This appeal concerned whether the trustees of the Barnardo Staff Pension Scheme could move pension increases from the Retail Prices Index to another measure, such as the Consumer Prices Index, while the RPI was still published. Pensions in payment rise by the lesser of 5% and the annual increase in an index defined as the official Retail Prices Index or any replacement adopted by the trustees. The Supreme Court held that those words do not empower the trustees to adopt another index unless the RPI has been discontinued as an officially published index and replaced.
The pension increase in dispute
Barnardo’s, the sponsoring employer, argued that the trustees of its staff pension scheme could adopt the Consumer Prices Index, or another suitable measure of price inflation, whether or not the Retail Prices Index continued to be published. It regarded the CPI as more appropriate and as a way of reducing the scheme’s deficit. Representative members said that there was no power to leave the RPI while it was still published, because they were concerned that the change would over time reduce the benefits they received. The trustees were neutral.
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The rules were adopted in 1991, took effect from 1 April 1988 and superseded an earlier scheme. Their relevant substance was unchanged thereafter. A member received one-sixtieth of final pensionable earnings for each complete year of pensionable service. A pension in payment increased by the lesser of 5% and the percentage rise in the Retail Prices Index in the year ending on the previous 31 December.
That index was defined as the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the trustees without prejudicing Approval. Approval was the Inland Revenue’s discretionary approval of the scheme as an exempt approved scheme. The definition also explained an increase in line with the index if it had been replaced or re-based. An Appendix, which formed part of the rules and summarised the Revenue’s benefit limits, used similar language. References to Approval reflected the tax regime then in force, later superseded by the Finance Act 2004.
Two meanings of replacement
Lewison LJ stated the choice created by the words ‘or any replacement adopted by the Trustees without prejudicing Approval’. Either they mean the RPI or an index that replaces it and is adopted by the trustees, so that an official body must first replace the RPI. Or they mean the RPI or any index the trustees adopt as a replacement, whether or not the RPI is still published. Barnardo’s supported the second meaning. It said that the need for a discretion, and for the replacement not to prejudice approval, pointed to a choice by the trustees rather than mere adoption of an official successor, and that discontinuance of the RPI was improbable in 1991. It also said that the second sentence should be left out of account because it defined an expression found in the Appendix rather than the rules.
On the trustees’ claim for a ruling, Warren J held that they could not adopt another index unless the RPI had been discontinued as an officially published index and replaced. A majority of the Court of Appeal, Lewison and McFarlane LJJ, agreed and dismissed the appeal. Vos LJ dissented. The Supreme Court gave permission on the understanding that similar wording might appear in many pension schemes, although it was not clear whether it did.
The weight given to the words
Lord Hodge gave the judgment; Lady Hale, Lord Wilson, Lord Sumption and Lord Briggs agreed. The ordinary principles of interpretation applied, but a pension scheme has features which make the text especially important. It is a formal document prepared by specialist draftsmen, not the product of a negotiation concluded under pressure of time. It defines rights long into the future, including rights of members who were not parties and who may be unable to discover the background. The court therefore concentrates on the words used and attaches less weight to circumstances, or industry expectations, which later members cannot readily ascertain.
The text must still be given a reasonable and practical effect where possible. Schemes are also read against their tax background. Revenue guidance, IR 12 (1979), would have allowed another suitable index to be agreed, so approval did not compel either reading. The draftsman did not follow that guidance. The question was whether the words actually chosen created the power for which Barnardo’s contended.
The Court’s reasons
Lord Hodge held that replacement does not naturally mean choosing an alternative while the original remains available, and that ‘a replacement adopted by the trustees’ suggests a sequence: replacement first, adoption second. The discretion and approval condition could be explained without the wider power. In 1991 there were already other official indices, including the state pensioner indices, the Tax and Prices Index and the Rossi Index. The draftsman might have been providing for more than one official successor, in which case the trustees would choose and the Revenue would consider suitability.
The same definition, and the Appendix, speak of the index being replaced or re-based. Re-basing resets the index’s starting point to 100 and is done by the publishing authority. The second sentence was not a mistake merely because it repeated the Appendix, and the rules and Appendix had to be read together. Consistency meant that the official publisher, not the trustees, effects the replacement. The differently worded 1978 scheme did not alter that conclusion: the rules had been redrafted wholesale, and members could not be expected to rely on superseded provisions.
Limiting the power to official replacement was rational. The Government had changed its official index in 1946 and 1956, so a long-term scheme might provide for a further change. Later criticism of the RPI, and any preference for the employer or the members, could not determine the meaning. Vos LJ favoured the argument that the result was inconveniently inflexible, because the trustees could not move away from an RPI which remained in existence but had ceased to suit pensioners, while a proviso to rule 46 prevented an alteration prejudicing a pension or annuity then payable or a benefit already secured. Lord Hodge accepted that flexibility might have been desirable, but held that the draftsman had relied on the official index. The suggested inconvenience depended on hindsight.
Verdict: The Court unanimously dismissed Barnardo’s appeal. The rules gave the trustees no power to switch index while the RPI continued to be published. The Court therefore did not need to decide the members’ cross-appeal about accrued rights.
Source: Barnardo’s v Buckinghamshire and others [2018] UKSC 55
