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[2008] UKUT 33 (AAC) (08 December 2008)

 


[2008] UKUT 33 (AAC)

IN THE UPPER TRIBUNAL Appeal No. CP/2611/2007

(ADMINISTRATIVE APPEALS CHAMBER)

Before: JUDGE ROWLAND

Attendances:

For the Appellant: Mr James Clifford of counsel, acting through the Free Representation Unit.

For the Respondent Mr Andrew Henshaw of counsel, instructed by the Solicitor to the Department for Work and Pensions and the Department of Health.

Decision: The claimant's appeal is dismissed.

REASONS FOR DECISION

1. The claimant reached pensionable age on 12 May 2002. He had claimed a retirement pension on 22 April 2002 and, on 29 April 2002, he was awarded a basic pension and graduated retirement benefit totalling £80.01 pw with effect from 13 May 2002. Those elements of his pension are not in dispute. On 22 May 2002, the award was revised so as to include an additional pension. The amount of the pension has been in dispute ever since. It is unnecessary to set out the full history. Suffice it to say that the case has been before a Social Security Commissioner (CP/3833/2003), who considered the respective functions of the social security adjudicating authorities and the tax adjudicating authorities, and a Special Commissioner for income tax (SC 3296/2005), who found that the claimant had been in contracted-out employment from 1985 to 1991, and that, on 13 December 2006, the Secretary of State revised the award of retirement pension and decided that the claimant was entitled to £122.62 pw from 13 May 2002, calculated as follows –

	£	£
Basic pension (100%)		75.50
Gross Pre- April 1997 additional pension	67.82
Less Guaranteed minimum pension	40.66
Payable pre-April 1997 additional pension	27.16	27.16
Post-April 1997 additional pension		15.45
Graduated retirement benefit		4.51
Total		122.62

There have, of course, been up-ratings since then but they do not affect the point in issue on this appeal.

2. By letter dated 20 December 2006, the claimant appealed against the revised decision. This was treated as an appeal against the calculation of the amount of guaranteed minimum pension and as an appeal against the decision that the guaranteed minimum pension fell to be deducted from the whole of the gross pre-1997 additional pension. The tribunal dismissed the appeal on both points and refused leave to appeal to a Social Security Commissioner.
3. The claimant then renewed his application to a Commissioner and, at his request, I held an oral hearing of the application. The claimant raised various issues about his contribution record but I took the view that those fell within the jurisdiction of the tax adjudication authorities, rather than the Secretary of State and the appeal tribunal (see section 8(1)(c) and (e) of the Social Security Contributions (Transfer of Functions, etc.) Act 1999 and section 8(5) of the Social Security Act 1998). As the claimant did not suggest that, if he was in contracted-out employment from 1985 to 1991 and his contributions fall to be treated as contracted-out contributions, his guaranteed minimum pension was incorrectly calculated by Her Majesty's Revenue and Customs on behalf of the Secretary of State, which was the first issue that was before the tribunal, I refused leave to appeal on that issue (CP/2612/2007). As to the second point, I said –

"The claimant's second argument is that the guaranteed minimum pension should be set against the additional retirement pension only insofar as the latter is based on contributions paid in the years in which he was in contracted-out employment. This is an argument that has been rejected by Commissioners in CP/1318/2001, CP/281/2002, CP/1023/2004 and CP/60/2006 and by a Lord Justice of Appeal refusing leave to appeal against CP/1023/2004 (Pearce v. Secretary of State for Work and Pensions [2005] EWCA Civ 453). However, none of those cases is reported and in none of them was the claimant legally represented. The approach taken in those cases is clearly the only one consistent with the words of the legislation. However, in none of the cases was there any detailed argument to the effect that the legislation as drafted did not give effect to the intention of Parliament and that it was permissible to read words into the legislation in the light of Inco Europe v. First Choice Distribution [2000] 1 WLR 586 (HL). I grant leave to appeal in CP/2611/2007 so that such an argument can be considered. This point is one of some legal difficulty and may require some research into the history of section 46(1) of the Pensions Schemes Act 1993 and the purpose of the amendment made to it by the Pensions Act 1995. I suggest that the claimant seeks legal advice and I will direct him to make a submission on this issue before I seek a submission from the Secretary of State for Work and Pensions. I will give him more than the usual month in which to make a submission because there may be some delay while he obtains representation.

In fact, extensions of time were sought and granted and it is only now that the case has come back before me. Meanwhile, on November 3, 2008, Part 1 of the Tribunals, Courts and Enforcement Act 2007 came into force and the functions of the Commissioners have been transferred to the Upper Tribunal, with the Commissioners becoming judges of the Upper Tribunal (see the Transfer of Tribunal Functions Order 2008 (S.I. 2008/2833)).

4. Essentially, the claimant's point is that the guaranteed minimum pension in his case, arising out of his contracted-out employment from 1985 to 1991, is more than he would have received by way of additional pension had his employment not been contracted out during that period and that the consequence of it being deducted from the whole of the additional pension derived from his contributions up to April 1997, rather than just the additional pension derived from his contributions during the period of that employment, is that he gains less than he should from the contributions he made before 1985 and after 1991. That, it is submitted, is illogical and unjust and the legislation should be read so as to remove the illogicality and the injustice.
5. Section 46 of the Pensions Schemes Act 1993, which was a consolidation measure but has been amended, now provides –

"(1) Where for any period a person is entitled both—

(a) to a Category A or Category B retirement pension, a widowed mother's allowance, a widowed parent's allowance or a widow's pension under the Social Security Contributions and Benefits Act 1992; and

(b) to one or more guaranteed minimum pensions,

the weekly rate of the benefit mentioned in paragraph (a) shall for that period be reduced by an amount equal—

(i) to that part of its additional pension which is attributable to earnings factors for any tax years ending before the principal appointed day, or

(ii) to the weekly rate of the pension mentioned in paragraph (b) (or, if there is more than one such pension, their aggregate weekly rates),

whichever is the less."

The "principal appointed day" is 6 April 1997 and the reference to it was introduced when head (i) was substituted by paragraph 44 of Schedule 5 to the Pensions Act 1995. Previously, head (i) had read simply: "to its additional pension". This amendment is less significant than I thought might be the case when I granted leave to appeal.

6. Mr Clifford accepted that the decisions of the Secretary of State and the tribunal in this case were consistent with a literal interpretation of section 46, as has been decided in all the cases to which I referred when I granted leave to appeal, but he submitted that it is obvious that Parliament intended that a guaranteed minimum pension should be deducted only from the additional pension attributable to the period when the claimant was in the relevant contracted-out employment and that the necessary words to achieve that result must be read into the legislation in order to give effect to Parliament's intention.
7. In Inco Europe, Lord Nicholls of Birkenhead said, at page 592, -

"It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language. The court must be able to correct obvious drafting errors. In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words. Some notable instances are given in Professor Sir Rupert Cross' admirable opuscule, Statutory Interpretation, 3rd ed., pp. 93-105. He comments, at page 103:

'In omitting or inserting words the judge is not really engaged in a hypothetical reconstruction of the intentions of the drafter or the legislature, but is simply making as much sense as he can of the text of the statutory provision read in its appropriate context and within the limits of the judicial role.'

This power is confined to plain cases of drafting mistakes. The courts are ever mindful that their constitutional role in this field is interpretative. They must abstain from any course which might have the appearance of judicial legislation. A statute is expressed in language approved and enacted by the legislature. So the courts exercise considerable caution before adding or omitting or substituting words. Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed. The third of these conditions is of crucial importance. Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation: see Lord Diplock in Jones v. Wrotham Park Settled Estates [1980] A.C. 74, 105."

8. Mr Clifford relied on Lloyd LJ's description of the requirement to deduct the guaranteed minimum pension from the additional pension in respect of the whole period from 1978 to 1997 in Pearce v. Secretary of State for Work and Pensions [2005] EWCA Civ 453 at [21] as "illogical" but that is not a sound enough basis for reading words into the legislation, particularly given the way Ms Pearce had argued her case. A more detailed analysis of the legislation is required and it is also useful to have clearly in mind why the legislation may be said to have an unfair consequence in the present case.
9. The claimant's indignation about the way the legislation affects him has been fuelled by his misunderstanding as to the amount actually at issue in his case, which misunderstanding is substantially the product of a hopelessly inaccurate pension forecast issued to him on 25 October 2000 stating that the amount to be deducted from his additional pension on account of his guaranteed minimum pension was a mere 64p per week. He has also produced a calculation suggesting that the "fair" deduction would be 71p per week. On that basis, he has been about £40 per week worse off than he believes he should be ever since he became entitled to a retirement pension.
10. However, as the claimant does not dispute that his guaranteed minimum pension was £40.66 per week at the date of his retirement and as he accepts that it is right that that should be set against at least the additional pension attributable to his contributions made while in contracted-out employment, it is necessary properly to calculate what that additional pension would have been. Mr Clifford accepted that one would expect it to bear roughly the same proportionate relationship to the claimant's total additional pension attributable to the years from 1978 to 1997 as his earnings from his contracted-out employment bore to his total earnings during that period. In fact, it is possible to calculate the exact sum in issue from the figures on doc 3, the key figures being the revalued surplus earnings for the years when the claimant was in contracted-out employment.
11. The claimant was in contracted-out employment from 18 March 1985 to 31 March 1991 and, conveniently, it is therefore possible to isolate as the relevant earnings all the earnings for the six tax years from 6 April 1985 to 5 April 1991. (A comparison with the figures used to calculate his guaranteed minimum pension suggests that earnings attributed to 1991-92 for the purpose of calculating his guaranteed minimum pension may have been attributed to1992-93 for the purpose of calculating his additional pension, possibly because he received his final salary payment after 5 April 1991 but, if there is a discrepancy, it may be justified by the different bases of the calculations and in any event it is relatively small and I will therefore ignore it for the purpose of this decision.)
12. The claimant's "working life" from 1978 to 2002 having been 24 years and there having been a change in the basis of calculation with effect from 6 April 1988, the calculation of the additional pension attributable to the six relevant years due from 13 May 2002 is as follows, –

years	revalued surplus earnings	arithmetic	weekly additional pension
1985-88	£91,473.99	... 25% ( 24 ( 52	£18.32
1988-91	£82,525.29	... 23.5% ( 24 ( 52	£15.54
		Total	£33.86

The reason that the amount of additional pension attributable to those six years is approximately half of the additional pension attributable to the nineteen years from 1978 to 1997 is that the revalued surplus earnings in those six years is approximately half of the revalued surplus earnings for the nineteen years, for some of which the claimant was not in employed earner's employment. If the amount of guaranteed minimum pension that could be deducted from the total additional pension were limited to £33.86 per week, being the amount of additional pension attributable to the six relevant years, the claimant would have been £6.80 per week better off than he was with £40.66 per week being deducted. That is not an insignificant sum, but it is considerably less than the sum the claimant has had in mind.

13. It is only if the guaranteed minimum pension is greater than the additional pension attributed to contracted-out contributions that it matters whether the former is to be deducted from the total additional pension attributable to all contributions or merely from the additional pension attributable to the contracted-out contributions. It is possible to see from the detailed calculations in the papers in this case, and in the papers that were before me in the case in which I refused leave to appeal, why the guaranteed minimum pension in the claimant's case was greater than the additional pension attributable to his years in contracted-out employment. The earnings used to calculate the additional pension were revalued through an increase in line with inflation amounting to 72.4% between 1991 and 2002. Without that increase, the additional pension attributable to his years in contracted-out employment would have been about £19.64 per week, which was higher than the 1991 value of the guaranteed minimum pension, which was £18.35 per week. However, the guaranteed minimum pension was revalued at the rate of 7.5% per annum compound, which over eleven years increased its value by 121.6%. That different rate of revaluation explains why the value of the guaranteed minimum pension overtook the value of the additional pension attributable to the six relevant years.
14. However, after the claimant reached pensionable age, it can be seen from the figures in paragraph 9(i) of the submission to the tribunal at doc 1H that, although the claimant's guaranteed minimum pension has increased in value, the rate of increase has been very much less than the rate of increase in the additional pension. Although the figures in the submission do not extend to 2008, the additional pension attributable to the six relevant years probably by now exceeds the guaranteed minimum pension. The amount in issue in this case is therefore probably in the order of £1,000 in total rather than the £2,000 per annum for life that the claimant has believed to be at stake.
15. Pensions legislation is complicated and this is not an area of law with which Social Security Commissioners had to grapple very often so I cannot claim great familiarity with it. However, it is necessary to have the scheme of the legislation firmly in mind when considering the intention of Parliament and I will attempt to summarise what appear to me to be the key features. The position is made more complex by the fact that there have been major changes to pensions legislation. The most important pieces of legislation for the purposes of the present case are the Social Security Pensions Act 1975, which introduced what was known as the State Earnings-Related Pensions Scheme with effect from 6 April 1978, the Social Security Act 1986, which amended that scheme with effect from 6 April 1988, the Pension Schemes Act 1993, which was a consolidation measure, and the Pensions Act 1995, which made further changes with effect from 6 April 1997. The Child Support, Pensions and Social Security Act 2000 brought the State Earnings-Related Pension Scheme to an end in 2002 but those who contributed to that scheme will continue to receive pensions under it for much of this century.
16. The Social Security Pensions Act 1975, as originally enacted, provided for an earnings-related "additional component" of a retirement pension, which would be calculated so that it would represent 25% of inflation-proofed earnings above the lower earnings limit in the "best twenty years" of the claimant's working life. Employment could be "contracted-out" if there was an occupational pension scheme providing requisite benefits, including a guaranteed minimum pension. The guaranteed minimum pension was calculated in a similar way to the additional pension but in respect only of earnings in contracted-out employment adjusted to represent an average over the whole working life rather than just the best twenty years. When calculated in respect of earnings over the same period as the additional component, as would be inevitable in the first twenty years of the scheme, the guaranteed minimum pension would not exceed the additional component and it could be less because some payments that counted as earnings for the purposes of calculating the additional component did not count as earnings for the purposes of calculating the guaranteed minimum pension. Section 29(1) provided that, where a person was entitled to a guaranteed minimum pension, the amount of a contributory retirement pension should be reduced by "an amount equal to its additional component or, if less, an amount equal to the weekly rate or aggregate weekly rates of the [guaranteed minimum pension]".
17. As far as I can see, the only circumstance in which a guaranteed minimum pension might exceed an additional pension attributable to contracted-out earnings could be where a person had left contracted-out employment before reaching pensionable age, in which case section 35(7) of the 1975 Act provided that the scheme should provide for the guaranteed minimum pension to be increased by at least 5 per cent compound or the rate used to revalue earnings factors, for each relevant year after the year the employment ended, "whichever makes the lesser increase (so however that this sub-section is not to be taken as preventing the scheme from providing increases above those alternative minima)". Thus, it was only if the scheme chose to provide a high fixed rate of revaluation of the guaranteed minimum pension for an early leaver that the rate of revaluation might turn out to be greater than the rate of inflation and the guaranteed minimum pension might exceed the additional component calculated in respect of earnings received during the same period. It is not entirely clear to me why a pension scheme should choose such a rate of revaluation but one consideration may have been the calculation of a state scheme premium under section 45. Such a premium, known as a "limited valuation premium" was paid to the National Insurance Fund to cover increases in inflation above the fixed rate of revaluation.
18. By the time the Social Security Act 1986 was passed, the 1975 Act was perceived as having been too generous. The 1986 Act substantially amended the 1975 Act and in particular abolished the "best twenty years" rule and reduced the level of the additional pension or guaranteed minimum pension to 20% of inflation-proofed earnings but neither section 29(1) nor section 35(7) was affected (save that the reference to the "additional component" in the former became a reference to an "additional pension", a difference described by Mr Commissioner Mesher in CP/1318/2001 as "merely a change of name"). The main relevance of the 1986 Act to the present case, apart from requirement to make different calculations based on earnings before and from 6 April 1988, is that, in the long run, it would become less likely that a guaranteed minimum pension would be substantially less than an additional pension based on contracted-out contributions paid in respect of the same employment. In the short term, the likelihood was actually increased because the reduced level of the guaranteed minimum pension was introduced immediately, whereas the reduced level of the additional pension was phased in gradually, being 23.5% of inflation-proofed earnings from 6 April 1988 in the claimant's case (see section 6 of the 1975 Act, as amended by section 18 of the 1986 Act).
19. In 1993, sections 29(1) and section 35(7) of the 1975 Act became section 46(1) and section 16(2) and (3) of the 1993 Act, respectively.
20. The Pensions Act 1995 wrought further changes and, in particular did away with guaranteed minimum pensions with respect to years from 6 April 1997 and also provided that additional pensions would not be calculated by reference to earnings from contracted-out employment, thus separating additional pensions from occupational pensions. As I have already noted, it amended section 46(1) by substituting the current head (i) for the previous version.
21. Perhaps more significantly for the present case, the 1995 Act also amended section 16(3) of the 1993 Act by providing that, if the guaranteed minimum pension was not to be revalued in line with inflation in accordance with revaluation orders, the scheme should provide for it to be increased by at least the prescribed percentage. The relevant prescribed percentage where a person ceased to be employed between 6 April 1988 and 5 April 1993 is 7.5% (see regulation 62(2)(b) of the Occupational Pensions Schemes (Contracting Out) Regulations 1996 (S.I. 1996/1172)). That is the percentage applicable in the present case.
22. This amendment removed the possibility of opting for a fixed limited revaluation rate safe in the knowledge that, if the inflation rate fell below it, revaluation would be limited to the inflation rate. Now, opting for a fixed revaluation rate carried some risk, but from the point of view of the pension scheme that may have been outweighed by the likelihood of the pension fund increasing in value at a substantially greater rate and by the advantages of certainty. One consequence of the amendment may therefore have been substantially to increase the likelihood of a guaranteed minimum pension increasing in value at a greater rate than a prospective additional pension.
23. Behind the legislation I have described there is further legislation, much of it originating in the Health and Social Security Act 1984 and the Social Security Act 1985, making detailed provision for guaranteed minimum pensions where a person transfers from one occupational pension scheme to another. A guaranteed minimum pension can be transferred to another scheme with a transfer value payment and there was also provision for a transfer premium to be paid to a person whose rights were transferred from a contracted-out scheme to another pension scheme that was not contracted out. The 1986 Act enabled a person to contract out of the State Earnings-Related Pension Scheme if he or she had a personal pension and further provision was made for transferring from an occupational pension scheme into such a scheme. Of particular interest are the anti-franking provisions, which originated in the 1984 Act and are currently to be found in sections 87 to 92 of the 1993 Act. They prevent statutory increases in the guaranteed minimum pension being offset against the excess over the guaranteed minimum pension at the date of leaving a pension scheme.
24. It does seem to me that, looking at the scheme of the legislation as a whole, it is anomalous that a guaranteed minimum pension derived from a contracted-out pension scheme should be offset against an additional pension derived from earnings factors attributable to contributions or earnings in employment that was not contracted-out. Although the state scheme had a topping-up role in relation to pensions attributable to contracted-out employment as well as providing pensions in respect of other employment, occupational pension schemes generally have a role only in relation to the contracted-out employment to which they are linked and are not expected to subsidise pensions attributable to contributions paid in respect of other periods. It would be easy to amend the wording to make it clear that the offset should be limited to the additional pension attributable to the contracted-out earnings, although the words I would read in would not be precisely the same as those suggested by Mr Clifford. Moreover, this is just the sort of point that a draftsman can overlook. It is very easy, when a draftsman has a clear vision of the effect that legislation should have, for him or her to forget the need to make explicit all the points that he or she considers obvious. For an example of a very similar case, where benefits could be offset against compensation and the draftsman did not expressly limit the amount of benefits that might be offset to the amount paid in the period in respect of which compensation for loss of earnings had been paid, see paragraphs 31 and 32 of R(CR) 2/04.
25. However, at the end of the day, I am not "abundantly sure" that the anomaly was overlooked in this case, even though none of the contemporaneous material produced by Mr Henshaw dealt specifically with the issue, or that, if it was, it would necessarily have been avoided.
26. The state scheme is a "pay-as-you-go" scheme and is not funded, so that a contributor cannot expect complete correlation between contributions and benefits. It seems to me to be important to keep in mind that the state scheme bore a substantial part of the risk of inflation and, at least when the scheme started, was far more likely to be topping up provision made through an occupational pension scheme in respect of period when a claimant was in contracted-out employment than gaining in respect of other periods from the existence of a guaranteed minimum pension. It was possible to envisage the state scheme as providing a safety net over the whole of a claimant's working life and, as between occupational pension schemes and the State, it makes sense that, if the risk of a fixed-rate revaluation being at a rate less than inflation is borne by the State, the State should gain if the revaluation rate turns out to be greater than the rate of inflation. That is not a particularly compelling approach because, although it makes sense as between pensions schemes as a whole and the State, it operates arbitrarily as between one contributor and another. However, the point is not unarguable, particularly as it may have been thought that the scale of the anomaly was likely to be small.
27. The likelihood of there being an anomaly and the likely size of any anomaly might well have been material considerations. In this context, it is important to bear in mind that the fixed rate revaluation has always represented what appeared at the time to be a reasonable estimate of inflation and it lasts only until the contributor reaches pensionable age. Thereafter, inflation-proofing is the responsibility of the state scheme, which is why the anomaly existed for only about six years in the present case, having gradually diminished during that period.
28. It is also of some importance that the 1993 Act was a consolidation measure and that, as far as section 46 was concerned, the amendment made by the 1995 Act maintained the status quo in respect of the years up to 1997. That means that regard must be had to the intention of Parliament when section 29(1) of the 1975 Act was enacted. In 1975, the anomaly that arises because a guaranteed minimum pension might be greater than the additional pension attributable to the same earnings may have been foreseeable but was less likely to occur, and less likely to be substantial if it did occur, than it later became. I accept that the amendment made by to section 46 of the 1993 Act by the 1995 Act was made at the same time as the amendment made to section 16 of the 1993 Act, which made the anomaly much more likely, but it was only a matter of degree and I do not see how words can be read into the amendment if they are not also read into the original version and the earlier legislation. Moreover, the 1995 Act did at least have the effect that the anomaly would not have effect in respect of any additional pension earned through contributions paid after 5 April 1997
29. Pension-planning is, in any event, a matter of forecasting and taking decisions that may turn out not to be the right ones in the light of subsequent events. The scale of the anomaly must be seen in that context.
30. For all these reasons, I do not consider that I can remove the anomaly that this case reveals merely through judicial interpretation of the legislation. Accordingly, I must dismiss the claimant's appeal.
31. However, it is open to Parliament to remove the anomaly and it is open to the Government to propose legislation to that end. It is interesting that it appears from Pearce at paragraphs [19] to [21], that a booklet issued by the Department itself once explained the scheme in terms that would support the claimant's case. The anomaly most affects those who ceased to be employed in contracted-out employment at a time when the fixed rate for the revaluation of guaranteed minimum pensions was particularly high and has in fact been followed by a lower rate of inflation for some time. It really is not clear to me why, in the present case, the decision of the pension scheme of which the claimant was a member to opt for a fixed-rate revaluation of his guaranteed minimum pension should have had the effect that, at least for the first few years of his entitlement to a retirement pension, the claimant derived less benefit from the contributions he had made to the National Insurance Fund before and after his six years of contracted-out employment than he would have done had he been unemployed for those six years.

MARK ROWLAND

8 December 2008