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Jersey Unreported Judgments |
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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> In the matter of Citibank (CI) Ltd Pension Scheme [2017] JRC 039 (06 March 2017) URL: http://www.bailii.org/je/cases/UR/2017/2017_039.html Cite as: [2017] JRC 39, [2017] JRC 039 |
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Before : |
Sir Michael Birt, Commissioner, and Jurats Nicolle and Thomas |
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Between |
Citibank (Channel Islands) Limited |
Representor |
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And |
CCIL Pension Scheme Trustees Limited |
First Respondent |
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And |
Manuel Fricker (as representative of the beneficiaries of the said Pension Scheme) |
Second Respondent |
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IN THE MATTER OF CITIBANK (CHANNEL ISLANDS) LIMITED PENSION SCHEME
Advocate A. Kistler for the Representor and the First Respondent.
Advocate N. A. K. Williams for the Second Respondent.
judgment
the COMMISSIONER:
1. This is an application by the representor ("the bank") for rectification of an instrument of amendment dated 20th July, 2012, ("the 2012 Variation") executed by the bank with the consent of the first respondent ("the trustee") amending the terms of the Citibank (Channel Islands) Limited Pension Scheme ("the scheme").
2. Upon original presentation of the representation, the Court appointed the second respondent ("Mr Fricker") as representative of all the beneficiaries of the scheme and directed that he should, at the expense of the bank, obtain independent legal advice and be represented at the final hearing. The Court also directed that all members of the scheme should be given notice of the nature of the application by means of a letter substantially in the form provided to the Court. The representor was also directed to place an advertisement in the Jersey Evening Post substantially in the form provided to the Court.
3. At the conclusion of the hearing, the Court granted the order for rectification and we now give our reasons for that decision.
4. The Court has been provided with four affidavits. The two principal ones are those sworn by Mr Philip Hooper and Mr Kevin McDermott. Mr Hooper was the Citi Country Officer ("CCO") of Citigroup in Jersey and a director of the bank at the material time. He is now the head of Citibank in Switzerland. The CCO has overall responsibility for Citigroup operations in Jersey. Mr McDermott has been a director of the trustee since October 2008.
5. The affidavits are very detailed and exhibit all the relevant documentation. We accept the evidence of both Mr Hooper and Mr McDermott, supported as it is by the relevant documentation, and we find the facts to be as follows.
6. The scheme is a defined benefit scheme established to provide benefits for the bank's employees. It was established on 31st December, 1982, by an interim trust deed made between the bank and the original trustees. The rules constituting the scheme were attached as a schedule to the interim deed.
7. The trustee was appointed as sole trustee of the scheme on 31st December, 1984. Under the terms of the interim deed, the bank undertook to execute a definitive trust deed within 24 months of the date of execution of the interim deed and on 31st December, 1984, a definitive trust instrument was entered into by the bank and the trustee which amended the interim deed and the rules attached to that deed. Various amendments were made to the definitive trust instrument and the rules attached as a schedule to that instrument by supplemental instrument dated 13th June, 1985, ("the 1985 instrument"). We shall refer to the definitive trust deed incorporating the amendments effected by the 1985 instrument as the "1984 deed". The rules attached as a schedule to the 1984 deed, which also incorporate amendments effected by the 1985 instrument, are referred to as the "1984 rules".
8. Under Clause 26 of the 1984 deed the bank has power to amend the terms of the scheme with the consent of the trustee. On 20th July, 2012, with the consent of the trustee, the bank exercised that power by means of the 2012 variation. The effect of the 2012 variation was to delete the 1984 rules in their entirety and replace them with the rules attached to the 2012 variation ("the 2012 rules"). The 2012 rules were based on the standard rules of Norwich Union (the administrator of the scheme) and reflected certain changes that had been made in 1990 to the law concerning pensions under the Income Tax (Jersey) Law 1961 ("the 1961 Law"). We shall refer to the standard Norwich Union rules as the "1990 standard rules". The effect of the 2012 variation was to adopt the 1990 standard rules with some minor amendments as the 2012 rules and they were stated to take effect from 1st November, 1990, (with one exception which is not relevant for present purposes); in other words they had retrospective effect. The 2012 rules remain the current rules of the scheme.
9. As already stated, the scheme is a defined benefit scheme which is approved under Article 131 of the 1961 Law and was established to provide benefits for the bank's employees. As at 30th September, 2015, there were 177 members, of whom 52 were active members, 122 were deferred members, 2 were past retirement age but had not yet retired and 1 is past retirement age and has retired but has not yet started drawing down his benefit. There are 18 individuals who are drawing down the relevant benefit, which is an annuity purchased by the trustee. The scheme closed to new members in December 2013.
10. Both the 1984 rules and the 2012 rules provide that upon retirement a member shall receive a pension calculated by reference to his average remuneration (to use a neutral expression) for the three years before retirement. However, different definitions are used in the 1984 rules and the 2012 rules and it is this which has given rise to the problem.
11. In the 1984 rules the pension is calculated by reference to the average "compensation" received by the member over the previous three years and "compensation" is defined as follows:-
""Compensation" means the regular fixed basic annual rate of compensation received by a participant from the Constituent Company employing the Participant during Continuous Employment ... . It shall not include any bonuses, special allowances, overtime payments, commissions, presents, donations or other similar distributions...". (emphasis added).
12. Conversely, under the 2012 rules benefits are calculated by reference to a member's "final pensionable salary" which means the average of the member's pensionable salary for the last three years. Pensionable salary is defined as follows:-
""Pensionable Salary" means actual earnings received from the Employer during the 12 months ending on the day before the last Scheme Anniversary".
13. As can be seen, there is a difference between the two. Under the 1984 rules, the calculation was by reference to the member's basic salary and specifically excluded bonuses, overtime payments and any other payments. Conversely, under the 2012 rules the pension is calculated by reference to the member's 'actual earnings'. The bank has been advised by Messrs Carey Olsen that 'actual earnings' are not limited to basic salary but would include overtime, bonuses and other payments.
14. It is said by the bank and the trustee that this was a mistake. There was no intention to change the manner in which members' pensions were calculated (namely by reference to basic salary) and the wording of the 2012 rules was a mistake which did not reflect the intention of the parties to the 2012 variation.
15. The test for rectification in Jersey is well established; see for example In re the R.E. Sesemann Will Trust [2005] JLR 421 at para 12. There are three requirements:-
16. Mr Hooper's affidavit goes into considerable detail concerning events between 1996 and the present. It was essential that he do so and we have been much assisted by his affidavit and the exhibited contemporaneous documents in coming to an understanding of how the problem arose. However, we do not think it is necessary to describe the history in detail for the purposes of this judgment.
17. Suffice it to say that the scheme has always been administered by Norwich Union (now Aviva) and there has been substantial discussion over the years between the trustee and Norwich Union in relation to amending the 1984 rules so as to conform with the 1990 standard rules, which is Norwich Union's own precedent. It is clear that there was discussion from an early stage about replacing the 1984 rules with the 1990 standard rules - sometimes including the scheme's then legal advisers - but there have been various false starts and hiatuses. This is said by Mr Hooper to be have been down to a combination of the complexity of the issues that arose from the potential amendments to the scheme and a lack of resources to prioritise and take forward the amendments.
18. There also appears to have been some confusion over the years between the trustee, the bank and Norwich Union as to whether Norwich Union was in fact administrating the scheme on the basis of the 1984 rules or the 1990 standard rules. As far back as 1996, the bank's head of human resources ("the HR Director") wrote to the scheme's then legal advisers enclosing a draft deed of variation and draft rules that had been provided by Norwich Union and requesting them to review the draft documents.
19. However not much seems to have happened. The next significant event is that in April 2005 the advisers to the scheme ("Mercer") reviewed the scheme and pointed out that the definition of 'pensionable salary' in the 'current scheme rules' referred to actual earnings whereas it should have referred to basic salary or wages, which was the definition contained in the members' guide to the scheme. This is an indication of the confusion which existed as to which rules were in place. At that stage the 1990 standard rules had not been adopted and therefore the definition of "pensionable salary" was not relevant as it was not used in the 1984 rules; yet this was being referred to by Mercer as being contained in the current scheme rules.
20. In any event, the report from Mercer was considered at a meeting in Jersey on 4th April, 2005, and a note of the meeting stated as follows:-
"Each section [of the report] was then discussed and the following points were agreed.
Scheme Rules
NU [Norwich Union] to alter the definition of 'Pensionable Salary' to 'Basic Salary'. It was noted that this definition complies with 'contract of employment'. (page 4 of the report).
Member Guide
Pensionable Salary - correct definition - no action (page 6)."
In our judgment this indicates a clear intention at the time that the pension of members should continue to be calculated by reference to the basic salary.
21. Mr Hooper then recounts numerous exchanges and correspondence over the years without a great deal of progress being made. It is clear that confusion continued as to whether the 1984 rules or the 1990 standard rules were in force and whether Norwich Union was administering the scheme on the basis of the 1984 rules or the 1990 standard rules. It is also clear that no one at the bank or the trustee was aware of the significance of the difference in definition between 'compensation' and 'pensionable salary'. For example, in August 2009 the previous legal advisers were instructed to prepare a comparison between the 1984 rules and the 1990 standard rules but their advice did not explain what was meant by 'actual earnings' (as found in the definition of pensionable salary in the 1990 standard rules) and how this might differ from 'basic annual rate of compensation' (as found in the definition of compensation in the 1984 rules).
22. On 19th October, 2011, the HR director sent an email to Mr Hooper and Mr McDermott stating that "actual earnings are based purely on salary and do not include any discretionary or structured bonus payments" thereby indicating her understanding that 'pensionable salary' had the same meaning as 'compensation'.
23. Eventually the 2012 variation was executed but there is no suggestion in the minutes of the trustee or any suggestion in the correspondence and other documents at the time that a change in relation to the basis of calculating the pension was being effected by the 2012 variation. Both Mr Hooper on behalf of the bank and Mr McDermott on behalf of the trustee confirmed that there was no such intention. The intention was to carry on calculating the pension by reference to the basic salary as previously.
24. The problem came to light when, after the 2012 variation was signed, Norwich Union was asked to update the members' guide to the scheme. It was then realised that there might be a difference between 'pensionable salary' in the 2012 rules and 'compensation' in the 1984 rules. The firm's previous legal advisers were consulted in May and July 2013. Their advice was that while, given the context and the previous practice, the expression 'actual earnings' was ambiguous and could properly be taken as being confined to the actual salary, it would nevertheless be prudent to amend the rules in due course to confirm that for the avoidance of doubt.
25. The bank subsequently sought advice from Carey Olsen who advised in November 2013 that, while there could be some room for debate, the natural meaning of 'actual earnings' was to include all earnings including overtime and other payments. They pointed out that this would have the effect of increasing the bank's liabilities and this would be exacerbated by the fact that the 2012 rules applied with retrospective effect going back over 20 years.
26. In the light of that advice, the bank and the trustee decided in due course to seek rectification. That took some time and the representation was duly presented to this Court on 24th October, 2016.
27. As already indicated, the Act of that date ordered that a letter be sent to all members. The letter was duly sent and members were invited to contact Mr Fricker should they have any questions or concerns. Mr Fricker has reported that he received a total of eight responses from members. They raised certain questions of detail which he was able to deal with, but none of them objected to the application for rectification or suggested that any member thought the benefits under the scheme would be calculated by reference to anything other than the member's basic salary.
28. We agree that the natural meaning of 'actual earnings' is to include all earnings including bonuses, overtime etc. It is not the same as the basic salary or, as it is put in the definition of 'compensation' in the 1984 rules, the 'basic annual rate of compensation'.
29. We also accept the evidence of Mr Hooper and Mr McDermott that neither the bank nor the Trustee intended to change the basis of calculating a member's pension when adopting the 2012 Rules and that the effect of substituting 'pensionable salary' for 'compensation' was not appreciated or understood. The change in the method of calculating the pension was therefore a mistake and did not reflect the intention of the parties to the 2012 Variation.
30. Further support for the fact that the change was effected by mistake can be derived from the following:-
(i) Successive editions of the members' guide to the scheme have always stated specifically that the pension is calculated by reference to basic salary without including any bonuses, commission, payments for overtime or any other fluctuating emoluments. Given that the 2012 rules have retrospective effect to 1990, it would be astonishing if the bank had intended to reverse that position for all the years since 1990, which would have been quite contrary to what was said to members in the members' guide.
(ii) Pensions have only ever been calculated and paid by reference to the member's basic salary (excluding bonuses etc.) and pensions have continued to be calculated and paid on this basis since the 2012 variation.
(iii) Each member of the scheme receives an annual employee benefit statement which summarises a member's anticipated retirement benefit. It makes clear that the member's retirement benefit has been calculated using the member's current 'final pensionable salary' and then provides a figure as to what that final pensionable salary is. The final pensionable salary figure inserted in the employee benefit statements has always been the annual basic salary, both before the 2012 variation and thereafter.
(iv) Following the discovery of the problem, the bank instructed an actuary to calculate the financial consequences for the bank if the definition of pensionable salary was calculated on gross earnings (i.e. including bonuses, overtime etc.) as opposed to basic salary for all members of the scheme from 1st November, 1990. It is clear that the financial consequences for the bank would be significant (both in terms of current liabilities and future contributions) running into many millions of pounds. Mr Hooper makes it clear in his affidavit that for an increase in funding obligations of this level, there is a process which would need to be followed because of the financial impact on the bank. Apart from being considered locally, it would also have to be considered by the regional head office in London and ultimately the global head office in New York. No such steps were undertaken and, until the actuary was instructed after the event, no estimate was made of any increased costs which would result from the 2012 variation because it was not thought that there were any.
31. For the reasons given, we are therefore satisfied that a genuine mistake was made, so that the 2012 rules do not carry out the true intention of the bank and the trustee. The first requirement set out in para 15 above is therefore satisfied.
32. Turning to the second requirement set out at para 15, we are satisfied that there has been full and frank disclosure.
33. As to the third requirement, we are also satisfied that there is no other practical remedy. It would be possible for the bank and the trustee to execute a deed of variation but this could not be used to reduce benefits which have accrued under the 2012 rules or to correct the position retrospectively. We are satisfied that there is no satisfactory alternative remedy to rectification.
34. It was for these reasons that we approved the application and ordered that the definition of 'pensionable salary' in the 2012 rules be rectified with effect from the date of the 2012 variation, namely 20th July, 2012, by replacing the present definition with the following:-
""Pensionable Salary" means basic salary received from the Employer during the 12 months ending on the day before the last Scheme Anniversary and shall not include bonuses or any other emoluments."
35. We should end by expressing our appreciation to both Advocate Kistler and Advocate Williams. The fact that their skeleton arguments - and the affidavits - anticipated and dealt satisfactorily with all the questions which the Court might have had meant that the hearing was very much shorter than would otherwise have been the case.
