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.
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.
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:
- RPI or any price index which replaces RPI and which the trustees then adopt (the interpretation argued on behalf of the members); or
- 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.
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.
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.