UK: Supreme Court Rules Against Barnardo's Switching To CPI

The Barnardo's scheme's rules stated that uprating of benefits must be based on the "general index of retail prices or any replacement adopted by the trustees without prejudicing approval". While the retail price index (RPI) continues to be published (i.e. not "replaced"), the Supreme Court found it is not open to the trustees to adopt a new index.

Barnardo's submissions were unanimously refused by the Supreme Court, endorsing the judgments of the lower courts. In so doing the Supreme Court adopted a textual rather than purposive approach to its construction of pension scheme rules. Our experts examine this case and what it means for schemes generally.

Key points

1. Scheme specific

As with all of the "retail price index (RPI) /consumer price index (CPI) pension cases" which the courts have considered up until now, this case was fact specific and turned on the precise wording of the relevant rule in the Barnardo's staff pension scheme.

2. What did the relevant rule mean?

The Supreme Court ruled that, until such time as RPI has been replaced (which only the Office for National Statistics (ONS) can do), the trustees of the Barnardo's pension scheme have no power to select a new index. The fact that RPI is no longer used by some parties and official bodies (i.e. they have 'replaced' RPI with CPI) and that significant criticism has been directed at RPI does not negate the fact that RPI continues to be published.

3. Textual approach favoured by the judges

Importantly, the Supreme Court adopted a more literalist, textual approach to interpreting the Barnardo's scheme rules, rather than a purposive approach which has sometimes been taken by judges in previous cases.

4. Relevant factors

The Supreme Court set out clear factors to be taken into account when interpreting the provisions of pension scheme rules. Significantly, the Court highlighted the importance of being sensitive to members' interests, who would not have been parties to the scheme's deeds and rules, who may have joined the scheme many years after the documents had been signed and who would probably have no knowledge of the commercial background or industry practice at the time the deed and rules were executed.

5. Wider implications

The decision may therefore have wider implications. For example, a purposive (rather than literal) construction of pension scheme provisions may be more difficult to justify if it could not be properly understood by a reader (such as a scheme member) unaware of the background against which the document was executed.

6. Section 67

As the Supreme Court declined to deal with the point, the ruling in Qinetiq, to the effect that Section 67 is not engaged by a switch of inflation index, remains the legal position.

Background

Barnardo's is the sponsoring employer of a pension scheme, which has historically provided pension increases by reference to increases in the index of retail prices (RPI).

Barnardo's brought proceedings to obtain a declaration that the trustees of the pension scheme had the power to move the inflationary measure used for pension increases from RPI to CPI. CPI is generally lower than RPI, and the latter has not been considered a "national statistic" by the ONS since 2013 because the formula used to calculate it did not meet international standards.

The way RPI was defined in the rules of the Barnardo's scheme executed in 1988 (1988 Rules) was critical to the resolution of the issue and set out the circumstances in which a switch away from RPI is permissible:

"RPI means 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." (emphasis added)

The issue for the Supreme Court was whether the definition of RPI in the above provision meant:

  1. RPI or any price index which replaces RPI and which the trustees then adopt (the interpretation argued on behalf of the members); or
  2. RPI or any other index which the trustees decide to use in place of RPI (the interpretation argued by Barnardo's).

Barnardo's had been unsuccessful before the High Court, and also unsuccessful before the Court of Appeal. Barnardo's went on to appeal the issue to the Supreme Court.

Supreme Court's judgment

The Supreme Court unanimously held that the trustees of the Barnardo's scheme had no power under the rules to switch to CPI.

To construe the provision, the Supreme Court stated that the Court must have regard to the nature of the document in which it was contained, its purpose within the context of the trust and the circumstances in which it had been agreed.

In particular, the document introducing the 1988 Rules was to be treated as a sophisticated instrument, prepared by skilled draftsman. Unlike a commercial contract, it was not subject to commercial negotiation and the draftsman would have assumed that the document would endure for many years. Importantly, members (whose benefits were governed by the 1988 Rules) were not party to the 1988 Rules, may have joined the scheme many years after the 1988 Rules had been executed and may not have had the benefit of legal advice or been able to ascertain the circumstances in which the 1988 Rules had been introduced.

In construing what the 1988 Rules meant, therefore, the Supreme Court put more emphasis on the words the draftsman had actually used (i.e. what might be called a more literal, textual approach) and less emphasis on the background facts which could be deployed to ascertain the purpose of the provision (what might be called a "purposive approach" which, for example, is more relevant in a commercial contract case).

The Supreme Court's principal reasons were:

  • the draftsman had used the word "replacement" which did not "naturally suggest the selection of an alternative to an option which remains available";
  • the word order and grammatical construction of the phrase "a replacement adopted by the trustees" suggested that RPI must first be replaced and then the trustees adopt the replacement;
  • the rule does have rational purpose by providing for the circumstance in which RPI could be replaced. The UK Government had changed its official index previously and so commercial common sense did not run against the literal analysis;
  • while the index had been defined differently in previous rules this did not matter because the rule had been subject to wholesale revision and members could not be expected to look into the scheme's archaeology;
  • the second sentence of the rule indicated that the authority responsible for 're-basing' RPI was also responsible for 'replacing' it and it was therefore necessary to read the rule consistently within the context of the document as a whole; and
  • while the implications for the retention of RPI might contribute to the scheme's deficit, the rule must be construed in isolation without any preference to either Barnardo's or the members.

Conclusion

This case is another in a long line scrutinising pension schemes' provisions designed to protect the value of members' pension benefits from inflation, though this is the first to reach the Supreme Court. Despite increasing criticism of RPI, the ONS has been slow to make any changes to fix it, although work is being done to prepare an alternative 'household' index. The amount of potential liabilities resting on the interpretation and application of these rules can be significant (£100m in Barnardo's case).

Each of the cases so far brought before the courts have been scheme-specific, dependent on the wording used in the relevant pension scheme's governing rules. This case is no different. The industry is watching out for the upcoming BT Court of Appeal judgment so we shall see if it sheds more light on these issues.

Quite apart from the continuing debate about RPI and CPI, the case provides Supreme Court guidance on the principles to be applied in construing a pension scheme's rules. While there had been a line of authority that construing pension scheme documents requires no special approach (as compared to, say, construing a commercial contract), the Supreme Court's decision and its emphasis on the importance of members indicates that, in some respects, a different approach is called for.

The Supreme Court's focus on the words used shows a subtle (but perhaps important) change in emphasis. This rows away from construction being used as a tool to purposively determine what the parties to a document objectively intended (by introducing extrinsic evidence as an aid) in favour of an approach which prefers the ease of the reader (and which arguably could operate at the expense of common sense).

The decision may therefore have a wider impact on construing documents in pensions practice. For example, a purposive construction may now be more difficult to justify if it could not be properly understood by a reader (such as a scheme member) unaware of the background against which the document was executed.

It had been hoped by some that the Supreme Court would take the opportunity to reverse the judgment in Danks v Qinetiq, which held that changes away from RPI would not contravene section 67 Pensions Act 1995. The Supreme Court however declined to consider the members' cross-appeal on this point.

Read the original article on GowlingWLG.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions