The level of pension increases and the freedom to change the rate used has been the topic of ongoing discussion since the government introduced the use of CPI for revaluing government benefits over ten years ago. The debate doesn't seem to be dying down!
We have previously discussed the following decisions:
- The British Airways pension scheme - click here
- The Barnado's pension scheme - click here
- The Coats UK Pension Scheme - click here
During our analysis of these previous cases it has become clear that the options available to employers who are trying to save cash by reducing pension increases will depend on a number of factors including, primarily:
- the wording of the Rules (the specific wording will dictate whether there is flexibility to move away from the rate/ index/method currently used for calculating and awarding pension increases); and
- the views of the parties who have the power to exercise any relevant discretions (for instance, a change of index may be subject to Trustee consent).
In the latest of this suite of pension increase cases the Court of Appeal had to consider the application of the following words: "or any other rate decided by the Principal Employer". On the face of it one could be forgiven for being perplexed by the level of debate which has resulted from these seemingly unambiguous words.
Indeed, one would also be forgiven for viewing the High Court decision as somewhat perverse in the conclusion that these words had meant "any higher rate" than was currently in payment.
In the scheme of final salary pensions the Britvic scheme was a positively modern scheme, being established under a trust deed produced in 2003. The provisions relevant to pension increases were then amended in 2008. Archaic wording, which advisers and courts often have to grapple with in relation to such schemes, was therefore not a concern in this instance. The wording which was the subject of the debate in this case is shown in bold italics in the following extract from the Britvic rules:
"The part of a pension which exceeds any guaranteed minimum pension in payment is increased on 1 October in each year. The rate of increase is the percentage increase in the retail prices index during the year ending the previous 31 May but subject to a maximum of 5 per cent. in relation to Pensionable Employment up to and including 30 June 2008 and a maximum of 2.5 per cent. in relation to Pensionable Employment on and from 1 July 2008 (or any other rate decided by the Principal Employer)."
Reassuringly, the High Court judge did recognise that the words shown in bold italics above did not mean "any higher rate" when construed strictly and literally. However, he held that the Rule had to be construed "with an eye to giving reasonable and practical effect to the scheme", resulting in his conclusion that the provision would have been understood by an objective observer who was furnished with the relevant facts, to mean "any higher rate". In essence, his view was that the rule provided a capped level of increase, and the only sensible meaning of the words in question must have been to provide for upward adjustment to that cap. He felt his interpretation gave "better reasonable and practical effect" to the rule in question.
Understandably Britvic was dissatisfied with this conclusion and
took the case to the Court of Appeal to seek reversal. The Court of
Appeal did have sympathy with the High Court Judge's view and
agreed that the High Court's purposive interpretation made
sense in the context of the scheme's provisions and the facts
surrounding the case. However, the Court of Appeal focussed on the
Supreme Court's guidance from August 2020 on interpretation and
construction - which encourages a more simplistic and literal
approach to interpreting unambiguous wording. Where the wording of
the rule has a clear meaning which can be practically applied then
it should be assumed that was the intended meaning of the words. As
such the Court of Appeal overturned the High Court decision, thus
Britvic could use its power as Principal Employer to pay increases at a different level (be that higher or lower) than the rates specified in the earlier part of the rule.
Whilst we have a degree of sympathy with the Members and Trustees in this case, who wanted assurance that the rates specified provided them with an absolute right to increases with a fixed cap, there is a clear benefit to the Court of Appeal's approach. Whilst the High Court decision wasn't as wild as one might think upon an initial read of the headline words it was, in our view, a concerning and rather dangerous approach which would leave the floodgates open to a raft of similar claims. If unambiguous wording, such as the Britvic increase rule, could be subject to purposive interpretation it would result in great uncertainty for sponsoring employers, trustees and their advisers alike.
Clearly there must be the opportunity for corrections to be made where things have gone wrong in the drafting of documents, but there wasn't a clear case for such action in this case, and in our view such cases will be limited to obvious errors and as such, these cases are likely to be rare!
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.