold that the statutory jurisdiction of the ombudsman under section 146(1) of the Pension Schemes Act 1993 was limited to the determination of disputes involving the rights of the complainant as against the trustees or managers of the scheme and that the ombudsman had no power to determine disputes which involved the rights of others or to direct steps to be taken which could adversely affect those rights. Second, he contends that the Vice-Chancellor was wrong to hold that, in the exercise of their discretionary power to amend the rules, the trustees were not subject to a duty to act impartially as between individual or classes of beneficiaries; and was wrong to hold that the trustees were themselves the judges of whether their exercise of the power was fair as between included and excluded beneficiaries. Third, he contends that the Vice-Chancellor was wrong to hold that the facts found by the ombudsman did not justify the conclusion that the trustees’ decision to amend the rules was made in breach of trust.

The notice of appeal, as served, included the further contention that the Vice-Chancellor was wrong to reverse the ombudsman’s conclusion that the trustees who were also members of the scheme were accountable for any benefits accruing to them as a result of the amendments - even if the amendments were otherwise valid. That contention was abandoned before us. The point has been laid to rest, for the future, by the enactment of section 39 of the Pensions Act 1995. It is unnecessary to say more about it; save to indicate that we have no doubt that the Vice-Chancellor was correct, for the reasons which he gave, to dismiss the contention.

We turn, therefore, to the issues which fall for decision on this appeal. It is convenient to consider whether the ombudsman was correct to hold that the trustees had acted in breach of duty before addressing the more general question whether the directions which he gave were within his powers.

In examining the contention that, in exercising their power to amend the rules, the trustees were subject to a duty to act impartially as between individual or classes of beneficiaries - in the sense relied upon by the ombudsman - it is important to have in mind the circumstances in which the need for amendments arose and the nature of those amendments. A convenient starting point is rule 3:

The main purpose of the Scheme is the provision of retirement and other benefits for employees of Training Boards and Successor Bodies who are Members of the Scheme.

The Trust Fund is to be constituted and maintained by means of periodical and other contributions to be made by the Members and by the Employers in accordance with the Rules.

At the risk of stating the obvious, that “main purpose” rule embodies three concepts which are fundamental to a pension scheme of this nature. First, the purpose of the scheme is to provide the retirement and other benefits to which the members, pensioners and dependants are entitled under the rules. The scheme is a “defined benefits” scheme: the benefits are fixed by the rules. The scheme is not set up as a unit trust; under which the members would be entitled to a proportionate share in the fund. Second, the fund out of which the benefits are to be provided is constituted and maintained by means of periodic payments. The amount of those payments will depend not only on the rate of contributions but also on the number of members in service from time to time who are contributors and on the number of employers who continue to participate. In that sense the fund is dynamic. Although it will be possible, at any given time, to measure the value of the assets then held in the fund, and to measure the liabilities which then have to be met out of those assets (on the basis of termination), that is not a particularly useful exercise unless termination is seen to be imminent. What is required is an actuarial valuation of the assets, present and future, taking into account the contributions which are to be made by employers and members over the remaining life of the fund; and an actuarial valuation of the liabilities which will have to be met as employees in service retire and become pensioners (or die and leave dependants). Third, the task of the trustees is to maintain a balance between assets and liabilities valued on that actuarial basis; so that, so far as the future can be foreseen, they will be in a position to provide pensions and other benefits in accordance with the rules throughout the life of the scheme. That task is to be performed by setting appropriate levels for employers’ and members’ contributions. If that task could be performed with perfect foresight there would be no surpluses and no deficits. But, because the task has to be performed in the real world, surpluses and deficits are bound to arise from time to time and prudent trustees will aim to ensure that the likelihood of surplus outweighs the risk of deficit. Nevertheless, it is no part of the trustees’ function, in a fund of this nature, to set levels for contributions which will generate surpluses beyond those properly required as a reserve against contingencies.

The principal tool by which the trustees are enabled to perform the task of maintaining a balance between assets and liabilities valued on an actuarial basis is the “balance of cost” provision in rule 10.1:

Each of the Employers shall contribute to the Trust Fund within seven days of the end of each monthly or other accounting period after the Operative Date and whilst it remains one of the Employers such sum as the Actuary shall certify to be the amount which is required , in addition to all other contributions of the Employer and the Members in the employment of the Employer, by way of “Employer’s Ordinary Contribution” for such month or other period in order to make due provision for the benefits secured by the Scheme in respect of such Members. [emphasis added]

That provision must be read in conjunction with rule 227.2(c) - which imposes on the appointed actuary a duty to make periodic valuations of the scheme - and rule 203, which is in these terms:

If any periodic valuation by the Actuary shall disclose any surplus, deficiency or anticipated deficiency in the Trust Fund, the Managing Trustees shall . . . with the purpose of maintaining the amount in the Trust Fund in reasonable balance with the liabilities under the Scheme, request the Actuary to make certification under Rule 10 regarding the rate of the Employer’s Ordinary Contributions to be payable to the Trust Fund. [emphasis added]

Rule 227.2(b) imposes on the actuary the duty to determine the contributions to be made to the fund; and rule 227.2(a) imposes on him the duty to make such determinations, furnish such certificates and give such advice as are required by the rules.

As the Vice-Chancellor pointed out, in the passages to which we have already referred (at pages 522E-F and 523B-C), the ability to maintain the fund in balance through the machinery provided by rule 10.1 is limited by the requirement, in rules 506.4 and 602.4, that the employers’ contributions shall always be greater than or equal to those of the members. But this presents no insuperable difficulty. The rules give the trustees a second tool by which they can maintain the fund in balance. Rules 506.1 and 602.1, require that each member shall, in each contribution year:

. . . pay Members’ contributions to the Trust Fund at the rate from time to time prescribed by the Managing Trustees and in accordance with this Rule. [emphasis added]

If no rate is prescribed under those rules the rate of members’ contributions is six per cent of pensionable salary; or (under rule 602.1) five per cent in the case of a female member who was in service on 31 March 1983. Rules 506.4 and 602.4, which are in the same terms, require:

(a) the Managing Trustees shall prescribe the contribution rate or rates for each Contribution Year prior to the commencement thereof ; and

(b) the Managing Trustees shall in so prescribing act under the advice of the Actuary who shall in the absence of special circumstances preserve such a ratio between the contributions to be made by the Members and those to be made by the Employers as will ensure that the Employers’ contributions will at all times be equal or greater than the contributions to be made by the Members. [emphasis added]

This second tool is less flexible than the first; because the power to prescribe can only be exercised in advance of the contribution year. But, if the power to prescribe members’ contributions is exercised so as to reduce the rate of contributions below the rate applicable in default, there is additional scope for the actuary in certifying the rate of employers’ contributions.

On a true analysis, the trustees did not make use of what we have described as the second tool in the present case. They accepted the actuary’s advice that the contribution change should take effect from 1 October 1993. That was a date within the then current contribution year; so that change could not be effected by the “prescribed rate” machinery provided by rules 506 and 602. The change could be effected only by an alteration of the rules. That may be described as the third tool available to the trustees.

Rule 205.1 conferred power on the trustees to alter the rules after notification to the employers; but subject to certain restrictions. Three of those restrictions are set out in the proviso to rule 205.1:

PROVIDED ALWAYS that no such alteration, modification or addition shall be made as will

(a) vary the main purpose of the Scheme as declared in Rule 3; or

(b) result in the payment of any part of the Trust Fund to any of the Employers otherwise than upon a dissolution of the Scheme (as regards such Employer or generally); or

(c) result in the withdrawal of approval of the Scheme by the Commissioners of Inland Revenue, by the Occupational Pensions Board or by the Registrar of Non-Participating Employments.

None of those restrictions is in point in the present case. In particular, the rule change did not result in the payment of any part of the fund to the employers. What it did was to facilitate a reduction in the employers’ rate of contribution - which is quite a different matter.

The actuary’s report, delivered in April 1993, imposed on the trustees (i) a duty to consider what rate they should prescribe in respect of members’ contributions for the next contribution year, commencing 1 April 1994, under rules 506.4 and 602.4, and (ii) a duty to request the actuary to certify the rate at which contributions should be paid by employers under rule 10.1. The performance of those duties in circumstances in which there was no related change in benefits would have given little or no scope for the exercise of discretion. In deciding what rate they should prescribe in respect of members’ contributions for the next contribution year, the trustees would have been obliged - under the express terms of rules 506.4 and 602.4 - to act on the advice of the actuary. Rule 203 required them to request the actuary to certify the rate payable by employers under rule 10.1; and rule 10.1 itself required the employers to pay the rate certified by the actuary. That would have remained the position, in substance, notwithstanding that the trustees decided to make use of the third tool available to them (alteration of the default rate under rules 506.1 and 602.1) rather than the second tool (prescription of a new rate under rules 506.4 and 602.4) to maintain the fund in balance.

There was no obligation to make any change to the benefits payable under the rules. But the actuary’s report provided an opportunity for the trustees to consider whether the benefits payable under the scheme should be increased. That was an opportunity which they were obliged to take. They could not ignore the recommendation in paragraph 8.1 of the actuary’s report. They were obliged to consider whether to increase benefits; but, after consideration, they could have decided not to do so. They could have decided to maintain the fund in balance - on the basis of unchanged benefits - by appropriate adjustments to the contribution rates, using the tools which we have described. If they had reached that decision, after proper consideration of the alternatives, they could not have been criticised. The beneficiaries had no right to insist on an increase in benefits - see the observations of Mr Justice Knox in LRT Pension Fund Trustee Co Ltd v Hatt [1993] OPLR 225, at page 265D-H. Their right was to have the matter properly considered.

The right to have the matter properly considered gives rise to the requirement that, if there is an actuarial surplus after providing for the estimated liabilities, the trustees must, in deciding whether or not to increase benefits (and, if so, which benefits), act in a way which appears to them fair and equitable in all the circumstances; and so leads to a reasonable expectation amongst beneficiaries that that is what will be done - see the observations of Sir Donald Nicholls, Vice-Chancellor, in Thrells Limited v Lomas [1993] 1 WLR 456, at page 468H-469B.

The obligation to consider, properly, the question whether to increase benefits (and, if so, which benefits) will usually require the trustees to consider (amongst other matters) the circumstances in which the surplus has arisen. In deciding what is fair and equitable in all the circumstances, the trustees may be expected to give weight to the claims of those whose contributions are, or will be, the effective source of the surplus. For example, in a pure “balance of costs” scheme, trustees may properly take the view that an actuarial surplus which has arisen through past overfunding ought to be reduced by allowing the employers a future “contributions holiday” - see the observations of Mr Justice Millett, in a different context, in In re Courage Group’s Pension Schemes [1987] 1 WLR 495, at page 515. In a case where the actuarial surplus arises from prospective overfunding by excessive contributions from members in the future, the trustees may properly decide that the fair and equitable course is to reduce those contributions; or to increase the benefits of those who will be making those future contributions. If, on the other hand, the surplus has arisen through overfunding which is plainly attributable to members’ past contributions the members who have made those contributions will have a strong claim to an increase in benefits. The circumstances in which is possible to say, with any degree of confidence, that the surplus is plainly attributable to members’ past contributions may be rare in practice - but those circumstances could arise, for example, where the employer has not been called on to contribute at all over the period during which the surplus has accrued.

The need to consider the circumstances in which the surplus has arisen does not lead to the conclusion that the trustees are bound to take any particular course as a result of that consideration. They are not constrained by any rule of law either to increase benefits or to reduce contributions or to adopt any particular combination of those options. Nor does the need to consider the circumstances in which the surplus has arisen lead to the conclusion that the trustees are not required to take - or are prohibited from taking - any other matters into account in deciding what course to adopt. They must, for example, always have in mind the main purpose of the scheme - to provide retirement and other benefits for employees of the participating employers. They must consider the effect that any course which they are minded to take will have on the financial ability of the employers to make the contributions which that course will entail. They must be careful not to impose burdens which imperil the continuity and proper development of the employers’ business or the employment of the members who work in that business. The main purpose of the scheme is not served by putting an employer out of business. They must also consider the level of benefits under their scheme relative to the benefits under comparable schemes; or in the pensions market generally. They should ask themselves whether the scheme is attractive to the members whose willingness to continue paying contributions is essential to its future funding. Are the benefits seen by the members to be good value in relation to the contributions; would the members find it more attractive to pay higher contributions for higher benefits; or to pay lower contributions and accept lower benefits? The main purpose of the scheme is not served by setting contributions and benefits at levels which deter employees from joining; or which causes resentment. And they must ask themselves whether the benefits enjoyed by members in pension have kept up with increases in the cost of living; so that the expectations of those members during their service - that they were making adequate provision for their retirement through contributions to an occupational pensions scheme - are not defeated by inflation.

The matters to which we have referred are not to be taken as an exhaustive or a prescriptive list. It is likely that, in most circumstances, pensions trustees who fail to take those matters into account will be open to criticism. But there may well be other matters which are of equal or greater importance in the particular circumstances with which trustees are faced. The essential requirement is that the trustees address themselves to the question what is fair and equitable in all the circumstances. The weight to be given to one factor as against another is for them.

Properly understood, the so-called duty to act impartially - on which the ombudsman placed such reliance - is no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant. If pension fund trustees do that, they cannot be criticised if they reach a decision which appears to prefer the claims of one interest - whether that of employers, current employees or pensioners - over others. The preference will be the result of a proper exercise of the discretionary power.

It is, perhaps, unnecessary to add further citation of authority in support of the principles which the Vice-Chancellor set out - in particular, to the clear statement in the judgment of Lord Justice Salmon in In re Londonderry’s Settlement [1965] Ch 918, at page 936. But, in the light of the ombudsman’s contention, set out in his notice of appeal, that the Vice-Chancellor was wrong to apply principles derived from decisions on the exercise of dispositive powers under private discretionary trusts to the different functions which pension trustees are required to perform, we think it right to refer, first, to the decision of this court in Harris v Lord Shuttleworth [1995] OPLR 79 - a pension fund case - where Lord Justice Glidewell (with whom the other two members of the court agreed) said this at pages 86H-87A:

. . . the judge referred to a series of authorities, and adopted in particular the principles laid down in the decision of this Court in Lee v Showmen’s Guild of Great Britain [1952] 2 QB 329. These principles he expressed as follows:

(a) The trustees must ask themselves the correct questions.

(b) They must direct themselves correctly in law; in particular they must adopt a correct construction of the pension fund rules.

(c) They must not arrive at a perverse decision, i.e. a decision to which no reasonable body of trustees could arrive, and they must take into account all relevant but no irrelevant factors.

The judge held that if the trustees arrived at their decision acting within those limits, their decision could not be overturned by the courts. This part of his judgment is not challenged in either the appeal or the cross-appeal. In my view the judges’decision on the limits of his task and thus of his jurisdiction was entirely correct.

Some two and a half years later, in Wild v Smith [1996] OPLR 129, at page 135, Mr Justice Carnwath adopted the judge’s formulation in Harris v Lord Shuttleworth and observed that, to a public lawyer, those words were virtually identical to the so called Wednesbury principles. The same observation might be made of the Vice-Chancellor’s formulation in the present case (at pages 534C-D and 535F-G). It seems to us no coincidence that courts, considering the exercise of discretionary powers by those to whom such powers have been entrusted (albeit in different contexts), should reach similar and consistent conclusions; and should express those conclusions in much the same language. It is, perhaps, worth calling to mind the seminal passages in the judgment of Lord Greene, Master of the Rolls, in Associated Provincial Picture Houses v Wednesbury Corporation [1948] 1 KB 223. He was, of course, speaking of an executive discretion entrusted by Parliament to a local authority. He said this, at pages 228 to 231:

When discretion of this kind is granted the law recognizes certain principles upon which that discretion must be exercised, but within the four corners of those principles the discretion, in my opinion, is an absolute one and cannot be questioned in any court of law. What then are those principles? They are well understood. They are principles which the court looks to in considering any question of discretion of this kind. The exercise of such a discretion must be a real exercise of the discretion. If, in the statute conferring the discretion, there is to be found expressly or by implication matters which the authority exercising the discretion ought to have regard to, then in exercising the discretion it must have regard to those matters. Conversely, if the nature of the subject-matter and the general interpretation of the Act make it clear that certain matters would not be germane to the matter in question, the authority must disregard those irrelevant collateral matters . . . I am not sure myself whether the permissible grounds of attack may not be defined under a single head. It has been perhaps a little bit confusing to find a series of grounds set out. Bad faith, dishonesty - those of course, stand by themselves - unreasonableness, attention given to extraneous circumstances, disregard of public policy and things like that have all been referred to, according to the facts of individual cases, as being matters which are relevant to the question. If they cannot all be confined under one head, they at any rate, I think, overlap to a very great extent. For instance, we have heard in this case a great deal about the meaning of the word “unreasonable”.

It is true the discretion must be exercised reasonably. Now what does that mean? Lawyers familiar with the phraseology commonly used in relation to the exercise of statutory discretions often use the word “unreasonable” in a rather comprehensive sense. It has frequently been used and is frequently used as a general description of the things that must not be done. For instance, a person entrusted with a discretion must, so to speak, direct himself properly in law. He must call his own attention to the matters which he is bound to consider. He must exclude from his consideration matters which are irrelevant to what he has to consider. If he does not obey those rules he may truly be said, and often is said, to be acting “unreasonably”. Similarly, there may be something so absurd that no sensible person could ever dream that it lay within the powers of the authority. Warrington LJ in Short v Poole Corporation [1926] Ch 66, 90, 91, gave the example of the red-haired teacher, dismissed because she had red hair. That is unreasonable in one sense. In another sense it is taking into account extraneous matters. It is so unreasonable that it might almost be described as being done in bad faith; and, in fact, all these things run into one another.

. . .

Here Mr Gallop [counsel for the appellant] did not, I think, suggest that the council were directing their mind to a purely extraneous and irrelevant matter, but he based his argument on the word “unreasonable”, which he treated as an independent ground for attacking the decision of the authority; but once it is conceded, as it must be conceded in this case, that the particular subject-matter dealt with by this condition was one which it was competent for the authority to consider, there, in my opinion, is an end of the case. Once that is granted, Mr Gallop is bound to say that the decision of the authority is wrong because it is unreasonable, and in saying that he is really saying that the ultimate arbiter of what is and is not reasonable is the court and not the local authority. It is just there, as it seems to me, that the argument breaks down. It is clear that the local authority are entrusted by Parliament with the decision on a matter which the knowledge and experience of that authority can best be trusted to deal with. The subject-matter with which the condition deals is one relevant for its consideration. They have considered it and come to a decision upon it. It is true to say that, if a decision on a competent matter is so unreasonable that no reasonable authority could ever have come to it, then the court can interfere. That, I think, is quite right; but to prove a case of that kind would require something overwhelming, and, in this case, the facts do not come anywhere near anything of that kind. I think Mr Gallop in the end agreed that his proposition that the decision of the local authority can be upset if it is proved to be unreasonable, really meant that it must be proved to be unreasonable in the sense that the court considers it to be a decision that no reasonable body could have come to. It is not what the court considers reasonable, a different thing altogether. . . . The effect of the legislation is not to set up the court as an arbiter of the correctness of one view over another. It is the local authority that are set in that position and, provided they act, as they have acted, within the four corners of their jurisdiction, this court, in my opinion, cannot interfere.

It is unnecessary to consider, in the present case, how far an analogy between the principles applicable in public law cases can or should be pressed in the different context of a private pension scheme. But it is not without significance that the trustees in the present case - and, we suspect, in many cases of this type - are chosen for very much the same reason as that identified by Lord Greene, Master of the Rolls, in the passage just set out:

It is clear that the local authority are entrusted by Parliament with the decision on a matter which the knowledge and experience of that authority can best be trusted to deal with.

Under the present scheme, the “managing trustees” - in whom the power to alter the rules resides - are the trustees for the time being in office other that the custodian trustee (if any). They are appointed under the provisions contained in rule 210. Rules 210.2 and 210.3 provide for the appointment of equal numbers of individuals as “Board’s Trustees” and “Members’ Trustees” nominated respectively by each of the participating employers and from the members in the employment of each such employer. Two further individuals may be appointed as “Closed Fund Trustees”. At the relevant time there were twenty trustees (whose names and designations are set out in the second schedule to the deed of amendment of 17 August 1993): nine appointed by the employers, nine appointed from the employees, and two from those interested in the closed fund. It is clear that the trustees are entrusted with the powers which they have under the scheme for just the reason that they are likely to be persons with the knowledge and experience relevant to the questions with which (with the benefit of advice from the actuary) they will, from time to time, be faced. They are likely to be in a much better position to identify and weigh the relevant factors than the court (or the ombudsman) can ever hope to be.

For these reasons we reject the appellant’s criticisms of the Vice-Chancellor’s analysis of the nature of the duties which the law imposed upon trustees in relation to the exercise of their power to alter the rules by the deed of 17 August 1993 and of the limits within which the trustees’ decision to exercise that power in the way that they did could properly be reviewed by the ombudsman. The Vice-Chancellor was correct to hold that the ombudsman had approached his task on the wrong basis.

The trustees’ decision

In the present case it is plain that the trustees did give consideration to the question whether the benefits payable under the scheme should be increased. They decided that they should be; but only in respect of those members who would continue to make contributions. It will be clear from what we have already said that there is no reason in principle why pension trustees should not reach a decision of that nature. It is quite impossible to contend that the decision, itself, demonstrates that the trustees must have allowed their conflicts of interest to overwhelm “their duty to be impartial”. The decision cannot be challenged on the ground of manifest irrationality.

The conclusion reached by the ombudsman, at paragraph 54 of his determination - that:

The trustees breached their duty of impartiality, they did not act in the best interests of all the beneficiaries, and they exercised their power for an improper purpose.

is, as the Vice-Chancellor pointed out, at page 537H:

. . . a consequence of his attempt to put himself in the position of the trustees and himself to decide what was fair.

For that reason the conclusion cannot be supported by any reliance on the approach adopted by the ombudsman in his determination. But the ombudsman seeks, nevertheless, to uphold the conclusion in paragraph 54 on the basis that, having regard to the reasons which the trustees themselves gave for the exercise of their discretion and his own findings of fact, the trustees had failed to discharge the burden - which, it is said, fell on them - of showing that they had exercised the power upon correct principles.

The foundation of this new approach is that the conflict of interest in which the trustees found themselves imposed upon them the burden of showing that the decision which they reached was fair. The conflict is said to arise from the fact that the body of trustees comprised Board’s Trustees and Members’ Trustees (as explained above) and trustees appointed to represent the interest of the Closed Fund; but no trustees from the class - pensioners and those who would leave service before 1 April 1994 - who were, as a result of the decision effected by the deed of amendment, excluded from the increase in benefits arising from the award of additional years of pensionable service to those who remained in service after 1 April 1994.

The ombudsman relies on observations of Mr Justice Knox in Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862. In that case there had been a transfer of the whole of the assets and liabilities of one scheme (the FMC scheme) to another pension scheme (the HF scheme) in circumstances in which, following the transfer (but pursuant to an agreement negotiated between H plc and the FMC trustees before the transfer), the surplus was paid to H plc. The payment of the surplus to H plc was permissible under the HF scheme (following a rule change); but could not have been made while the assets remained in the FMC scheme. The submission to which the judge was addressing his remarks appears at pages 894g-895a:

The second additional argument advanced by Mr Nugee [counsel for the ombudsman] for attacking the validity of the transfer agreement of 17 November 1989 was that it was liable to be set aside as having been in breach of the self-dealing rule. That rule was shortly stated by Megarry J in Tito v Waddell (No 2) [1977] 3 All ER 129 at 241 . . . as follows:

‘The self-dealing rule is (to put it very shortly) that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitiae, however fair the transaction’

In the present case there are two persons, Mr Solomon and Mr Legg, who had a foot in three camps in that they were directors of Hillsdown (Mr Solomon was chairman), they were directors of the FMC trustee having previously been individual FMC trustees, and they were directors of the HF trustee. It is primarily in relation to the dual capacity regarding Hillsdown and the FMC trustee, between which bodies the critical bargaining took place, that the point is made. There is no doubt that Mr Legg in particular played an active part on behalf of the FMC trustee because he conducted the correspondence for them. Mr Nugee’s submission was to the effect that the self-dealing rule applied so as to render a transaction voidable, no matter how fair and proper it was, if in the negotiations leading up to the transaction there was at least one person who was either a trustee or a director on both sides with a conflict of duties.

Mr Justice Knox rejected that argument, but went on to make the observations on which the ombudsman now seeks to rely. He said this, at page 895c-d:

. . . I am not satisfied that the self-dealing rule is as hard and fast as to require a negotiation between pension fund trustees and the employer to be set aside automatically and without investigation if one or more of the trustees are directors of the employer. I accept that, unless there is an express provision in the relevant trust deed permitting a trustee to act in negotiations with the employer under the scheme notwithstanding that the trustee is a director or employee of the company, the fact that negotiations have been conducted by persons one of whom had a conflict of duties puts upon those who say the transaction in question should be upheld the onus of proving that it was indeed reasonable and proper . That of course involves an investigation of the facts. [emphasis added]

We have set out the context at some length in order to show that Mr Justice Knox was not addressing his observations to circumstances such as those in the present case. In the present case the rules specify the composition of the trustees. The Board’s Trustees must be past or present Members of a Board - that is to say, holding (or having held) an office equivalent to that of director. The Members’ Trustees must be appointed from amongst members in service. There is no provision in the rules for the appointment of trustees from amongst the pensioners. Yet it must have been obvious, at the time when the scheme was established, that the trustees would need, from time to time, to take decisions which required them to arrive at a balance between the interests of the employers (as contributors), the members in service (as contributors and as potential beneficiaries) and the pensioners. It is inevitable that such decisions will be perceived by some to favour one interest at the expense of another. But it could not have been intended that, if and when the validity of any particular decision reached by the trustees as a body was under challenge, the question “on whom does the onus of proving that the decision was reached on a proper basis fall” would depend on whether the decision was said to favour the employers, the members in service or the pensioners. To take an obvious example: the same decision to increase all benefits might be challenged by a pensioner on the grounds that the increase was insufficient and by a member in service on the grounds that it was over-generous (with a consequential effect on the level of members’ contributions). Is it to be said that, in the first case, the onus of showing the decision to be proper falls on the trustees; but, in the second case on the member? Or that, in both cases, the onus falls on the trustees? And, if the latter, why not in all cases? The only sensible conclusion in a case like the present is to accept that the scheme was established on the basis that the elaborate provisions regulating the composition of the trustees as a body were intended to provide a body of trustees which could be relied upon to consider all interests fairly and properly; and that those who seek to challenge a decision of that body should bear the ordinary burden of establishing that the decision has been reached improperly. That is not, of course, to say that the court, or the ombudsman, cannot draw appropriate inferences from any failure of the trustees to give an explanation when an explanation is called for; nor that the court, or the ombudsman, should not examine critically any explanation that is given. It is, however, to reject the submission that, in the present case, it was for the trustees to justify to the ombudsman the decision which they took.

Nevertheless, there is no doubt that the trustees’ decision can be set aside if it can be shown that they failed to consider matters which were relevant, or took into account matters which were irrelevant.

We agree with the Vice-Chancellor that the matters which the trustees said that they took into account were matters which it was proper for them to take into account. The problem with which they were faced was that, on the basis of actuarial projections, the scheme would be overfunded to such an extent that there was a real risk that it would lose tax exemption on part of the fund. Employers’ contributions had to be reduced; but that, of itself, would not meet the problem. Members’ contributions had to be reduced as well - thereby providing scope for a further reduction in employers’ contributions. The question was whether members’ and employers’ contributions should be reduced to such an extent that the whole of the actuarial surplus would be eliminated; or whether some part of the surplus should be absorbed by an increase in benefits - and, if so, which benefits. The position was quite different from that in Cowan v Scargill [1985] Ch 270, on which the ombudsman relied, where the question was whether the trustees of a fully funded scheme should pursue a particular investment policy. In the present case the continued viability of the scheme depended on the continued participation of employers and members in service. In deciding whether some part of the actuarial surplus should be absorbed by an increase in benefits - rather than reduced by a further reduction in contributions - it was necessary to take into account the burden which the obligation to contribute imposed on the employers at a time of recession. Further, in deciding whether the increase in benefits should be restricted to those in service, it was necessary to consider whether the pensioners were adequately provided for or had fallen behind as a result of inflation. The fact that benefits had been increased in the past and were index-linked was relevant in that context.

We have already set out three restrictions on the exercise of the power to amend the rules conferred by rule 205.1. There is a fourth restriction, in rule 205.2:

The consent of three-quarters in number of the Employers . . . shall be obtained where in the opinion of the Managing Trustees (whose decision shall be final) any benefit liability power or advantage of Employers, Members or Beneficiaries are likely to be materially affected.

It is plain that that restriction applied in the present case. The consent of the employers had to be obtained. The ombudsman criticised the trustees for making only such recommendations as they felt to be fair to everyone involved in the funds. His criticism suggests that, for the trustees to escape censure, they should have put forward proposals that they did not think were fair to the employers. We find that an astonishing proposition. It is said to be founded on observations of Mr Justice Millett in In re Courage Group’s Pension Schemes [1987] 1 WLR 495. We suspect that he, too, would be astonished to learn that any observation of his could be construed in that way. It needs to be kept in mind that, in In re Courage , Mr Justice Millett was considering a case in which the surplus arose (or would arise) in a scheme which was already fully funded - see his description of the existing scheme, at page 499D, and of the proposals, at page 500E. There was an existing contributions holiday for both employer and members. The question, which in the event the judge did not have to decide, was how an existing and actual surplus should be dealt with. The choice was between doing nothing - so leaving the surplus “in balk” as it is often described - repaying the whole or part of the surplus to the employer (which required a rule change) or absorbing the surplus in increased benefits. It was in that context that Mr Justice Millett said this, at page 515E-H:

Repayment will, however, still normally require amendment to the scheme, and thus co-operation between the employer and the trustees or committee of management. Where the employer seeks repayment, the trustees or committee can be expected to press for generous treatment of employees and pensioners, and the employer to be influenced by the desire to maintain good industrial relations with its workforce.

It is, therefore, precisely in relation to a surplus that the relationship between “the company” as the employer and the members as its present or past employees can be seen to be an essential feature of a pension scheme. In the present case, the members of the scheme object to being compulsorily transferred to a new scheme of which they know nothing except that it has a relatively small surplus. While they have no legal right to participate in the surpluses in the existing schemes, they are entitled to have them dealt with by consultation and negotiation between their employers with a continuing responsibility towards them and the committee of management with a discretion to exercise on their behalf, and not to be irrevocably parted from those surpluses by the unilateral decision of a take-over raider with only a transitory interest in the share capital of the companies which employ them.

Set in its proper context, Mr Justice Millett’s observation that “the trustees . . . can be expected to press for generous treatment of employees and pensioners” comes nowhere near to support for a criticism that, in making only such recommendations as they felt to be fair to everyone involved in the fund, the trustees “created a situation in which their conflicts of interests overwhelmed their duty to be impartial and represent the interests of all classes of beneficiaries”. It must be recognised that, in the present case, the employers were not seeking repayment. In the absence of any rule change the employers could have required the trustees to make an immediate reduction in the employers’ contribution to six per cent of pensionable salaries - under rule 10.1 and the certificate which the trustees would have been obliged to request and the actuary to furnish - followed by a further reduction to five per cent or below with effect from 1 April 1994 - under rules 506.4 and 602.4 and in accordance with the actuary’s advice which the trustees would have been obliged to follow. The only advantage to the employers, consequent upon the rule change, was an acceleration by six months - from 1 April 1994 to 1 October 1993 - of the reduction in the rate of subscriptions from six per cent to five per cent. The suggestion that the trustees were in a position to bargain with the employers which was in any way comparable to that of the committee of management in In re Courage is unreal. The trustees were almost wholly dependent on the goodwill of the employers to obtain any increase in benefits at all. To make only such recommendations as they felt to be fair to everyone involved in the fund was the only sensible and proper course which the trustees could adopt in the circumstances.

The ombudsman found as a fact that the main reason for choosing 1 April 1994 as the date from which those in service would qualify for the additional years of pensionable service was the desire to concentrate benefit increases on those who offered most future service to the employers and to avoid increasing the employers’ liability to make additional contributions under rule 518 in respect of those members who were made redundant in the period up to April 1994 - paragraph 50 of the determination. If the trustees weighed the factors which they were required to take into account and came to the conclusion that that was indeed the determinative consideration, we do not see how they can be criticised. In the circumstances with which they were faced, that seems a sensible and rational conclusion; one which the trustees were fully entitled to reach. As we have said, the true position was that the trustees were in no real position to bargain with the employers. Their concern was to reduce the surplus and avoid the loss of the tax exemption. The means by which that objective was to be achieved, provided by the rules by which they and the employers were bound, was by a reduction in the rate of contributions. Any increase in benefits which they could achieve for the members was a bonus. The employers were in a position, in effect, to dictate which class or classes of members should benefit from that bonus. We do not find it in the least surprising, in those circumstances, that the trustees should take the view that they should put forward a proposal 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.

For the reasons set out we are satisfied that the trustees were entitled to take into account not only the matters which they said they had taken into account but also the matters which the ombudsman, himself, held that they had taken into account. Can it be said that they left out of account matters which they ought to have taken into account? In that context it is significant that the ombudsman made no finding on the first complaint identified in the Summary of Complaint which his office had prepared in late 1994 - namely, the complaint that the surplus generated by the contributions of members in service before 31 March 1992 was to be distributed to some employees who (having commenced employment since that date) had not contributed to that surplus; while others, who had contributed, would receive no benefit from it. He did not make findings of fact either (i) that, as at 31 March 1992, there was some part of an existing surplus which could properly be attributed to the past contributions of pensioners or of employees who would leave service before 1 April 1994, or (ii) that, if so, the trustees had failed to take that into account in reaching their decision. In our view, having regard to the extensive consultation which clearly did take place between the trustees and the actuary, it is likely that matters of that kind were considered. But, for the purposes of this appeal, we are left in the position that there is no finding of fact that they were not; and so no basis on which the ombudsman’s determination could be supported on the ground that the trustees left out of account matters which they ought to have taken into account.

In the circumstances that the trustees have not been shown to have misdirected themselves - nor to have reached a decision which is irrational - there were no grounds upon which the ombudsman could properly have found that they had acted in breach of trust. We agree with the Vice-Chancellor that the ombudsman’s determination cannot stand.

If we are correct in the view that the ombudsman’s determination that the trustees acted in breach of trust cannot stand, it could be said that it is unnecessary to consider the other issue raised by this appeal: whether the Vice-Chancellor was correct to hold that, although section 146(1) of the Pension Schemes Act 1993 conferred on the ombudsman power to investigate and determine “any complaint”, Parliament could not have intended the ombudsman to entertain complaints which could only be remedied by steps which adversely affected those who were not bound by his determination or to determine disputes in circumstances in which his determination could not be effective. But the point has been fully argued and is of obvious importance. Indeed, the ombudsman asserts, in his notice of appeal, that, if the Vice-Chancellor’s decision on this issue stands, the manner in which the statutory jurisdiction has been exercised by the ombudsman in a very large number of cases in the past has been excessive and that the jurisdiction will be substantially limited in the future. In those circumstances we think it appropriate to address the issue.

The Pensions Ombudsman is appointed by the Secretary of State for the purpose of conducting investigations in accordance with Part X of the Pension Schemes Act 1993 - section 145 of that Act, replacing the provisions formerly introduced into the Social Security Pensions Act 1975 by section 12 of and schedule 3 to the Social Security Act 1990. Sections 146 to 151 of the 1993 Act, as enacted, were replaced on the coming into force of section 157 in part IV of the Pensions Act 1995; but it is common ground that the relevant provisions in the present case were those enacted in 1993. Section 146 of the 1993 Act, subsections (1) and (2), as enacted, was in these terms:

(1) The Pensions Ombudsman may investigate and determine any complaint made to him in writing by or on behalf an authorised complainant who alleges that he has sustained injustice in consequence of maladministration in connection with any act or omission of the trustees or managers of an occupational pension scheme or personal pension scheme.

(2) The Pensions Ombudsman may also investigate and determine any dispute of fact or law which arises in relation to such a scheme between -

(a) the trustees or managers of the scheme, and

(b) an authorised complainant,

and which is referred to him in writing by or on behalf of the authorised complainant.

Section 151(2) of the 1993 Act provides that, where the ombudsman makes a determination under Part X, he may direct the trustees or managers of the scheme concerned to take, or refrain from taking, such steps as he shall specify. Section 151(3) provides that - subject to section 151(4), which gives a right of appeal to the High Court on a point of law - the determination by the ombudsman of a complaint or dispute shall be final and binding on (a) the authorised complainant in question, (b) the trustees or managers of the scheme concerned, and (c) any person claiming under them respectively. Section 151(5) provides that any determination or direction of the ombudsman shall be enforceable in a county court as if it were a judgment or order of that court.

The problem in cases like the present was identified by the Vice-Chancellor at page 518B-C of his judgment:

The problem with the provisions of Part X of the Act taken as a whole is that they do not cater at all for a case in which a complaint is made against, say, trustees but in which the remedial steps to be taken if the complaint is well founded will prejudice the position of some third party or parties.

The Vice-Chancellor pointed out that, where a complaint could only be remedied by a direction to the trustees to take steps which would affect adversely the interests of persons who were not bound by the determination - or where a determination of some disputed fact or law would not bind all persons interested in that issue - the direction or determination would be ineffective. The point can be illustrated by reference to the determination made and the directions given in the present case. The ombudsman determined that the deed of amendment of 17 August 1993 - by which the benefit increases, reduction in members’ contributions (and consequent reduction in employers’ contributions) were introduced - was invalid. He directed the trustees to administer the scheme on the basis of its rules prior to the amendment. That direction required that the trustees should not pay to members who were in service on 1 April 1994, but who had subsequently retired, the benefit increases to which they would be entitled under the rules as amended. While the direction stood, section 151(5) of the 1993 Act would have enabled Mr Nicholson, as complainant, to seek an injunction from the county court restraining the trustees from paying those benefit increases. But, if a member who was in service on 1 April 1994 and had since retired had brought proceedings against the trustees for unpaid benefits there could have been no answer to his claim. If the claimant were not bound by the determination, the trustees could not have relied, as against him, on the fact that the ombudsman had held the deed of amendment to be invalid. They could hardly have been expected to set up, by way of defence, their own alleged breach of trust; and, if they had sought to do that, that defence would have failed - for the reasons already given. It is, in our view, plain that no court, properly directing itself, could have granted an injunction against the trustees restraining them from paying the benefit increases in those circumstances. The ombudsman’s direction was ineffective because it could not be acted upon by the trustees or enforced against them.

It was this conclusion that led the Vice-Chancellor to the view that Parliament could not have intended the ombudsman to entertain complaints which could only be remedied by steps which would affect adversely those who were not bound by his determination. The ombudsman could not have been intended to entertain complaints in circumstances where no effect could be given to his determination.

The ombudsman takes two points in his notice of appeal. First, it is submitted that Parliament could not have intended “to limit the statutory jurisdiction in this way”. But that submission cannot be sustained. If the true position is that no effect can be given to his determination in a case where that determination is adverse to the rights or interests of persons who are not bound by it, it is impossible to attribute to the legislature, in the absence of plain words, an intention that the ombudsman should expend what are, no doubt, limited resources provided from public funds in pursuing an investigation which may lead to that result. The obvious purpose of the ombudsman’s jurisdiction, as it seems to us, is that it should lead to the effective determination of complaints or disputes in a manner which is relatively quick, informal and inexpensive. That purpose is not served if the result of a determination in favour of the claimant will be that the trustees are unable to act upon the consequential directions to which such a determination will necessarily give rise without becoming involved in disputes with other persons interested in the fund who are not bound by the determination. The true question is whether the premise that Parliament did not intend that persons who were not party to the ombudsman’s investigation should be bound by his determination and so liable to be affected adversely by directions given following that determination is correct. It is convenient to consider that question in conjunction with the second ground of appeal.

The second point taken in the notice of appeal - but not taken before the Vice-Chancellor - is that members in service (whose benefits were enhanced) were persons “claiming under” the trustees for the purposes of section 151(3) of the 1993 Act. It is said (appellant’s skeleton argument, paragraph 13) that:

The members’ rights are enforceable against the trustees, and there is no reason why the non-complainant members should not be bound by a determination in which the trustees have implicitly represented their interests.

The submission overlooks the fact that the members in service were affected by the deed of amendment in two respects: (i) by having their benefits enhanced if they remained in service until 1 April 1994 and (ii) by having their contributions reduced as from 1 October 1993. Whatever force there might be in a contention that a member claiming benefits is “claiming under” the trustees, it is impossible to see how that contention can be advanced in relation to a member’s obligation to pay contributions.

Further, the submission overlooks the position of a non-complainant member who is in the same interest as the complainant in a case where the ombudsman’s determination is against the complainant. In such a case the submission does not lead to the conclusion that the non-complainant is bound by the determination. It cannot be said that the non-complainant is a person “claiming under” the complainant. The expression “any person claiming under” the authorised complainant, in section 151(3) of the 1993 Act, is apt to include the dependants or personal representatives of the complainant; but it cannot be stretched to include persons who claim against the trustees in their own right. And it cannot be said that the trustees have “impliedly represented” the interests of a member who is in the same interest as the complainant whose complaint they were seeking to rebut. If a non-complainant member is not bound by a determination against the complainant - because he is not a person “claiming under” either the complainant or the trustees - we can see no reason in principle why he should be bound if the determination is in favour of the complainant.

The true position is that Part X of the 1993 Act and the regulations made under it do not make any general provision for the representation of class interests. We reach that conclusion from a consideration of the following material:

(1) Section 146(1) and (2) of the 1993 Act empower the ombudsman to investigate and determine “any complaint” or “any dispute of fact or law”. Section 146(6) of the 1993 Act restricts that power. The sub-section is in these terms:

(6) The Pensions Ombudsman shall not investigate or determine a complaint or dispute -

(a) if before the making of the complaint or the reference of the dispute, proceedings have been begun in any court in respect of the matters which would be the subject of the investigation;

. . .

(c) if and to the extent that the complaint or dispute, or any matter arising in connection with the complaint or dispute, is of a description which is excluded from the jurisdiction of the Pensions Ombudsman by regulations under this subsection.

(2) The regulations in force at the time that the ombudsman commenced his investigation in the present case were those in the Personal and Occupational Pension Schemes (Pensions Ombudsman) Regulations 1991 (SI 1991 No 588) - made under section 59C(5) of the Social Security Pensions Act 1975. As the Vice-Chancellor recognised (at page 516F in the report of his judgment) there is nothing in those regulations - nor in the regulations by which they were replaced (SI 1996 No 2475) - which could exclude the complaint made by Mr Nicholson in the present case from investigation by the ombudsman.

(3) Section 146(4) of the 1993 Act empowers the Secretary of State to provide by regulations that Part X of the Act shall apply in relation to:

(4) . . . (a) the employer in relation to any description or category of employment to which an occupational pension scheme relates or has related, or

(b) any prescribed person or body of persons concerned with the financing or administration of, or the provision of benefits under, any occupational or personal pension scheme,

as it applies in relation to the trustees or managers of such a scheme.

Regulation 2(1) of the 1991 Regulations extended the ombudsman’s powers to the investigation and determination of any complaint or dispute involving an authorised complainant and the employer to which the scheme related. The opportunity to extend those powers to the determination of disputes between the complainant and, say, members in service who were financing the provision of benefits through their contributions could have been taken when the 1991 Regulations were made - section 146(4)(b) of the Act - but was not taken. Save in a case where members were “concerned with the financing . . . of, or the provision of benefits under,” a scheme there was no power, under section 146(4), to extend the ombudsman’s powers of investigation and determination to disputes of fact and law between members in different interests.

(4) Section 149 of the 1993 Act (“Procedure on an investigation”) is in these terms:

(1) Where the Pensions Ombudsman proposes to conduct an investigation into a complaint made or dispute referred under [Part X of the Act], he shall give -

(a) the trustees and managers of the scheme concerned, and

(b) any other person against whom allegations are made in the complaint or reference,

an opportunity to comment on any allegations contained in the complaint or reference.

(2) The Secretary of State may make rules with respect to the procedure which is to be adopted in connection with the making of complaints, the reference of disputes, and the investigation of complaints made and disputes referred, under this Part.

(3) The rules may include provision -

(a) requiring any oral hearing held in connection with such an investigation to take place in public, except in such cases as may be specified by the rules; and

(b) as to the persons entitled to appear and be heard on behalf of parties to an investigation . . .

(4) Subject to any provision made by the rules, the procedure for conducting such an investigation shall be such as the Pensions Ombudsman considers appropriate in the circumstances of the case; and he may, in particular, obtain information from such persons and in such manner, and make such inquiries, as he thinks fit.

(5) In that context, the “parties to an investigation” are those identified in section 148(5) of the Act - that is to say, (a) the authorised complainant (b) the trustees or managers of the scheme (c) any person against whom allegations are made in the complaint or reference, and (d) any person claiming under a person falling within paragraphs (a) to (c).

(6) The relevant procedural rules - which came into force on 10 May 1995 - are contained in the Personal and Occupational Pension Schemes (Pensions Ombudsman) (Procedure) Rules 1995 (SI 1995 No 1053). For the purposes of those rules “respondent” means (a) the trustees or managers, or (b) any other person to whom Part X of the Pension Schemes Act 1993 applies (as it applies in relation to such trustees or managers) to whom the complaint or dispute relates. The rules do not, as it seems to us, include within the definition of respondent all of those who come within the description “parties to an investigation” for the purposes of section 149(3)(b).

As we have indicated, that material points to the conclusion that Part X of the 1993 Act and the regulations made under it do not make any general provision for the representation of class interests. But, in our view, there is another conclusion to which that material also points with equal clarity: that those against whom findings may be made at the conclusion of the investigation are to have an opportunity to be heard. We do not find that in the least surprising. It is to be expected that Parliament intended the ombudsman to conduct his investigations in accordance with the ordinary principles of natural justice - see the observations of Mr Justice Carnwath in Duffield v Pensions Ombudsman [1996] Pensions Law Reports 285, at paragraph 41. Further, we can see no difference in principle between the need for an opportunity to be heard before criticisms are made against an individual and the need for a class to have its interests properly represented, and the arguments in support of those interests presented, before findings are made which would have an adverse effect on those interests. This leads us to the further conclusions (i) that, notwithstanding the width of section 146(1) of the 1993 Act, the provisions in Part X as a whole and the subordinate legislation made under that Part indicate that it was not the intention of Parliament or of the Secretary of State (exercising the powers delegated to him) that those whose interests cannot be properly represented on an investigation by the ombudsman should be bound by his determination and (ii) that it cannot have been intended that the ombudsman would undertake investigations where the issues were such that no effective remedy could be given because those whose interests would not be properly represented would not be bound by his determination.

Sub-sections (1) and (2) of section 146 of the 1993 Act draw a distinction between a “complaint of maladministration” and a “dispute of fact or law”. The distinction is recognised in the statutory regulations. In the present case it is clear that the ombudsman approached the matter on the basis that he was investigating a complaint of maladministration by the trustees. He did not approach the matter on the basis that he was investigating a dispute of fact or law which had been referred to him. This may have had some bearing on the procedure which he decided to adopt. He started from the position that the only persons against whom complaints were made by the authorised complainant, Mr Nicholson, were the trustees of the scheme. That defined, in relation to the complaint of maladministration, who were the “parties to the investigation” - rule 148(5) of the 1993 Act.

Mr Nicholson’s complaint raised issues which affected at least four distinct interests: (i) the interests of those members who had left service before 1 October 1993 - who would benefit neither from the reduction in contributions nor from the additional service credit, (ii) the interests of those members (of whom Mr Nicholson himself was one) who left service between 1 October 1993 and 1 April 1994 - they would benefit, in some measure, from the reduction in contributions but not from the additional service credit, (iii) the interests of those members who had remained in service on 1 April 1994 - they would benefit both from the reduction in contributions and from the additional service credit, and (iv) the interests of the employers - who would benefit, indirectly, from the reduction in members’ contributions because that would enable the actuary to certify a corresponding reduction in employers’ contributions under rule 10.1.

It would have been open to the ombudsman - if he had treated the matter which he was to investigate as a dispute as to the validity of the deed of amendment rather than as a complaint of maladministration - to join the employers (as well as the trustees) as respondents for the purposes of the investigation. It is clear that the employers were persons to whom Part X of the 1993 Act applied; and were persons to whom a dispute as to the validity of the deed of amendment related. In fact - perhaps because the ombudsman treated the matter before him as a complaint of maladministration by the trustees and not as a dispute as to fact or law affecting the validity of the deed of amendment - he did not join the employers as respondents; and so gave them no notice of the investigation.

But, even if the ombudsman had joined the employers as respondents for the purposes of the investigation, the interests represented in his investigation would have been incomplete. That is because it would not have been open to him, as it seems to us, to join any of the members (or any representative of any of the classes of members) as respondents. In particular, although the members who had remained in service on 1 April 1994 were plainly persons to whom a dispute as to the validity of the deed of amendment related, they were not persons to whom Part X of the 1993 Act applied - save in the capacity of authorised complainants. The position, therefore, was that neither the 1993 Act nor the regulations or rules made under that Act, provided a framework in which all the interests that would or might be affected by a determination of the issues raised by Mr Nicholson’s complaint (if and in so far as they were bound by anything in that determination) could be heard.

It follows, in our view, that this was an investigation which the ombudsman (properly advised) should not have undertaken. We do not hold that, in the strict sense, there was absence of jurisdiction to entertain the complaint; rather, that the ombudsman, in the exercise of his discretion, should have declined to do so. We adopt the analysis of the position in the judgment of the Vice-Chancellor, at page 519B:

Jurisdiction in relation to courts or tribunals can have two alternative meanings. In its strict sense a reference to the jurisdiction of a court or tribunal is a reference to the type of case that the court or tribunal is capable of entertaining. A reference to the jurisdiction of a court or tribunal is, however, often a reference to the circumstances in which it is proper for a tribunal to entertain a case or to make a particular order. In the strict sense there is, in my opinion, no limit, save such limits as are imposed by regulations made under section 146 of the Act, to the type of complaints of injustice sustained by maladministration or as to the type of disputes of fact or law which arise in relation to a scheme that the Pensions Ombudsman may entertain under section 146(1) and (2). “Any complaint” presumably means what it says. So does “any dispute of fact or law”.

On the other hand it would not, in my opinion, be proper for the Pensions Ombudsman to entertain a complaint or a dispute of fact or law except in circumstances in which those whose proprietary interests would be adversely affected by his determination of the issues had a fair opportunity to make representations in defence of their interests and in which they would be bound by his determination.

For the reasons which we have given this appeal must be dismissed.

When this appeal came on for hearing we were asked to hold that the ombudsman had no standing as an appellant against a decision of the High Court which had set aside his determination. We declined to dismiss the appeal in limine on that ground. It seemed to us that it would be wrong to do so in the circumstances (i) that the ombudsman had been granted leave to appeal by an order made by this court (Lord Justice Peter Gibson and Lord Justice Henry) on 24 April 1998 and (ii) that the ombudsman was directly affected by the order made by the Vice-Chancellor that he should pay the costs of the appeal to the High Court. Nevertheless, this court has, on at least two occasions, expressed misgivings as to the position of the ombudsman as an appellant - see Miller v Stapleton [1996] OPLR 281, at page 287, and Westminster City Council v Haywood [1998] Ch 377, at page 401E. It is, we think, appropriate to address the point.

It is convenient to have in mind the position on an appeal to the High Court. Order 55 rule 4(1) of the Rules of the Supreme Court 1965 required a party exercising his right to appeal under section 151(4) of the 1993 Act to serve the ombudsman with notice. That requirement is preserved in the Civil Procedure Rules 1998. Service of notice has the effect of making the ombudsman a party to that appeal - section 151(1) of the Supreme Court Act 1981. Nevertheless, he has no right to appear and be heard on that appeal - S v Special Educational Needs Tribunal and the City of Westminster [1996] 1 ELR 102 and R v Special Educational Needs Tribunal, ex parte F [1996] ELR 213 - in both of which contrast was made between the persons required to be served with notice under Order 55 rule 4(1) and the narrower class of persons entitled under Order 55 rule 8 to appear and be heard on the appeal - and Miller v Stapleton [1996] 1 OPLR 281, at page 286C. But the High Court may take the view that it will be assisted by his submissions; and, if so, it will allow him to appear - Dolphin Packaging Materials Ltd v Pensions Ombudsman [1995] OPLR 331. If he does appear, he risks the possibility that an order for costs may be made against him if his arguments are unsuccessful - U niversity of Nottingham v Eyett [1999] 1 WLR 594.

An appeal from the High Court to this court requires permission. Where the ombudsman’s arguments have been unsuccessful in the High Court and an order for costs has been made against him, it seems plain enough that he is entitled to apply for permission to appeal. But, now that the principles upon which an adverse order for costs will be made have become settled, it will be rare that the mere fact that there has been an order for costs against him in those circumstances will be sufficient to persuade this court that permission to appeal should be granted. The question whether the ombudsman should be granted permission to appeal against an order of the High Court setting aside his determination should be approached on broader grounds. As counsel for the trustees rightly pointed out, it is surprising to find a tribunal appealing from the decision of the High Court overturning its own determination. It is important that the ombudsman should avoid being seen to be partisan and there is a danger that by appealing on behalf of complainants he may become too closely identified with them. In our view the ombudsman must consider carefully whether there is some proper reason why the performance of the statutory role given to him under Part X of the 1993 Act requires that he should challenge a decision of the High Court given on appeal under section 151(4) of that Act. Unless there is some point of principle in relation to which conflicting decisions of the High Court make it difficult for him to perform his proper functions without further guidance from this court, it is difficult to see why he should not accept and act upon the decisions of that court - to which Parliament has entrusted the task of hearing appeals from his determinations.

Order: Application dismissed with costs.