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Pension trustees not able to substitute CPI for RPI uprating: Supreme Court

7 November 2018

A provision in a pension scheme that pensions should be uprated in line with the retail prices index (RPI), “or any replacement adopted by the Trustees without prejudicing Approval”, did not empower the trustees to adopt an index other than the RPI unless the RPI had been discontinued as an officially published index and replaced, the UK Supreme Court held today.

Five judges unanimously dismissed an appeal by the charity Barnardo’s against a decision to that effect by a majority in the Court of Appeal, upholding the High Court, on the trustees seeking a ruling on the meaning of the definition. Barnardo’s wanted the trustees to substitute use of the consumer prices index (CPI) , which it considered a more suitable measure of price inflation, and which would significantly reduce the deficit in its pension fund, but would also be likely to significantly reduce future increases in pensions payable to pensioners. The trustees adopted a neutral stance.

Lord Hodge, with whom Lady Hale, Lord Wilson, Lord Sumption and Lord Briggs agreed, said that in deciding which interpretative tools would best assist in ascertaining the meaning of a contract or trust, and the weight to be given to each of the relevant interpretative tools, English courts must have regard to the nature and circumstances of the particular instrument.

A pension scheme had several distinctive characteristics which were relevant to the court’s selection of the appropriate tools. First, it was a formal legal document which had been prepared by skilled and specialist legal draftsmen. Secondly, unlike many commercial contracts, it was not the product of commercial negotiation between parties who might have conflicting interests and who might conclude their agreement under considerable pressure of time. Thirdly, it was an instrument which was designed to operate in the long term, defining people’s rights long after the economic and other circumstances, which existed at the time when it was signed, might have ceased to exist. Fourthly, the scheme conferred important rights on parties, the members of the pension scheme, who were not parties to the instrument and who might have joined the scheme many years after it was initiated. Fifthly, members of a pension scheme might not have easy access to expert legal advice or be able readily to ascertain the circumstances which existed when the scheme was established.

In light of these characteristics, it was appropriate for the court to give weight to textual analysis, by concentrating on the words which the draftsman had chosen to use and by attaching less weight to the background factual matrix than might be appropriate in certain commercial contracts. However, the emphasis on textual analysis as an interpretative tool did not derogate from the need both to avoid undue technicality and to have regard to the practical consequences of any construction. Such an analysis did not involve literalism but included a purposive construction when that was appropriate.

The court, Lord Hodge continued, was persuaded that the correct interpretation of the quoted part of the definition was that RPI meant “the RPI or any index that replaces the RPI and is adopted by the trustees”. Eight reasons supported this. (1) The word “replacement” did not naturally suggest the selection of an alternative to an option which remained available. It was, nonetheless, capable of bearing that meaning, and guidance had to be sought from the context. (2) The word order and grammatical construction of the phrase “a replacement adopted by the trustees” suggested that the RPI must first be replaced and that the trustees adopt the replacement. (3) The existence of a discretion on the part of the trustees and the requirement that the adoption should not prejudice the approval of the Commissioners of Inland Revenue (“CIR”) did not militate against this view. (4) Consistency within the rules of the scheme as a whole, and indeed within the definition itself, suggested that it was the relevant official authority and not the trustees who were to effect the replacement. (5) The CIR guidance on approval of schemes did not assist because the draftsman had not chosen to use similar wording to the guidance in the definition. (6) Superseded rules did not assist in interpreting the definition. (7) A provision which provided for the circumstance of the official replacement of a cost of living index did not lack a rational purpose. (8) While the requirement of indexation by reference to the RPI imposed obligations on Barnardo’s and contributed to the pension deficit at a time when many saw the CPI as a more reliable index for the cost of living, the court had to construe the rules of the scheme without any preconceptions as to whether a construction should favour the sponsoring employer or the members.

Click here to access the judgment.

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