Neutral Citation Number: [2008] EWHC 2573 (Ch)
Case No: HC07C01408
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 30 October 2008

Before :

THE CHANCELLOR OF THE HIGH COURT
(THE RIGHT HONOURABLE SIR ANDREW MORRITT)
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Between :

	EASTERLY LIMITED	Claimant	
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	HEADWAY PLC	Defendant	

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Mr. Andrew Simmonds QC (instructed by CMS Cameron McKenna LLP) for the Claimant
Mr. Michael Furness QC (instructed by DLA Piper UK LLP) for the Defendant

Hearing dates: 21st and 22nd October 2008
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Judgment
The Chancellor: 

Introduction

1.	The Headway PLC Group Pension Fund (“the Scheme”) is constituted by a Trust Deed and Rules dated 2nd April 1993;  the claimant (“the Trustee”) is the sole trustee, the defendant (“the Company”) the principal employer.  The Scheme provides for both final salary and money purchase benefits, but the issues with which I am concerned only arise in respect of benefits of the former description.   In 1997 the Company’s manufacturing business ceased, its work force was shed and accruals to the Scheme ceased.  The winding up of the Scheme was triggered by a resolution of the trustees passed on 11th May 2001.  No insolvency event in relation to the Company, as defined by s.75(4) Pensions Act 1995, had then or has since occurred;  but the Scheme is in deficit.
2.	Before the winding up of the Scheme can be completed it is necessary to compute and recover the debt due from the Company under s.75 Pensions Act 1995 and to apply both the proceeds of that debt and the Scheme’s other assets in securing the benefits due to members in accordance with the rules of the Scheme and the legislation, both primary and secondary, which regulates it.  Such a debt is computed at ‘the applicable time’, as defined in s.75(3) Pensions Act 1995, so as to produce an amount which, when added to the other assets of the Scheme, is equal to the minimum funding requirement (“MFR”) for the Scheme required by the legislation.   As the yardstick for that funding requirement is based on an assumed yield on gilt-edged securities or equities in excess of anything available on the market the debt due from the employer is inevitably insufficient to provide for the members’ benefits in full.
3.	The Trustee has devised an arrangement (“the Partial Buy-out Route”) whereby it seeks to minimise that insufficiency.  It involves three stages: (1) the application of the existing assets of the Fund in the purchase of annuities for members so as, to that extent, to secure for them the benefits for which the Fund provides, (2) thereafter fixing an ‘applicable time’ for the computation and recovery of the debt due by the Company under s.75 Pensions Act 1995 and (3) applying the proceeds of that debt in the purchase of further annuities for members so as to secure for them a further tranche of the benefits for which the Fund provides.  The Trustee maintains that the consequence of the first step is to remove from the calculation of the s.75 debt due by the Company both the assets so applied and the liability of the Trustee to provide for benefits to the extent that the purchased annuities have discharged it.  It contends that the debt due by the Company under s.75 is thereby increased so that the amount available at the third stage for securing the balance of the benefit due to the members is more than it would otherwise have been.  
4.	In his written argument, counsel for the Trustee describes the effect as follows:
“20.	Assume a scheme with assets of £10m and liabilities calculated at (a) £20m on the full buy-out basis and (b) £15m on the prescribed section 75 basis.
21.	If the Trustees adopt the conventional approach and collect the section 75 debt before buying out members’ benefits, the employer will be liable to pay the £5m section 75 shortfall and there will remain a £5m deficit on buyout.
22.	If the Trustees adopt the partial buy-out route, they will apply the £10m assets in buying out 50% (i.e. 10/20) of scheme liabilities.  The Trustees will then fix an “applicable time” for section 75 purposes.  At that time the scheme’s liabilities on the prescribed section 75 basis will be £7.5m (i.e. 50% of £15m because half of the liabilities are bought out at stage one) and the assets will be nil.  The section 75 debt is therefore £7.5m rather than £5m.  The Trustees will collect this and will accordingly have an extra £2.5m available to meet the remaining buy-out cost of £10m.
23.	The difference in outcome is accounted for by the fact that, under the partial buy-out route, the liabilities discharged at stage one are effectively valued on the buy-out basis rather than on the prescribed section 75 basis.”
5.	This is disputed by the Company.  It contends that the partial buyout arrangement, if implemented, would not have the effect for which the Trustee contends because the consequence of the partial buy-out at stage 1 could only be to discharge 10/15ths of the liabilities valued on the s.75 basis, i.e. £10m, thereby leaving a s.75 debt of £5m as before.  In addition the Company claims that, if the partial buy-out route were adopted, the Trustee would have no power to fix an ‘applicable time’ thereafter.  In this event, on those assumed figures, the members of the Scheme would be £5m worse off.  I understand that it is common ground that the likely amount of the s.75 debt in the light of the assets and liabilities of the Scheme is £1m on a conventional basis, £2.5m on a partial buy-out if the Trustee’s contention is correct but nil if the Company is right in its contention as to the effect of a partial buy-out on the power to fix an applicable time.
6.	In the light of these contentions and the amount at stake the Trustee issued the Part 8 claim now before me seeking a declaration that if the Trustee effected a partial buy-out of members benefits as described in the witness statement of its director (who is also an actuary) Mr Bruce-Gardner then (1) it would be entitled to fix an ‘applicable time’ for the purposes of s.75 for some date after the partial buy-out, and (2) the Company would be liable for a debt under s.75 based on the remaining unmatched liabilities of the Scheme.   Counsel for the parties dealt with these two points in reverse order and I will do likewise.  But first it is necessary to consider in some detail the primary and secondary legislation by which the Scheme is regulated as well as its rules.

The Relevant Legislation
7.	I start with s.75 Pensions Act 1995.  It was amended by s.271 Pensions Act 2004 with effect from 6th April 2005.  As the Scheme was already being wound up the amendments are not applicable.  In its unamended form, so far as relevant it provided:
“75 Deficiencies in the assets 
(1)	If, in the case of an occupational pension scheme....., the value at the applicable time of the assets of the scheme is less than the amount at that time of the liabilities of the scheme, an amount equal to the difference shall be treated as a debt due from the employer to the trustees or managers of the scheme. 
[(2)...]
(3)	In this section "the applicable time" means – 
		(a)	if the scheme is being wound up before a relevant insolvency event occurs in relation to the employer, any time when it is being wound up before such an event occurs, and 
		(b)	otherwise, immediately before the relevant insolvency event occurs. 
(4)	For the purposes of this section a relevant insolvency event occurs in relation to the employer– 
		(a)	in England and Wales– 
	(i)	where the employer is a company, when it goes into liquidation, within the meaning of section 247(2) of the [1986 c. 45.] Insolvency Act 1986,... 
(5)	For the purposes of subsection (1), the liabilities and assets to be taken into account, and their amount or value, must be determined, calculated and verified by a prescribed person and in the prescribed manner. 
[(6)
(7) 
(8)
(9) 
(10)]”

8.	It is common ground that in a case such as this where the Company is not being wound up the Trustee has power to determine the applicable time under subsection (3).   The determination, calculation and verification of the assets and liabilities of the Scheme are to be determined in accordance with the Occupational Pension Schemes (Deficiency on Winding up etc) Regulations 1996 SI No:3128.  Those Regulations incorporate provisions of the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 SI No:1536.  The latter regulations incorporate and give legal effect to the Faculty and Institute of Actuaries Actuarial Guidance Note 27.  The Guidance Note requires the actuary to assume in appropriate cases an effective return on gilts of 8% and on equities of 2% per annum more than the assumed yield on gilts.
9.	It is common ground that the effect of all these provisions is as set out in paragraph 19 of the written argument of counsel for the Trustee in the following terms:
“What this all means for the calculation of the section 75 debt in relation to the Fund is as follows:
(1)	Pensioner liabilities are calculated on the buy-out basis: Deficiency Regulation 3A.  In fact, there were very few pensioner liabilities in the Fund and they have already been bought out with Legal & General Assurance Society Ltd (“L&G”).”
(2)	Non-pensioner liabilities fall to be calculated on the basis of the GN27-prescribed rates of return on a mixture of equities and gilts (MFR Regulation 7(7)) unless the Fund has a gilts-matching policy (MFR Regulation 7(8)).
(3)	In fact, the then trustees of the Fund adopted a gilts-matching policy in November 2002.  Thus, for section 75 purposes, non-pensioner liabilities are calculated on the basis of GN27-prescribed gilt returns.
(4)	If non-pensioner liabilities are calculated on a non-gilt matched basis, it is obvious why recovery of the section 75 debt will not provide sufficient funds to enable the purchase of annuities to secure the full amount of members’ scheme benefits.  Annuity rates in the market depend on gilt returns and the assumed higher equity returns in the notional portfolio depress the amount of the section 75 debt.
(5)	However, even where non-pensioner liabilities are calculated on a gilts-matched basis (as in the present case), a shortfall as against full buy-out costs will also arise because
	(i)	the GN27-prescribed gilt return (8% per annum) may be, and indeed is, higher than the return actually available; and
	(ii)	the gilt-matched basis makes no allowance for the buy-out premium charged by insurance companies.
(6)	If the Fund had gone into winding up on or after 11/6/03, the current problem would not have arisen.  By virtue of Deficiency Regulation 3B, the Company would have been liable to pay the full buy-out cost in respect of non-pensioner liabilities.”
10.	I should also refer to ss.19 and 81 of the Pension Schemes Act 1993.  As the heading to these sections point out they deal with the discharge of liability where, in the case of s.19 guaranteed minimum pensions or in the case of s.81 short service or alternative benefits are secured by insurance policies or annuity contracts.   In each case, and subject to compliance with the conditions for its operation the section provides that:
“A transaction to which this section applies discharges the trustees or managers of an occupational pension scheme from their liability to provide for or in respect of any person [guaranteed minimum pensions][short service benefit or any alternative to short service benefit]-
	[(a)...]
	(b) if and to the extent that it results in [guaranteed minimum pensions][short service benefit or any alternative to short service benefit] for or in respect of that person being appropriately secured...”
The Trustee relies on those sections as demonstrating that in the cases to which they apply the purchase of an annuity for a member of the Scheme of £x pa discharges the liability of the Trustee to pay a pension of the appropriate description of £x pa without in either case considering a valuation of that liability in accordance with the Minimum Funding Regulations or GN 27.  Counsel for the Company contrasted the provisions of s.99 Pension Schemes Act 1993 which in the cases to which it applies provides for the discharge of the liability of the trustees on a different basis, that is by reference to a cash equivalent provided for in s.93A.  As neither side suggested that the latter provisions are applicable in this case I need not refer to them further.
11.	I turn then to other provisions of the Pensions Act 1995.  Ss. 56 and following impose a minimum funding requirement on every occupational pension scheme.  The trustees or managers must obtain an actuarial valuation from time to time and set contribution rates so as to maintain that requirement.   In the case of a serious under-provision then the employer can be required to make up some of the difference.
12.	S.73 provides for preferential liabilities in the winding up of a salary related occupational pension scheme.  Its relevance for present purposes is threefold.  First it overrides some of the comparable provisions in the rules of the Scheme.  Second it provided for guaranteed minimum pensions, as statutorily defined, to be paid in priority to deferred benefits in excess of that amount, see s.73(3)(c) and (f).  Third it required the liability for those benefits to be calculated in accordance with the Occupational Pension Schemes (Winding up) Regulations 1996 SI No:3126.  Those regulations imported some of the provisions of the Minimum Funding Regulations.
13.	S.74 Pensions Act 1995 provides for the discharge of a trustee’s liability under a salary related occupational pension scheme by insurance.  Subsection (2) provides:
“(2) A liability to or in respect of a member of the scheme in respect of pensions or other benefits...is to be treated as discharged (to the extent that it would not be so treated apart from this section) if the trustees...provided for the discharge of the liability in one or more of the ways mentioned in subsection (3)”
Subsection (3) refers to transfers to other schemes and “purchasing one or more annuities..”.  Subsection (4) provides:
“If the assets of the scheme are insufficient to satisfy in full the liabilities, as calculated in accordance with the rules of the scheme....the reference in subsection (2) to providing for the discharge of any liability in one or more of the ways mentioned in subsection (3) is to applying any amount available, in accordance with s.73, in one or more of those ways.”
Though I was referred to the provisions of ss.73 and 74 by counsel for both parties and I refer to them for completeness counsel for the Trustee did not rely on them and counsel for the Company described them as ‘red herrings’.

The Relevant Provisions of the Scheme
14.	The relevant provisions of the Scheme are contained in the definitive trust deed made between the Company and the then trustees on 2nd April 1993 and the rules attached to it.  Clause 20 deals with termination of the Scheme.  Nothing turns on its terms; it is common ground that it was determined by a resolution of the trustees to that effect passed on 11th May 2001.  Clause 21 makes provision for what is to happen on determination.  So far as now relevant paragraph (b) set out an order of priorities in which the assets of the Scheme are to be applied after its determination.  The order itself is now subject to the provisions of s.73 Pensions Act 1995 but there were attached to it two provisos, namely provisos E and F, which are relevant to the questions I have to decide.  
15.	So far as relevant those provisos are in the following terms:
“PROVIDED THAT:
[A – D]
E. any benefits payable in accordance with this Clause 21(b) may, subject to Clause 21(e), be secured by purchasing Qualified Polices in accordance with Rule 12(j) and, in the case of any such Members as are referred to in the SECOND application above, may be on such terms (consistent with approval under the Act) as to the payment of any benefit on the death of any Member in respect of whom the policy is issued, as the Trustees shall (in their absolute discretion) think fit to arrange, but not so that the value of the pension and of any benefit so secured shall together be in excess of the value of the Member’s interest in the fund as mentioned above;
AND PROVIDED FURTHER THAT in respect of each Member, the pensions to be secured under paragraphs (vii) and (viii) shall be calculated:-
F.		having regard to the value, as determined by the Actuary, of the interests in the Fund (or Part A as appropriate) of the Member and his Dependants, reduced by the value of any benefits secured in respect of the Member under paragraphs (iv) and (v) of this Clause 21(b) or deemed to be secured under Rule 16(f) if an Accrued Rights Premium has been (or will be) paid in respect of the Member;
[G and H]”
The expression “Qualified Policies” is defined in the Schedule to the Rules in terms which require no further comment.
16.	Clause 21 then provides in sub-paragraph (c) that any surplus may be applied by the Trustee to augment benefits and, in so far as not so applied, should be paid to the Company.  Sub-paragraph (d) provides:
“The provisions of Rule 12(j) shall apply in relation to any benefit to be secured in accordance with this Clause.”
17.	The Rules deal with the usual matters such as membership, contributions and benefits.  Rule 12 deals generally with termination of pensionable service.  Paragraph (j) is headed “Purchase of Qualified Policies”.   The rule itself is in the following terms:
“Despite anything to the contrary expressed or implied in this Rule or elsewhere in the Trust Deed and Rules, at the date a Member’s Pensionable Service terminates, or at any time after that date, the Trustees may apply out of the Fund an amount not exceeding the value (as determined by the Actuary) of the benefits which the Member, or any Beneficiary, Personal Representative or Dependant of the Member has a prospective entitlement to under the Plan, in the purchase of one or more Qualified Policies providing benefits for one or more of such persons, in lieu of the benefits (or  any part of them) which would otherwise be payable under the Rules, and under which policy  (or policies) pensions are non-commutable and non-assignable except to such extent as may be permitted in accordance with the Rules and as the Trustees think fit.”
It is common ground that that rule empowers the Trustee to effect a partial buy-out.  What is in dispute is the liability which would be discharged in the event of its exercise.
18.	Rule 12(j) is subject to no fewer than 17 provisos lettered A to Q.  One or other party placed emphasis on provisos B, D, E, F and G.  So far as relevant those provisos are in the following terms:
“PROVIDED THAT:-
B the purchase (by the Trustees) of one or more Qualified Policies, where the Member is not exercising his right [to a cash equivalent]...., shall be made only if they have been approved by the Inland Revenue and if:-
	[(a)...] and
	(b) except as provided for in D(ii) below, they are purchased at the written request of the Member or his widow (or her widower), or  with his or the widow’s (or widower’s) written consent in such a form as is prescribed from time to time by statute or statutory regulations and thereupon the Trustees shall be discharged from their liability to provide benefits for (and in respect of) the Member under the Plan to the extent that an amount equivalent in value to the value of such benefits has been applied by the Trustees in the purchase of the policy (or policies);
D where Proviso A [purchase at the request of the member] to this Rule 12(j) does not apply, the Trustees may secure benefits by a Qualified Policy if they so decide, and in so doing, be discharged from their liability in respect of the benefit so provided in circumstances where
	[(i)...]
	(ii)	it is made without the consent of the Member...” 
[E and F apply in the case of short service and alternative benefits.  They require that the benefit to be provided by the Qualified Policy shall]....guarantee to provide benefits at a minimum level not less than those prescribed under Rule 16(b)...”
“G any such policy shall, to the extent that the rules permit, provide benefits for...the member...subject nevertheless to Proviso F above, and each such person shall accordingly cease to be entitled to any prospective benefit under the Plan but only to the extent that an amount equivalent in value to the value of such prospective benefit has been applied by the Trustees...in the purchase of a policy.”
19.	I should also refer to Rule 12(o).  This deals with a member’s right to a cash equivalent on termination of pensionable service.   Paragraph (i) confers on him, subject to conditions, 
“a right to a cash equivalent (as determined by the Actuary and notified to the Trustees) of the benefits under the Plan that have accrued to (or in respect of) him, such cash equivalent being determined at the Relevant Date.”
If the member exercises his right he may require the trustees “to apply such cash equivalent in whichever of the following ways as he chooses” one of which is the purchase of a Qualified Policy in accordance with Rule 12(j).  Paragraph (xii) then provides that when a member has exercised his right and the trustees have done what they were asked to do:
“...the Trustees shall be statutorily discharged, to the extent that [s.99(1) Pension Schemes Act 1993] permits from any obligation to provide benefits which the cash equivalent related to....”
S.99(1) Pension Schemes Act 1993 merely provides that:
“the trustees or managers shall be discharged from any obligation to provide benefits to which the cash equivalent related except...”

The Relevant Facts
20.	The most recent actuarial valuation of the Scheme was carried out in April 2003 as at 5th April 2002.  At that stage the pensions in payment had been secured by annuity policies effected by the trustees but there were 225 deferred pensioners entitled at their respective normal retirement dates in the aggregate to £602,505 per annum.  The minimum funding requirement for those liabilities was £2.95m.  Though the total liabilities of £3.099m were covered by assets of £3.225m, as the actuary observed there were not sufficient funds to cover cash equivalent values for all members.
21.	On 7th January 2003 the trustees paid to Legal & General Insurance Co Ltd £3.5m in order to lock the fund into the annuity rates then available.  The terms of business issued in October 2002 require Legal & General to issue annuity policies to individual members at a defined future date.  It is accepted by the Company that those policies will be Qualified Policies within the meaning of that term as defined in Schedule 1 to the Definitive Trust Deed and therefore capable of discharging the liability of the Trustee to provide benefits.
22.	From time to time the Scheme Actuary advised that the deficit in the Scheme was increasing.  After the Trustees’ meeting on 7th April 2004 he advised them that there was some doubt as to the calculation of the s.75 debt due by the Company.  The trustees and the Company appointed specialist leading counsel to resolve those doubts.   His determination did not resolve these doubts, but included comments outside the scope of his terms of reference which led to the Trustee devising the Partial Buy-out Route I am now considering.
23.	The claim form was issued on 1st June 2007.  The evidence is contained in witness statements on which there has been no cross-examination.  The Company through its solicitors and counsel has protested that the Partial Buy-out Route has not been sufficiently particularised to enable them or me to reach any clear conclusion on its efficacy but it has not been suggested that I should not consider the issues raised by the Part 8 claim.  That approach appears to me to be correct.  The Trustee is entitled to seek the directions of the Court before it decides whether or not to proceed down the Partial Buy-out Route.  If that Route is not sufficiently particularised then I will refuse to grant the relief sought.
24.	The only other matter to which I should refer at this stage is the solvency of the Company.  It is common ground that it is solvent and well able to pay any s.75 debt which might be established either on the conventional basis or after a partial buy-out.  It does not wish to pay any more than it is legally liable for.  Moreover as it is likely to have to pay the costs, whatever the result of the application, its opposition is not likely to reduce the benefits, whatever they are, payable to the remaining members. 

The Issues
25.	As indicated in paragraph 6 above the issues fall into two broad categories, namely (1) whether in the event of a partial buy-out the liability from which the Trustee would be released is ascertained by reference to the benefit it would otherwise have had to provide or the underlying minimum funding requirement for the provision of that benefit and (2) whether following such a partial buy-out the power to specify an ‘applicable time’ conferred by s.75(3) would remain exercisable and capable of a valid exercise.   
26.	The first issue is divisible into two issues, namely:
(a)	the identification from the legislation and the rules of the liability which is discharged by the purchase of an annuity for the benefit of a member, and 
(b)	whether it can be done consistently with the statutory requirements for the provision of the guaranteed minimum pensions.
The second issue is also similarly divisible into two questions, namely:
(a)	whether for the purposes of s.75(3), and assuming a partial buy-out as proposed, the Scheme would still be “being wound up”, and, if so,
(b)	whether the Trustee could properly then appoint an applicable time for the purpose of computing and recovering a s.75 debt increased by virtue of the partial buy-out.
I will deal with those issues in turn.

What liability would be discharged?
27.	Counsel for the Trustee points out that Clause 21 of the Trust Deed provides for securing the benefits of members in the winding up of the Scheme in sub-clause (b), in Proviso E to Clause 21 and in Clause 21(d).  In addition Rule 12(j) is specifically applied in the winding up of the Scheme and itself authorises the Trustee:
“to apply out of the Fund an amount not exceeding the value (as determined by the Actuary) of the benefits which the member...has a prospective entitlement to...in the purchase of one or more Qualified Policies...in lieu of the benefits (or any part of them) which would otherwise be payable...”
He contends, and it is not disputed, that this provision authorises a partial buy-out.  He submits, and this is contested, that the part of the rule I have quoted makes it plain in terms that the purchase of the Qualified Policy is to be ‘in lieu of’ the benefits of the member.  So, for example, if the Trustee uses £x to purchase an annuity of £y pa the liability which is discharged is the liability to pay £y pa not the minimum funding requirement for the provision of £y pa.  In summary he submits that the discharge is ‘benefit for benefit’.  He accepts that there is a cap or limit on the amount of the fund which may be so applied imposed by the words “not exceeding the value (as determined by the Actuary)” but denies that it has any further or other effect.
28.	Counsel for the Trustee also relies on the provisions of ss.19 and 81 of the Pension Schemes Act 1993 to achieve the same result.  I will deal with that argument as may be necessary after I have reached my conclusion on this issue.  In essence therefore the argument of the Trustee is simple and based on the express words of Rule 12(j).   It is, inevitably, somewhat obscured by the forest of relevant legislation, both primary and secondary and the bewildering array of provisos to both Clause 21 and Rule 12(j). 
29.	Counsel for the Company relies on a number of these for the proposition that the value of a benefit and, by implication, the benefit itself is that sum which under the minimum funding regulation is required to support it.  Thus proviso E to Clause 21 refers to “the value of the pension and of any benefit so secured” and to “the value of the member’s interest in the Fund”.  Proviso F to Clause 21 also refers to the “value, as determined by the Actuary, of the interests in the Fund....of the member” “reduced by the value of any benefits”.  He submits that in those contexts value and benefit must be ascertained by reference to the minimum funding required to support that benefit, scaled down as necessary if the Fund is being wound up.   He submits that the point is even clearer in connection with Rule 12(j) itself.  First, the cap or limit inevitably requires a minimum funding requirement calculation and, second, the terms of Provisos B(b) and G put the matter beyond doubt.   In addition,  as I understood him, he submitted that Clause 21(b) had been superseded by s.74 Pensions Act 1995.  He pointed out that, as counsel for the Trustee accepted, s.74 could not give a discharge for a partial buy-out.   In that event, so he submitted, the argument for the Trustee involved changing the basis of valuation from that used at stage 1 of the Partial Buy-out Route and that to be used at stage 3.  Finally he submitted that the concept of discharge by reference to the underlying minimum funding requirement was well recognised as, for example, in Rule 12(o).
30.	Counsel for the Trustee accepted that in certain contexts the rule or proviso had the effect for which Counsel for the Company contended but maintained that Rule 12(j) was not one of them.  He suggested that the dividing line lay between those provisions which in their operation would give the member something less that his strict entitlement otherwise than with his consent and those, such as Rule 12(j) where he got what he was entitled to.
31.	In my view it is essential to bear in mind the distinction, on the one hand, between the liability of the Trustee to a member and, on the other, the limits placed on the power of the Trustee in its dealings with the underlying fund.  If a member is entitled now or prospectively to an annual payment of £x and the Trustee properly applies part of the fund in the provision of an annuity for that member of £y thereafter the annual liability of the Trustee to that member is £x-£y, namely £z.   The member would not be entitled to claim against the Trustee to be paid in addition to £z some proportion of £y which represented the arithmetical difference between the capital required for the provision of £y on the open market and valued in accordance with the minimum funding requirement.   The simple fact is that the liability of the Trustee to the member would have been discharged to the extent of £y by the purchase of the annuity in his favour of that amount.
32.	But where a fund is subject to a minimum funding requirement based on gilt-edged and equity yields substantially in excess of market rates then some limits need to be imposed on the ability of the Trustee to apply the capital of the fund.    There must be some restriction on the ability of the Trustee to apply capital for the benefit of one member lest it be at the expense of others and some method of accounting for capital so applied consistently with the minimum funding requirement.
33.	It appears to me that the provisions on which counsel have relied in their arguments before me fall into one or other of these two categories.  Thus provisos E and F to Clause 21 fall within the second category in limiting the amount which the Trustee can apply either initially or having regard to previous applications.  But if the proper application of those limits entitles the Trustee to apply money in the purchase of an annuity for the member of £y there is nothing in either of those provisos to enable the member to claim more than £z from the Trustee.
34.	Rule 12(j) contains provisions of both types.  First there is the cap introduced by the requirement that the amount applied in the purchase of the annuity should not exceed the value of the benefits to which the member is presumptively entitled.  But having ascertained the maximum sum which may be so applied the second part of Rule 12(j) authorises its application in the purchase of the annuity ‘in lieu’, in whole or in part, of the benefits which would otherwise be payable to that member under the Rules.  If, in the example I have used, the Trustee is entitled to purchase an annuity for the member of £y and does so the member cannot thereafter claim from the Trustee anything more than £z.
35.	Proviso B(b) to rule 12(j) does not alter the effect of the receipt by the member of an annuity for £y but protects the Trustee from further requests which, if complied with, would lead to capital being applied in excess of the amount the Trustee is entitled to apply for the benefit of that member.  It is in its nature a restriction in the second category not the first.  By contrast Proviso D to Rule 12(j) falls within the first category.  It confirms in the particular cases to which it applies what in the general run of cases has already been provided by Rule 12(j) itself.
36.	Provisos E and F to Rule 12(j) deal with the benefits for which the policy must provide.  Neither of them qualifies the ordinary effect of receiving the benefit of the annuity for £y on the liability of the Trustee to provide annual benefits to the member of £x.  Proviso G enlarges the class of beneficiaries who may benefit from the policy.  The concluding words deal with the effect of the policy provided under Rule 12(j) on their prospective benefits.  It does so by reference to their value but leaves open how such value is to be ascertained.   It is not clear to me quite how that proviso would work, but I can see nothing in it to qualify the usual consequence of receiving from the Trustee an annuity for £y on the Trustee’s continuing liability to pay £x pa.   That the normal consequence is the pro tanto discharge of the Trustee’s obligation to pay £x appears to me to be recognised by Rule 12(o)(xii).
37.	In principle, therefore, I would accept the submission of counsel for the Trustee that Rule 12(j) operates in accordance with its terms.  Accordingly the purchase by the Trustee with a capital sum less than the limit or cap imposed by the first part of the rule of an annuity for £y discharges to that extent its liability to pay the annual benefit of £x.   It follows that the remaining liability of the Trustee of which account must be taken in the calculations required by s.75 is £z.  This conclusion is subject to the second point in relation to the first issue I summarised in paragraph 26 above.  

The Guaranteed Minimum Pension
38.	It is common ground that the position in regard to the guaranteed minimum pension is (as set out in paragraph 30 of the written argument of counsel for the Company) as follows:
“Because the Scheme has been contracted out of SERPs members have accrued guaranteed minimum pensions (GMPs) in lieu of benefits in SERPS. The requirement to provide GMPs is imposed by section 10 of the PSA 1993 and subsequent sections, and by the Contracting Out Regulations. The details are not important – it is only necessary to appreciate that GMPs are a minimum level of salary based benefit for members which the Scheme must provide, and which underpin the members’ Scheme benefits. What proportion of a member’s benefits is represented by the GMP depends on the member’s salary record. Generally, lower paid members have a higher proportion of GMP than higher paid members.” 
That obligation is recognised in provisos E and F to Rule 12(j) and in Rule 16(b).
39.	The Company points to the limit on the amounts which may be applied in the purchase of the annuities.  If, as the Company maintains, that limit is calculated in accordance with the minimum funding requirement then, by definition, it cannot provide an annuity equal to the amount of the member’s right to an annual payment.  In that event it will not necessarily discharge the obligations of the Trustee to pay the guaranteed minimum pension.  If that is right then, as the Company maintains, the Partial Buy-out Route will not work.
40.	This is disputed by the Trustee.  It points out that if in the case of an individual member the annuity bought by the Trustee exceeds the amount of his guaranteed minimum pension and has the same characteristics then under the express terms of s.19(1) Pension Schemes Act 1993 the obligation for payment of the guaranteed minimum pension is thereby discharged.   But if and to the extent that the amount of the purchased annuity is insufficient to satisfy the member’s rights to a guaranteed minimum pension then that right will remain a liability of the Trustee to be taken into account in calculation of the s.75 debt.  The response of counsel for the Company was to rely on Regulation 9 of the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 SI No:167.  But that regulation does not qualify the effect of s.19(1) Pension Schemes Act 1993.
41.	In principle, therefore, I accept the submission of counsel for the Trustee.   I do not think that the Partial Buy-out Route is altogether blocked by the obligation to provide for the guaranteed minimum pension.   If and so far as that obligation will be fully satisfied then the corresponding liability will be discharged, but not otherwise.  But the obligation may reduce the effect of a partial buy-out on the liability of the Company under s.75.  No calculations have been made of which I am aware to show how many members guaranteed minimum pension entitlements would not be discharged.  Accordingly it is not known what liabilities will remain and have to be taken into account in the calculation of the s.75 debt due by the Company at stage 3.  Thus I am unable to make any affirmative finding as to the appropriateness of the Partial Buy-out Route the Trustee wishes to pursue in this case.  This must affect the terms of the declaration I should make.
42.	In paragraph 28 above I left open the alternative argument for the Trustee based on the provisions of ss.19 and 81 Pension Schemes Act 1993.  In so far as I have dealt with the argument under s.19 I need not repeat it.  Insofar as I have not dealt with the argument based on s.81 I do not need to do so in the light of my conclusion on Rule 12(j).

Does the power conferred by s.75(3) remain exercisable after a Partial Buy-Out?
43.	It is common ground that s.75(3) empowers the Trustee to fix an ‘applicable time’ so long as “the scheme is being wound up” and before the occurrence of a relevant insolvency event in relation to the Company.  There has been no insolvency event in relation to the Company and it is not suggested that one is likely.  So the issue is whether, following a partial buy-out, the Scheme is still being wound up.
44.	In the written argument of counsel for the Company it was submitted that the application of the assets of the Scheme in the partial buy-out at stage 1 would bring the winding-up to an end.  The point was not pursued with any enthusiasm in oral argument; in my view rightly.  The normal process of winding up is the collection of the assets of the body in question and their application in paying or providing for its liabilities.  So long as assets remain uncollected or unapplied the process of winding up continues.   In this case not only will there remain in the hands of the Trustee the benefit of the claim against the Company under s.75 but also the balance of the existing assets not applied in the partial buy-out either because they have been retained as a reserve against the costs of the Trustee or, indeed, so as to preserve the process of winding up.  This was evidently the view of Sir Richard Scott V-C in National Bus Superannuation Scheme (1999) 48 PBLR para 36.  I agree with him.

May the power be properly exercised?
45.	The Company submits that the power cannot be properly exercised following a partial buy-out.  It contends that if the applicable time, and therefore the calculation of its s.75 liability, follows a partial buy-out the consequence will be that the Scheme will be funded in excess of the minimum funding requirement.  That this is so is clear from the hypothetical example given by counsel for the Trustee which I have quoted in paragraph 4 above.  But does it follow that any exercise of the power conferred by s.75(3) after a partial buy-out is invalid?
46.	Counsel for the Company submits that it does.  He relies on the Goode Report on Pension Law Reform (1993) paras 4.4.27 to 4.4.42 for the proposition that in passing the Pensions Act 1995 Parliament intended that pension schemes should be funded to the minimum funding requirement and no more.  He submits that the motive for the partial buy-out route is to secure funding in excess of that minimum and at the expense of the Company.  He contends that the exercise of any power for the purpose of securing that result is inevitably vitiated as being beyond its proper purpose.
47.	Counsel for the Trustee disputes each step in this argument.  First, there is no suggestion in the Goode Report that pension schemes should be funded up to the minimum funding requirement level but not beyond; second, the motive of the Trustee is irrelevant, what matters is its purpose and, third, the motive of which complaint is made lies behind the exercise of the buy-out power not the power to fix the applicable time.
48.	I do not accept the third of those propositions.  If the purpose or motive of the Trustee in following the Partial Buy-out Route is improper then such impropriety infects each step in its pursuit which is essential to its achievement.  Nor do I accept the second.  It is true that in argument counsel for the Company used the word ‘motive’.   It is well established that it is the purpose not the motive which matters in considering the validity of the exercise of a power.  But I understood the submission to be referring to the purpose of the exercise of the power.
49.	The short answer is that I do not accept that there is any impropriety in the course that the Trustee seeks to follow.  It is not the case that in passing the Pensions Act Parliament intended that schemes to which it applied should only be funded to the level of the minimum funding requirement.   I see nothing in either the Goode Report or the Pensions Act 1995 to require such a priori reasoning.  If, as I consider, both the Act and the Rules of this Scheme permit the Trustee to procure funding in excess of the minimum funding requirement (a surplus being payable back to the Company) by pursuing the partial buy-out route then, at the least, there can be nothing improper in seeking to achieve that result.  If, by contrast, neither the Act nor the Rules permit that result then it cannot be achieved whatever the purpose of the exercise of the power.
50.	In short this point adds nothing.  Either the Company is successful on the first issue or it is not.  An attack on the purpose of the exercise of the power conferred by s.75(3) is bound to fail.

Summary of Conclusions
51.	For all these reasons I conclude that the Partial Buy-Out Route the Trustee seeks to follow is permissible in that (1) the Trustee will be entitled to fix an applicable time after the partial buyout has been effected and (2) the subsequent calculation of the liability of the Company under s.75 will be based on the then liability of the Trustee to provide the benefits for which the Scheme provides (that is to say to the exclusion of those satisfied by the partial buy-out on a benefit for benefit basis).  In principle, therefore I am prepared to make the declarations sought by the Part 8 Claim.   
52.	To that conclusion I need to add two important provisos.  The first relates to the effect of my conclusion set out in paragraph 37 above on the dispute between the parties illustrated in paragraphs 4 and 5 above.  The second arises from the point to which I referred in paragraph 41 above.   Each of them may have an important effect on the practical benefits likely to be obtained from a partial buy-out.
53.	In relation to the first of those points it should not be assumed that because the liability of the Trustee to provide benefits of £x per annum is discharged by and to the extent of its provision for the member of an annuity of £y pa that the consequence is as illustrated in the written argument of counsel for the Trustee quoted in paragraph 4 above.   In that example it is assumed that the Trustee may properly apply £10m in providing for 50% of the Trustee’s liability.   This assumption carries with it the further assumption that the application of that £10m is within the limit or cap imposed by Rule 12(j) and a number of the provisos.    But is the assumption justified?   If one starts with the limit on how much the Trustee may spend in providing the annuity it may be that the liability which will be discharged on a benefit for benefit basis is less than that needed to discharge 50% of the Trustee’s liability.  If so the amount discharged may be the £15m for which the Company contends rather than the £20m which the Trustee asserts.
54.	A similar point arises from my conclusion in paragraph 41 above.  To the extent that a liability will remain because the annuity bought by the Trustee is insufficient to discharge its liability for the guaranteed minimum pension the liability of the Company under s.75 cannot be increased by a partial buy-out. What effect would that have on the practical effect of a partial buy-out?
55.	It is possible that the application of either or both these points to the facts of this case will rob the Partial Buy-out Route of worthwhile value.  Accordingly I will add a rider to the declaration I am prepared to make to the effect that the Trustee may not engage in any partial buy-out unless it is satisfied that the consequences of all three stages, after deducting the costs of their implementation, will be to provide worthwhile value for the members of the Scheme by materially increasing the debt due by the Company under s.75.   I invite counsel to agree the form of my order including the rider to which I have referred.