Increases are an important component of a member's pension, but can be a costly one to fund. The High Court has to grapple with the increases to be applied three times in recent months in the cases of Dutton –v- FDR, Buckinghamshire –v- Barnardo's and Re BCA Pension Plan.

Buckinghamshire and others –v- Barnardo's and others [2015] EWHC 2200 (Ch)

This case considered whether the trustees of the Barnardo Staff Pension Scheme (the Scheme) had the power to choose the index by which increases in pensions payments (indexation) and to deferred pensions (revaluation) would be calculated. 

Background

In order to protect against the effects of inflation, defined benefit occupational pension schemes are required by legislation to revalue deferred members' benefits and increase to pensions in payment.  These increases are to be in line with inflation as determined by the Secretary of State, subject to certain caps. Until 2010, the inflation measure used was RPI - the UK’s longest-running measure of price inflation - and many scheme rules expressly referred to RPI.  

However, from 1 January 2011, the Government started using CPI instead of RPI as its measure of inflation.

From Barnardo's (the Employer) perspective a change from RPI to CPI was attractive because CPI will typically be about 0.5-1% lower than RPI, which can translate into a significant funding difference. However, the issue was whether the scheme rules allowed the switch.

The Employer claimed that the Trustees did have the power to make the substitution, but we assume the Trustees disagreed (or at least were uncertain). Accordingly the trustees sought guidance from the court on whether they could make the change from RPI to CPI.  As is common in such cases, the Trustees took a neutral position to allow the competing arguments to be run by Barnardo's and a representative member.

Judgment

The Scheme Rules allowed for revaluation and indexation at the 'prescribed rate'. The rules provide that this is the lesser of 5% and 'the percentage rise in the Retail Prices Index'. Further RPI was defined as the 'general index of retail prices published by the Department of Employment or any replacement adopted by the Trustees' without prejudicing Inland Revenue approval of the Scheme.

The issue at stake was whether RPI in the Scheme rules meant:

  • RPI or any index that replaces RPI and is adopted by the trustees
  • RPI or any index that is adopted by the trustees as a replacement for RPI

Barnardo's submitted (in line with the second option) that if a different index only qualified as a replacement in circumstances where RPI had been discontinued, the additional requirement of adoption by the trustees was futile. Further they argued that this interpretation gave the Trustees more scope to adopt alternative indexes which best suited the needs of the Scheme at a certain point in time.

By contrast the members claimed that 'index' under the Scheme rules meant RPI, and therefore could not be replaced unless it was discontinued. 

Warren J found for the members. It was determined that the definition of 'Retail Prices Index' in the Scheme rules did not allow for the Trustees to adopt CPI as a replacement for RPI. This was on the grounds that CPI could only replace RPI once RPI had ceased to be published. 

Comment

Given that there have been previous decisions on whether a switch from RPI to CPI can be made where judgment has gone against members, this case emphasises the need to look very carefully at the precise wording of the trust deed and rules. Therefore when faced with an employer's request to switch, it would be sensible for trustees to take legal advice before making any decisions.

Dutton -v- FDR [2015] EWHC 2946 (Ch)  

The High Court considered what was the correct interpretation of a pensions increase clause under the FDR Limited Pension Scheme's (the Scheme) trust deed and rules. 

Background 

The trust deed and rules governing the Scheme contained an amendment power preventing changes which had a detrimental effect on benefits previously accrued. Further the Scheme adopted new rules in 1980 providing for pensions in payment to increase at a fixed rate of 3% compound per annum (the Old Rule). 

Following this in 1991, a deed of amendment changed the Old Rule allowing for pension increases in line with Limited Price Indexation capped at 5% (The New Rule)1. Purportedly this New Rule was valid in respect of past as well as future benefit accrual, and from 20 June 1991, despite its retrospective effect, the scheme was administered in line with the New Rule only. 

However, the New Rule prejudicially affected the right to increases for pensionable service pre-dating 20 June 1991, so it could not replace the Old Rule entirely.  FDR Limited (the Employer) and the Trustees agreed that the Scheme should be operated with the Old Rule acting as an underpin. The contentious issue was how the 3% underpin in respect of pre-20 June 1991 service should be applied. 

Judgment 

The Employer argued that members with pre-20 June 1991 pensionable service were protected by the underpin. However from that date they argued that all members should receive annual increases on the 5% LPI basis, irrespective of which period their accrued benefits were attributable to2.

The Judge did not agree with this argument and held that the Trustees' approach was correct3.  This provided that members with pre-1991 pensionable service were entitled to the greater of 3% fixed or 5% LPI each year.

This ruling resulted in the greatest increase in liabilities for the Scheme. The additional cost of providing members with benefits on this basis has been estimated as being up to £17 million.

Comment

As with the Barnardo case, this case turned on issues of interpretation of the wording in the rules, meaning that the wording of individual schemes needs to be considered very carefully.  Furthermore the Judge in FDR was influenced by how the Scheme could have been administered since the 1990s to give effect to the underpin, rejecting the overly technical (and less costly) interpretation of the Employer.  

Re BCA Pension Plan

The High Court has allowed a trustee application to administer their occupational pension scheme as if certain words from a previous pension increase rule had not been accidentally omitted during a consolidation exercise. 

Background 

Where an issue of construction arises in relation to the terms of a will or trust, s48 of the Administration of Justice Act 1985 allows the trustees, having obtained legal advice from senior counsel, to make an application to the High Court for an order authorising the trustees to take certain steps. 

The BCA Pension Plan (the Scheme) was governed by the 1998 trust deed and rules (the Original Rules). In 2005 the First Rules were amended by a deed of alteration (the 2005 Rules) and in 2011 a consolidated deed and rules (the Consolidated Rules) was executed. Certain parts of rule 23(1) under the Original Rules were omitted in Rule 22 of the Consolidated Rules.

Without the missing words Rules 22.3 and 22.3 provided for different rates of interest to apply to pensions and further, neither of these subsections gave an appropriate indicator as to which part of the pension was to be increased.

Judgement

Accordingly Mr Justice Snowden held that there had clearly been a mistake when the pension increases rule was drafted in the Consolidated Rules, as Rule 22 did not make sense without the additional wording. Therefore in order to rectify the mistake it was necessary to include certain deleted words.

By reading these words into Rule 22 the judge was satisfied that he was not creating a new contractual provision in the Rules that would otherwise work without it: the additional wording was necessary to make the existing Rules work.

Further although minded to do so at first, the judge's order was not conditional on the trustees obtaining member consent to the change.

Comment

The use of section 48 is not common in pension schemes.  Although it protects the trustees against a complaint that they have wrongly administered the Scheme, it does not prevent members from arguing a different interpretation.  However, it is a route which may be much quicker, and less costly, than an application for construction or rectification.