Appeal No. EAT/104/92

	EMPLOYMENT APPEAL TRIBUNAL
	58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 16 & 17th June 1993
	Judgment delivered on 30th July 1993

	Before

	THE HONOURABLE MR JUSTICE WOOD MC (P)

	MR R JACKSON

	MR J A SCOULLER

WALDEN ENGINEERING CO. LTD.	APPELLANTS

MR ERNEST WARRENER	RESPONDENT

	Transcript of Proceedings

	JUDGMENT

Revised

	APPEARANCES

For the Appellants	Mr P Elias QC
Mr A Lynch (of Counsel)
Engineering Employers
         Federation
Broadway House
Tothill Street
LONDON SW1H 9NQ 

For the Respondent	Mr J McMullen
	(of Counsel)
	Messrs Robin Thompson & 	       Partners
	Solicitors	
	Bainbridge House
	Bainbridge Street
	LONDON WC1A 1HT

MR JUSTICE WOOD (PRESIDENT):       By a Decision promulgated on 6th January 1992 after a hearing during the previous October, an Industrial Tribunal sitting at Hull declared
	"... that the Applicants terms and conditions of employment as regards pensions and pension schemes are that pensions are no less beneficial after 1 May 1991, than they were before this date, and reflect the terms of the pension scheme operating to the applicants benefit before 1 May 1991 formerly known as the Anglo-Nordic Pension Scheme."
Until his retirement at Christmas 1991 the Applicant, Mr Warrener continued to be employed by Walden Engineering Co Ltd (Waldens).

	Walden appeals and raises a number of points of general interest in connection with pension schemes, EEC Directive No.77/187 (the Directive) and the Transfer of Undertakings (Protection of Employment) Regulations 1981 (S.I.1981 No.1794) (the Regulations).

	The evidence was short - we have the notes - and a number of documents were before the Tribunal.  There seems to have been little, if any, disagreement on the facts.

	Prior to 1980 Mr Warrener had worked for Richard Sizer Ltd (Sizer).  He left but returned and from 12th March 1980 has been continuously employed.   Sizer was part of the Anglo-Nordic Group of Companies.  On 20th February 1991 Waldens bought the shares of Sizer.  On 1st April 1991 the business of Sizer was transferred to Waldens and the Sizer operation became a Division of Waldens.  The sale of the shares had not been within the Regulations, but this transfer was clearly within the Regulations and was conceded to be such.  The previous history of various company pension schemes within the Group was not before the Industrial Tribunal nor was it before us, but it seems clear, as was found by the Tribunal, that for some years Mr Warrener had been a member of a company scheme which ultimately was merged within the Anglo-Nordic Group Pension Scheme..  This was a "contracted-out contributory" scheme.  During March 1991 the name on the contracting-out certificate was changed to Waldens's and after receipt of financial and actuarial advice Waldens surrendered that contracting-out certificate with effect from 30th April 1991.  Waldens contracted back into State Earnings Related Pension Scheme (SERPS) and Mr Warrener thereafter ceased to be a member of any other scheme.  We do not know whether he re-entered SERPS.

The pension position
	The position of parties to a pension scheme has been considered in such cases as Re Courage Group's Pension Schemes [1987] 1 All ER 528: Mihlenstedt v. Barclays Bank International Ltd [1989] IRLR 522: and most recently in Imperial Group Pension Trust Ltd v. Imperial Tobacco Ltd [1991] 2 All ER 597.

	In Mihlenstedt the plaintiff sought payment of an ill-health pension under the Bank Pension Scheme.  In considering the rights of a member of the scheme Lord Justice Nicholls said this at paragraph 64:
	"I do not think it is necessary to pursue these points of trust law.  It is unnecessary to consider what might be the position under the law of trusts if the trust deed stood alone, and the plaintiff's rights were to be found only within the four corners of the trust deed and the rules.  It is unnecessary, because this is a case in which the plaintiff's status as a member springs from her contract of employment with the bank.  The bank holds out this pension scheme to its staff as a valuable part of the staff's overall remuneration package.  That being so, when one finds that under the rules of the pension scheme certain functions are entrusted to the bank, it is, in my view, necessarily implicit in the contract of employment that the bank agrees with the employee that it will duly discharge those functions in good faith.  In particular, if a member of the bank staff will become entitled to payment of an ill-health pension if the bank is of the relevant opinion concerning the state of health of the employee, it is an implied term of the contract that the bank will properly consider a genuine claim by an employee that her health qualifies her for an ill-health pension.  To my mind it is unthinkable that the position might be otherwise. ..."

	In the Imperial Group Pension case, Browne-Wilkinson VC was required to consider a point of fundamental importance namely, whether a company in giving or withholding its consent to any change in the rules of a trust deed was under some fiduciary or other duty to consider the interests of members and not merely the company's own interests.  We would draw attention to the reasoning of the learned Judge in his judgment from p.604G to 607H, but for the purposes of this judgment it is sufficient to cite from the second finding in the Headnote which reads:
	"Held ...
	 (2)  Although it was impossible to impose a condition of reasonableness on a company's right to give or withhold its consent to an increase in the pension benefits payable to members of its pension fund, its right to give or withhold its consent was subject to the obligation of good faith implied in every contract of employment requiring it to exercise its rights in such a way as not to destroy or seriously damage the relationship of confidence and trust between it and its employees and former employees.  The trust deed and the rules of the company's pension scheme likewise gave rise to an obligation of good faith on the company's part.  Accordingly, although the company was entitled to look after its own interests, financial and otherwise, in the future operation of the fund, its right to give or withhold its consent to an amendment under cl 36 to permit increases in the pension benefits payable to members had to be exercised in good faith, which required it to exercise its rights with a view to the efficient running of the scheme established by the fund and not for the collateral purposes of forcing members to give up their accrued rights in the existing fund which was subject to the scheme. ..."

	Any clause in a contract of employment requiring membership of any particular pension scheme is void.  (Social Security Act 1986 - Section 15).  Any application by an employee to join must be voluntary.  Once such application is accepted, then a tripartite legal position is created between the employer, the trustees and the employee/member, based in part on contract and in part on principles of Trust Law.  The duties, rights and liabilities are to be found in the Trust Deed, the rules of the scheme and any implied term which may be relevant.  Good faith is essential.

	This legal situation is not part of a contract of employment to which the trustees are not a party, but it clearly is an agreement within "the employment relationship".

	Thus, although upon the present material before us it is not possible to form a precise analytical view, it matters not, because in our judgment both the contract of employment and a legal agreement within the employment relationship fall within the Directive and the Regulations.
The Directive
	Before turning to the wording of the Directive itself, it is as well to make three observations.  First, as we are dealing with the private sector, Directives are not directly enforceable.  Secondly, that it is always open to the European Commission to take proceedings against the UK Government if it is of the view that domestic legislation is not giving effect to Directives or to the Treaty.  Thirdly, if the UK Government fails to carry out the effect of the Directive and if it is correct that the Regulations do not satisfy the requirements of the Directive, then an individual may have a right to claim damages directly against the Government on the principles of Francovich v. The Italian Republic [1992] IRLR 84.

	The relevant Article in the Directive is Article 3 in section 2, "Safeguarding of Employees' Rights".  Article 3 as relevant reads:
	"1.  The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer within the meaning of Article 1(1) shall, by reason of such transfer, be transferred to the transferee.

	..."

	 2.  ...

	 3. Paragraphs 1 and 2 shall not cover employees' rights to old-age, invalidity or survivors' benefits under supplementary company or inter company pension schemes outside the statutory social security schemes in Member States.

		Member States shall adopt the measures necessary to protect the interests of employees and of persons no longer employed in the transferor's business at the time of the transfer within the meaning of Article 1(1) in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors' benefits, under supplementary schemes referred to in the first subparagraph."

	The two parts of Article 3-(3) have been termed "limb A"  and limb B during submissions.  So far as "limb A"  is concerned the only issue is whether the Anglo-Nordic Group Pension Scheme is within the definition of "a supplementary pension scheme outside the social security schemes in Member States".

	Submissions have been made on "limb B" and its effect.  It is clearly addressed to "Member States" and does not create any liability on a transferor or transferee in the private sector.  Moreover, it seems to us that a proper reading of "limb B" indicates a duty on Member States to protect the interests which crystallise at the time of transfer in respects of the rights therein referred to.  Unless so read, the wording of "limb B" would be in conflict with the clear words of "limb A" .

	Turning to "limb A", in our judgment the distinction drawn in Article 3(3) is between pension schemes outside the statutory social security schemes of Member States and those statutory social security schemes.  Where does this scheme fall?

	Although the attitude shown by the Commission in Brussels does not interpret EEC Law, it is perhaps indicative of the view taken of the obligations in Member States arising out of Directives.  As recently as 21st October 1992 the Commission of the European Communities brought an action against the United Kingdom of Great Britain and Northern Ireland seeking declarations that the UK Government had not complied with the requirements of this Directive.  Neither in that action nor in the Report of the Commission to the Council was there any suggestion that there had been a failure to give effect to Article 3 of the Directive.

	Some help can also be obtained from the decisions of the European Court of Justice.  In Defrenne v. Belgium [1971] ECR 445, the Court stated
	"Although consideration in the nature of social security benefits is not therefore in principle alien to the concept of pay, there cannot be brought within this concept, as defined in Article 119, social security schemes or benefits, in particular retirement pensions, directly governed by legislation without any element of agreement within the undertaking or the occupational branch concerned, which are obligatorily applicable to general categories of workers." (Our emphasis)

	That case was cited with approval in Bilka-Kaufhaus GmbH v. Weber von Hartz [1987] ICR 110 by the Advocate General at p.117B where he says:
	"In his opinion in that case, Advocate General Dutheillet de Lamothe stated that in his view one of the reasons for the application of article 119 to supplementary pension schemes of this kind is the "necessary link between the consideration, the employer, the employed person and the employment, which article 119 implies": [1971] ECR 445, 459.  Such a link undeniably exists in this case.  It must be borne in mind that it is voluntary scheme which complements and "tops up" the statutory scheme, even if it was encouraged or organised by the authorities, and that it applies only in so far as it is incorporated in the employment relationship, after negotiations between the employer and the employees."

	This approach is confirmed in paragraph 17 of the decision of the full court.

	That contracted out contributors scheme such as the present scheme are within the phrase "supplementary schemes outside the statutory social security schemes of Member States" is also reinforced by a reading of Barber v. Guardian Assurance Group [1990] ICR 616.  Mr Advocate General Van Gerven deals with this issue in paragraphs 17 to 23 of his Opinion at pages 642 to 646 of the report.  However, the clearest passage seems to us to be found in the decision of the Court itself from paragraphs 21 to 27 - at p.669.
	"21.  In view of the answer given to the first question, the second question must be understood as seeking in substance to ascertain whether a retirement pension paid under a contracted-out private occupational scheme falls within the scope of article 119 of the Treaty, in particular where that pension is awarded in connection with compulsory redundancy.

	 22.  It must be pointed out in that regard that, in its judgment of 25 May 1971 in Defrenne v. Belgian State (Case 80/70)[1971] ECR 445, paras 7 and 8, the court stated that consideration in the nature of social security benefits is not in principle alien to the concept of pay.  However, the court pointed out that this concept, as defined in article 119, cannot encompass social security schemes or benefits, in particular retirement pensions, directly governed by legislation without any element of agreement within the undertaking or the occupational branch concerned, which are compulsorily applicable to general categories of workers.

	 23.  The court noted that those schemes afford the workers the benefit of a statutory scheme, to the financing of which workers, employers and possibly the public authorities contribute in a measure determined less by the employment relationship than by considerations of social policy.

	 24.  In order to answer the second question, therefore, it is necessary to ascertain whether those considerations also apply to contracted-out private occupational schemes such as that referred to in this case.

	 25.  In that regard it must be pointed out first of all that the schemes in question are the result either of an agreement between workers and employers or of a unilateral decision taken by the employer.  They are wholly financed by the employer or by both the employer and the workers without any contribution being made by the public authorities in any circumstances.  Accordingly, such schemes form part of the consideration offered to workers by the employer.

	 26.  Secondly, such schemes are not compulsorily applicable to general categories of workers.  On the contrary, they apply only to workers employed by certain undertakings, with the result that affiliation to those schemes derives of necessity from the employment relationship with a given employer.  Furthermore, even if the schemes in question are established in conformity with national legislation and consequently satisfy the conditions laid down by it for recognition as contracted-out schemes, they are governed by their own rules.

	 27.  Thirdly, it must be pointed out that, even if the contributions paid to those schemes and the benefits which they provide are in part a substitute for those of the general statutory schemes, that fact cannot preclude the application of article 119.  It is apparent from the documents before the court that occupational schemes such as that referred to in this case may grant to their members benefits greater than those which would be paid by the statutory scheme, with the result that their economic function is similar to that of the supplementary schemes which exist in certain member states, where affiliation and contribution to the statutory scheme is compulsory and no derogation is allowed.  In its judgment of 13 May 1986 in Bilka-Kaufhaus GmbH v. Weber von Hartz (Case 170'84)[1987] ICR 110, the court held that the benefits awarded under a supplementary pension scheme fell within the concept of pay, within the meaning of article 119."

	We have no doubt that the present scheme falls within the wording of article 3(3) as a supplementary pension scheme.  It is therefore outside the effect of the Directive.  This is so whether it falls within the strict wording "a contract of employment" or "from an employment relationship".

The Regulations
	"Exclusion of occupational pensions schemes

	7.  Regulations 5 and 6 above shall not apply -

	(a)to so much of a contract of employment or collective agreement as relates to an occupational pension schheme within the meaning of the Social Security Pensions Act 1975 or the Social Security Pensions (Northern Ireland) Order 1975; or

	(b)to any rights, powers, duties or liabilities under or in connection with any such contract or subsisting by virtue of any such agreement and relating to such a scheme or otherwise arising in connection with that person's employment and relating to such a scheme." 
It is not suggested that Regulation 7 does not follow the Directive.  An occupational pension scheme is not within the Directive nor is it within Regulation 7.  If it is to be understood to be within "a contract of employment" the wording in 7(b) is clear; if it falls within "the employment relationship" then it seems to us to fall within the wording of Regulation 7(b), "or otherwise arising in connection with that person's employment and relating to such a scheme".

	We were referred to the recent case of Perry v. Intec Colleges Ltd [1993] IRLR 56.  This decision is not binding upon us, but the learned Chairman of an Industrial Tribunal sitting at Bristol, who himself has written a work on Pensions in connection with employment law, has agreed with our reasoning thus far.	  However, in Perry the Industrial Tribunal decided that following the guidance in Litser      the following words should be added at the end of Regulation 7:
	"But any contract of employment transferred by virtue of Regulation 5 shall be deemed to include such rights as are necessary to protect the interests of the employee in respect of rights conferring on him immediate or prospective entitlement to old-age benefits, including survivors' benefits, and supplementary pension scheme."

	This decision is based upon "limb B" of Article 3(3) to which we have already referred and about which we expressed our views.  It is unnecessary in the present appeal to reach a conclusion on this particular issue, but whether or not a pension scheme is in fact part of a contract of employment may have to be decided on the facts of any particular case; secondly, it will be necessary to decide whether there is any power under the Regulation to create rights between the parties which did not previously exist; and thirdly, whether or not the guidance given in  Webb v. Emo Air Cargo (UK) Ltd [1993] ICR 175, HL permits such a course.  That Industrial Tribunal did not have the advantage of the guidance of Lord Keith.  Our duty is to seek to interpret the intention of the draftsman of the Regulations, and if alternative constructions are available then this Court will presume that the draftsman did not intend so to draft as to be in conflict, but to be in conformity, with EEC Law.  However, if the wording is clear, it is for us to construe that wording according to the English language.  We, ourselves, would not feel able to insert that wording after Regulation 7, not only on the guidance of Lord Keith in Webb, but also from our understanding of the true meaning of "limb B".

	Even if the Directive does not apply and the Regulations give effect to the Directive, Mr Warrener bases his case on the existence of a separate contract between Waldens and himself which is alleged to have come into existence during March and April 1991.  Reliance is placed upon the last few lines of paragraph 12 of the Decision.  After a recital of the contents of a number of documents, it is in this paragraph that the Industrial Tribunal sets out its reasoning.  It reads:
	"There can be no doubt of the aim of Directive 77/187.  It seems to us that there can be no doubt that this pension scheme is not a supplementary scheme that the company Anglo Nordic Scheme were running when Mr Warrener applied to join.  It was a contracted-out scheme and not a supplementary; it was additional to the state scheme; it was a free standing separate scheme in its own right and not a supplementary scheme we find.  Therefore, are we satisfied that Regulation 7 of the 1981 Regulations means what it apparently says on its face?  Can the respondents simply cut off any responsibility they have had to an employee such as Mr Warrener, and discontinue providing benefits similar to those which had been enjoyed, and which were part of the contract of employment prior to the transfer of this undertaking?  We feel we must give a European meaning to the Regulation.  We take the view that Regulation 7 does not comply with the Directive and that the contention put forward so ably by Mr Jeffrey in his written submissions to us is right.  We prefer his interpretation of this matter to that of the respondents.  We are aware that this whole area is an area of great concern to many and is compounded of course by Barber decision and what that decision truly means.  But it does seem to this tribunal that if the meaning of this Regulation is as contended for by the respondents, then the applicant has to resign and claim constructive dismissal or sue his employer for repudiatory breach of contract because the respondents are refusing to maintain his terms and conditions of employment.  We find the contentions of the applicant and his advocate are to be preferred to those of the respondent."

	It seems to us upon reading this part of the decision in its context, that the Tribunal was considering the Regulations and their application.  There was no intention to make a finding of fact that a contract existed and that there had been a fundamental breach of that contract.  If that had been the intention there was no need to consider which view of the Regulations was to prevail, as the contract was independent of either view.  We therefore accept the first submission made by Mr Elias on this issue, that there never was a finding of fact that a fresh contract existed between Mr Warrener and Waldens.

	Secondly, he submits that the documents relied on, namely "a notice to all employees of Richard Sizer Ltd" of 28th March 1991 and a "notice of explanation" of 31st March 1991 as constituting an offer, were sent by and were made by Sizer and not Waldens.  This is also clear.  There is no suggestion of any agency and Sizer, upon whose headed paper the documents are typed, is a separate legal entity.  We agree with this submission.

	Thirdly, the documents when properly construed are merely notices giving information.  We agree, but would add that where transfers are being contemplated, it is important carefully to bear in mind the effect which will inevitably be caused upon the pension situation.  It may be that the financial advice ultimately given to Waldens in the present case, came as a disappointing surprise, nevertheless it seems to us important that if possible, false hopes or expectations should not be raised, however unwittingly.  Lastly, it seems to us that there cannot have been an intention to create a contractual relationship.

	The position under the Anglo Nordic Pension Scheme continued until the end of April.  A section of the scheme dealt with Sizer employees.  When Mr Warrener applied to join he did so under the terms of the Trust Deed and the governing Rules.  This is stressed by the booklet describing the scheme, which also emphasises "Future conditions cannot be foreseen and the Group must therefore reserve the right to amend or discontinue the Scheme at any time."  Indeed, no one would expect a well drafted scheme not to include such provisions.

	Thus, even if the liability of Sizer under the Scheme did pass to Waldens, there is no suggestion that the decision to surrender the contracting-out certificate was made in bad faith.

	Before leaving this appeal we would like to express out thanks to Counsel for their assistance in a difficult matter, and also to stress that pension rights under an occupational pension scheme, whether arising from the contract of employment or the employment relationship often form a valuable part of an employee's remuneration.  In consequence, where a transfer takes place, good industrial relations require that both transferor and transferee, when consulting and informing employees, should ensure that the pension position is clearly explained to each employee.  This should cover both the existing situation and any proposed future pension arrangements. 

	For the reasons we have given therefore it seems inevitable that Mr Warrener's application must fail.  This appeal is allowed and his application is dismissed.   Leave to appeal.