Note to employers: leave off our pension windfall

`Funds are set up for the benefit of the employee, and to the extent that the employer also benefits from them, it is by providing the employee with that perk. For every employer who thinks he is contributing too much, there is an employee and a pensioner who think benefits are too low'
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The Independent Online
Is it just me, or am I right in suspecting that the purpose of a growing number of High Court judg ments these days is to set an example rather than decide on the merits of the case? By establishing a point of principle, the judge gets himself into the legal text books and becomes a part of case law. So presumably that is what Mr Justice Robert Walker was trying to do with his judgment this week in favour of the National Grid and National Power, overturning a previous ruling by the Pensions Ombudsman, Sir Julian Farrand.

Sir Julian said earlier this year that the National Grid had misused more than pounds 43m of the accumulated surplus in its pension scheme. Across the privatised electricity industry as a whole, more than pounds 1bn of pension surplus has been realised in this way, so this was an important test case.

The point of principle Mr Justice Walker wants to establish is that final salary, occupational pension schemes are a jolly good thing, that companies should be allowed to use surpluses for their own purposes, and that they might stop supporting these schemes if they are prevented from doing so.

It is a matter of real concern, he said, that when a company's right to realise the surplus is challenged the outcome "often seems to depend on subtle and complex arguments about the meaning of scheme documents". This he eloquently compares to arguing about how many angels can stand on the point of a needle.

So, having in 46 pages of written judgment rehearsed the various arguments about angels and needles, he comes round in the final two sentences to the real meat of the decision. "Any general exclusion of employers from surplus would tend to make employers very reluctant to contribute to their pension schemes more than the bare minimum that they could get away with. That would be unfortunate, and it would be even more unfortunate if employers were driven to abandon final salary, balance of cost schemes and were instead to turn to money purchase schemes which may in the long term prove less advantageous to the beneficiaries".

All good, down to earth, common sense, you might think. But actually he is wrong about this.

There is no evidence that being barred from sharing in the surplus affects either the level of contributions that companies are prepared to make to occupation pension schemes or their willingness to persist with them. In many schemes, such action is specifically excluded, and while some executives might feel unhappy about that, it hasn't driven them down the money purchase route.

Companies that persist with final salary schemes or set up new ones (yes, there are a few) do so not on the basis that there may be a windfall in it, but because they think it an important way of securing a committed and loyal workforce. Moreover, it is actually quite common for final salary schemes to contain specific clauses requiring that the funds be used for the benefit of members.

In some cases these clauses are cast iron and unassailable, even by the cleverest corporate lawyers. In others, such as the electricity industry, they are more ambiguous, giving the corporate raiders their chance. But in all cases their purpose is the same - the protection is there not so much for the employee as the taxpayer. It would be all too easy for companies to use their pension schemes as a way of avoiding tax if they could at will pay into the scheme out of tax free income only to take it out as an untaxed surplus.

What about the argument that since companies are generally required to pick up the tab for a deficit, they should also be allowed to realise the surplus? Well actually this one doesn't work either. In nearly all cases where a scheme falls into deficit these days the company involved is insolvent and therefore incapable of providing the extra funding. Where schemes have more generally fallen into deficit as a result of a stock market crash, the position usually corrects itself over time without the need for enhanced employer contributions. By the same token, it might prove dangerous to realise an apparent surplus that could prove illusory in the event of a prolonged bear market.

It is apparent that the point of principle involved here is not nearly as clear cut as Mr Justice Walker might think. There is at the same time another point of principle that he's ignored altogether. Pension funds are set up for the benefit of the employee, and to the extent that the employer should also benefits from them, it is in the incentive provided by this extra form of remuneration. Personally I regard the employers' contribution to my pension arrangements as part of my salary and would feel pretty angry, I think justifiably, if the employer tried to take it back at a later stage. In any case, there are always two ways of looking at these things. For every employer who thinks he is contributing too much, there is an employee and a pensioner who think that benefits are too low.

Moving from the general to the particular, there has been some pretty shabby behaviour in this case. National Power's raid on the surplus was bulldozed through at a meeting of trustees on the casting vote of the finance director. The demands of member representatives that the issue should first be tested in the courts and a more equitable way of splitting the surplus be found were ignored. This does not strike me as much like abstract argument over how many angels can stand on the point of a needle. This was not a good judgment and it should certainly go to the Court of Appeal.

The Lord Mayor's Mansion House dinner this week was the scene for one of the cleverest pieces of public speaking I've witnessed in a long time. Everyone knows that Eddie George, Governor of the Bank of England, is vehemently opposed to the Government's plans for a super-SIB, encompassing the Bank's supervisory functions. The question was whether he was actually going to say it publicly, right there in front of Gordon Brown, the TV cameras, and the City's great and good. Like a cat, he played with his audience. More and more daring he became in his criticism of the proposals.

The lounge suited Treasury contingent began to fiddle nervously with their mobile phones. Alistair Darling, chief secretary to the Treasury, jerked his head forward in dismayed anticipation and for one glorious moment we all thought, this is it, Eddie's going for the redundancy cheque. Then withdrawal. "In the final analysis", Mr George said, "it is not the regulatory structure that determines the outcome, but the way in which regulation is actually managed within that structure". Relief all round.

Meanwhile there was much tut tutting in the gents about all those lounge suits. "Bloody rude, if you ask me", was the general view among the black ties. A swift glance round the hall revealed the lounge suit brigade to be confined almost exclusively to ministers and Treasury officials. But hold on a mo. Who's that in the colourful tie and grey suit? Surely not Alistair Defriez, director general of the Takeover Panel? Perhaps he's looking for a permanent job in regulation.