Under the rules of the Barnardo's scheme, indexation and revaluation had to be in line with the "General Index of Retail Prices... or any replacement adopted by the Trustees". Did this definition give the trustees an option to switch to CPI?
The Court of Appeal (CA) has now agreed with the High Court that the answer is "no". It was a majority decision.
The CA also agreed with the High Court that, if the trustees did have the option to switch and they exercised it, the new index could apply for all service without bringing section 67 (that protects benefits already accrued) into play.
The High Court had also come to this conclusion on section 67 in two other cases, QinetiQ and Arcadia. It is helpful to employers in particular that a higher court has now agreed the point.
In more detail
Under the 1988 rules of the Barnardo's DB scheme, the measure of inflation for indexation and revaluation was:
"... the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval. Where an amount is to be increased 'in line with the Retail Prices Index' over a period, the increase as a percentage of the original amount will be equal to the percentage increase between the figures in the Retail Prices Index published immediately prior to dates when the period began and ended, with an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period."
Did this definition give the trustees a general option to switch from RPI to CPI?
In a majority decision, the Court of Appeal decided not, agreeing with the earlier High Court judgment.
The case turned on the construction of the scheme rules. These contained certain inconsistencies that led to intricate discussion of possible interpretations and finally to a majority decision.
The leading judgment (Lewison LJ) for the majority emphasised the obligation on a scheme to retain its tax status and the consequent influence that HMRC requirements (summarised in an appendix to the rules) can have on the interpretation of its rules. At the time HMRC requirements (Practice Notes IR 12) were for revaluation and indexation be based on RPI or any other index it agreed specifically with a particular scheme.
The judge also noted that new official inflation indices were created periodically and that variants of existing ones were developed for different purposes. This made it a virtue for trustees to have a degree of choice between them (in fact there were four potential "replacement" indices in 1988 when the rules were adopted).
Against that background the judge decided the natural meaning of the language in the definition of inflation was that "replacement" preceded "adoption" by the trustees and that both "re-basing" and "replacing" RPI had to be done by its official publisher. So there was no unilateral right for the trustees to switch indices.
Sir Geoffrey Vos disagreed and held that the definition gave the trustees a general option to switch indices as long as that did not prejudice the scheme's tax status.
He argued that, as a matter of construction, the definition was capable of being read either way.
In a key difference of approach from the majority, he gave weight to the change in the definition of the inflation index from the 1978 rules. There it read:
"'Index' shall mean the Government’s Index of Retail Prices or any other official cost of living index published by authority in place of or in substitution for that Index."
In the judge's view, the change in wording was meant to give the trustees the freedom of choice the employer was arguing for. He also saw it as a deliberate attempt by the drafter of the 1988 rules to allow the scheme to use the freedom in IR12 to agree a measure for inflation with HMRC other than RPI.
The majority had specifically rejected this "forensic archaeology" of the 1978 rules as likely to be misleading.
In addition, Vos C relied on the principle of "business common sense". This is the idea that where there is an ambiguity in a commercial legal document, it is permissible to ask which interpretation makes most common sense in the business context. In the judge's view, the reading that would allow the trustees to switch made most business common sense.
The majority had seen no room for a "business common sense argument" because "the natural meaning of the words" of the definition was clear enough and the result was not uncommercial.
The second question was whether, if the trustees did have the option to switch and they exercised it for all service, would that offend section 67 (that protects accrued benefits).
In a unanimous decision, the CA agreed with the High Court that the answer was "no".
The High Court had also reached that conclusion in two other earlier cases (Danks v QinetiQ and Arcadia).
In the Barnardo's case, the answer to this question is not officially part of the CA's decision because, given its answer on switching, the second question did not arise strictly speaking.
Nevertheless it is helpful to employers in particular that the CA addressed the issue and agreed with the earlier decisions.
The argument is that the member's "subsisting right" (protected by section 67) is to revaluation or indexation at a rate consistent with the definition of the inflation measure in the scheme rules. Where that measure gives the trustees power to switch indices, the member has no right to a particular measure until the time comes to calculate their revaluation or to pay the next annual pension increase. It is an argument about timing.
We understand the employer plans to apply for permission to appeal to the Supreme Court.