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There have been many messages about "who owns the surplus", "can our Members of the European Parliament help us", and similar legal matters. The legal position is unclear for various reasons: a) Pensions normally operate under Trust Law. This is not inevitable, and there was a Social Security Select Committee once that recommended change, but it is not likely to change. Jeff Rooker, the relevant Minister of State, has recently Trust Law principles date from the Middle Ages and have been slowly developing since then. The Trustee Act 1925 and the Variation of Trusts Act 1958 brought together most of the rules concerning trustees which had been established in cases over centuries. In the simplest case, the "settlor" endows the trust from which the members or "beneficiaries" draw their pensions. Since the members can contribute to the endowment and the company can benefit from it, many pension schemes have to stretch the trust law to cover more than the simplest case. Trust law continues to be refined by case law. Case law works in two ways. In cases where one conflict progresses from lower to higher courts, oscillating in judgment, it is the final judgement that wipes out the previous ones. (As in the case of Equitable). Where there are similar but different cases, the judge will often find a reason to distinguish (differentiate) one from another. This allows the judge to impose his/her ruling without saying that the judge in the other case was wrong. Both judgments remain operational, sometimes seeming to be contradictory. This is why the judgements on Barclays and the power companies are not judgements on IBM, although obviously judges take what other judges have said into account. b) There is an unresolved contention about using reserves for the beneficiaries. Here is how "Occupational Pensions" described it a decade ago. "Trade Unions generally view employee and employer pension contributions as deferred pay. Unions argue, therefore, that pension fund assets, including any surpluses, should always be used to benefit scheme members rather than employers. They believe that members should benefit from advantageous investment returns and any knock on effects of redundancies. Employers, for their part, usually argue that the scheme rules determine benefits and that employer contributions are intended to meet the balance of the cost - as stated explicitly in many trust deeds. In some cases this may mean that the employer is required to pay more if investment returns are poor. It follows, employers maintain, that if a scheme is in surplus, it is correct to reduce employer contributions to the levels necessary to fulfill the balance-of-cost commitment. In practice, a compromise is often struck between unions and employers where the surplus is split - perhaps half-and-half - between benefit improvements and employer contribution reductions or holidays." Some emphasis has changed, but that contention has lasted the decade. c) We have a mix of European Law and national laws. The Americans have a Constitution, which serves to point the direction for a multitude of lesser laws. In the UK, we don't have a constitution, but we have signed up to some Treaties. Countries that sign up to these treaties are signing up to bring their local laws into alignment with the treaty. For example, Article 119 of the treaty that established the European Community simply says: Each Member State shall during the first stage ensure and subsequently maintain the application of the principle that men and women should receive equal pay for equal work. For the purpose of this Article, pay means the ordinary basic or minimum wage or salary and any other consideration, whether in cash or in kind, which the worker receives, directly or indirectly, in respect of his employment from his employer. Equal pay without discrimination based on sex means:
Because of that Article, a number of UK laws had to be adjusted to avoid sex discrimination. Just how much, and where, a UK law has to change because of a treaty remains a source of confusion. d) Different pension schemes have different deeds. There are some 151,000 different pension schemes in the UK, if you include all the little ones, designed as tax havens for the one or two directors in a small company. So there are many different deeds, making a ruling for one scheme inapplicable to another. e) The company's obligations are not as obvious as you might expect. You might expect that the company could do anything it liked in the pursuit of profit provided it could defend that on the small print in its agreements. That is not so. There was a 1990 judgement that 'established the principle that there is an implied term in every contract of employment that "the employers will not, without reasonable and proper cause, conduct themselves in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee". The judge called this the "implied obligation of good faith" and stated that it applies as much to the exercise of the employer's rights and powers under a pension scheme as it does to the other rights and powers of an employer.'How this applies to today's cases is another source of confusion.
These notes are not a legal brief, they can only point to the confusion, not take a position within it. It is a reasonable question to ask where the trends are heading. It is a measure of the increased corporate control of the UK over the decade (or of the increased realism of politicians if you prefer) that party manifestos now take less of a position in favour of retirees. In 1992 the Labour Party said that if elected it "will enshrine in statute the principle that pension fund contributions are deferred pay and that their assets, including surpluses...belong to the scheme's members".At the same election, the Liberal Democrats said "Pension fund surpluses have been built up with the substantial aid of tax subsidies on pension contributions and investment income. For this reason, they are the employees' funds, not the employers', and this should be recognised by law".You are unlikely to find such support for the members in current manifestos. The trend against members has reached the point where a judge recently said: 'surplus is not in any way beneficially owned by any of the employees or pensioners under a scheme... it cannot be contended that a member of a pension scheme has any "right"...to...surplus' This trend in mood has been matched with a trend in practice. Although the vast majority of members of final salary schemes still have their entire pension protected against erosion by at least Limited Price Indexation, there has been a change in how surpluses are used. In certain circumstances, pension schemes are required to tell the Inland Revenue what they are doing with a surplus. Based on statistics gathered that way for the year 2000, 28% of the surpluses went to benefit the members and 72% went to benefit the employers. In previous years the split, on average, was 35% to 65%. On the other hand, The Court of Justice of the European Communities has remained steadfast. As recently as May 2000 it repeated that occupational pensions (as opposed to state pensions) are deferred pay:
"As regards, in particular, the compensation granted by an employer to an employee on termination of his employment, the Court has already stated that such compensation is a form of deferred pay to which the worker is entitled by reason of his employment but which is paid to him on termination of the employment relationship with a view to enabling him to adjust to the new circumstances arising from such termination." It was this combination of the "deferred pay" principle and Article 119 that required the UK government to introduce regulation to avoid sex discrimination on occupational pensions. As an aside, it is noteworthy that it is the unions who argue much of the case for bringing European Community law into UK practice. There is a case where a tribunal was sufficiently impressed by the MSF argument that it attached the union's written submission to its decision. (MSF is Manufacturing, Science, Finance, the parent organisation of the union that messages on the website urge us to join, the ITPA - Information Technology Professionals Association.) It reasonable to ask what the government is doing about the confusion and the increasing gap between the "deferred pay" viewpoint and practice. The government is talking to the Law Commission. The Law Commission has an ongoing duty to keep "all the law" under review. It says: At any one time the Commission will be engaged on between 20 and 30 projects of law reform, at different stages of completion. A typical project will begin with a study of the area of law in question, and an attempt to identify its defects. Foreign systems of law will be examined to see how they deal with similar problems .So the Law Commission might be considering something like the division of each surplus into a members' account and an employers' account, which is the South African government's solution. Or they may be considering just making it easier for corporations to take all the surplus without risking opposition from the members. We will not know until the Law Commission does some consultation. Is there anything retirees can do in the meantime? If you are not a union member, your route to influence is via your MP. When the election is over, you might want to write and suggest your MP takes an interest in what the Law Commission is up to, with a view to giving the "deferred pay" principle due weight. If you are interested in specific new regulations, here are a couple that have been suggested: The current regulations require at least a third of trustees to be member elected. That doesn't provide much protection against a rogue company, because they can always be outvoted. It would be different if the requirement was a half or a majority. This is not a radical proposal - it once upon a time had the support of the National Association of Pension Funds. (NAPF is an association for people who control pension funds. It does not have representation for the members of schemes so it might be expected to take an employers' line.) Currently there are regulations for some special circumstances where benefits must be given to members before companies can profit from a surplus. (The company has a "residual" claim to the surplus.) But that does not apply generally to all pensions. If it did, it would not make much difference for most members, because most receive guarantees against pension erosion now, as the result of good practice. It would prevent rogue companies from getting a competitive advantage by taking their benefit from the surplus without allowing improvements to benefits for members.
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