Barnardo's and Others v Buckinghamshire and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice McFarlane |
| Judgment Date | 02 November 2016 |
| Neutral Citation | [2016] EWCA Civ 1064 |
| Docket Number | Case No: A3/2015/3944 |
| Court | Court of Appeal (Civil Division) |
| Date | 02 November 2016 |
[2016] EWCA Civ 1064
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
Mr Justice Warren
HC13C05161
Royal Courts of Justice
Strand, London, WC2A 2LL
THE CHANCELLOR OF THE HIGH COURT
Lord Justice McFarlane
and
Lord Justice Lewison
Case No: A3/2015/3944
Mr Keith Rowley QC & Mr Henry Day (instructed by Eversheds LLP) for the Appellants
Mr Andrew Simmonds QC (instructed by Dentons UKMEA LLP) for the Respondents
Mr Nicolas Stallworthy QC (instructed by Stephenson Harwood LLP) for the Trustee
Hearing dates: 5 and 6 October 2016
Approved Judgment
Under the 1988 rules of the Barnardo's pension scheme pensioners are entitled to annual increases in their pensions. The annual increase is the lower of 5 per cent and increases in prices. Increases in prices have hitherto been measured by reference to the Retail Prices Index ("the RPI"). The main issue on this appeal is whether the trustees of the scheme have the power under the 1988 rules to substitute the Consumer Prices Index ("the CPI") or some other index for the RPI. Warren J held that in current circumstances they had no such power. With his permission Barnardo's, as sponsoring employer, appeals. The judge's very full judgment explains the factual background in detail. It is available at [2015] EWHC 2200 (Ch), [2015] Pens LR 501.
The answer that we give to the main issue will affect other versions of the rules applicable to the scheme, and also the method by which pensions not yet in payment are revalued. The question is an important one because if the trustees have that power and choose to exercise it the substitution of the CPI or some other index for the RPI will on the one hand significantly reduce the deficit in the pension fund; but, on the other hand, is likely significantly to reduce future increases in pensions payable to pensioners.
The answer to the question posed by the appeal depends on the interpretation of the rules. The two most immediately relevant rules are the definition of "the prescribed rate" in rule 30.1.3 and the definition of "Retail Prices Index" in rule 53. The first of these provides:
"… an increase at the rate of the lesser of:-
(a) 5%, and
the percentage rise in the Retail Prices Index (if any) over the year ending on the previous 31 December".
The second provides:
" Retail Prices Index 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."
"Approval" standing alone is not defined in the rules, although it is defined in the Appendix to the rules. The rules define "Tax Approval". Tax Approval is defined to mean approval as an exempt approved scheme under Chapter I of Part XIV of the Income and Corporation Taxes Act 1988. "Approval", standing alone, is similarly defined in the Appendix.
The critical words in the definition of the RPI are "or any replacement adopted by the Trustees without prejudicing Approval." Does the definition mean:
i) The RPI or any index that replaces the RPI and is adopted by the trustees; or
ii) The RPI or any index that is adopted by the trustees as a replacement for the RPI?
The first of these is a two stage process in which first, the RPI is replaced by something else which the trustees then adopt. The second is a single step by which the trustees simply choose another index, whether or not the RPI itself has been replaced. I should also record that it is no part of Barnardo's case, presented by Mr Rowley QC, that the RPI has in fact already been replaced independently of any exercise of discretion by the trustees. Any replacement will come about if and when the trustees exercise the discretion which he says they have to choose a replacement index.
There is no significant dispute about the applicable principles of interpretation. The rules of a pension scheme are, in principle, to be interpreted in the same way as any other written instrument. As the Supreme Court said in Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [15] the court must focus on the meaning of the relevant words in their documentary, factual and commercial context.
"That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [instrument], (iii) the overall purpose of the clause and the [instrument], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions."
Reliance on background and commercial common sense must not be allowed to undervalue the importance of the words of the instrument. In addition commercial common sense cannot be invoked retrospectively.
There are, however, at least three points of special relevance to the interpretation of pension schemes. First, all or almost all pension schemes are intended to be tax efficient and to comply with Inland Revenue requirements. So Inland Revenue requirements are relevant to their interpretation. Second, pension schemes should be interpreted to have reasonable and practical effect. Third, since the rules of a pension scheme affect all those who join it (in some cases many years after its inception) other background facts have a very limited role to play.
One further point of general application is that in principle one would expect words and phrases to be used consistently in a carefully drafted instrument. Judicial statements to this effect are legion, but I take as representative the observations of Tomlinson LJ in Interactive Investor Trading Ltd v City Index Ltd [2011] EWCA Civ 837 at [29] that "it should ordinarily be presumed that language is used consistently within the four corners of an agreement."
The importance of Inland Revenue requirements is reflected in the drafting of the pension scheme itself. First, the rules contain many prohibitions on things that would prejudice Tax Approval: for example limits on additional contributions under rule 6.2; dates when pension may become payable under rule 12.2; limitation of benefits under rule 32, and winding up under rule 48, all in addition to the uprating of pensions under rule 30. Second, the rules contain an Appendix which sets out the Inland Revenue limits which were understood to apply at the date when the rules came into force. Those limits include, at paragraph 6 of the Appendix:
"The maximum pension … may be increased whilst in payment at 3% p.a. compound or (if greater) in line with RPI."
Although the rules themselves contain a definition of "in line with the Retail Prices Index" the Appendix contains its own definition in very similar terms:
"'in line with RPI' over a period means in proportion to increases between figures in the General Index of Retail Prices published by the Department of Employment (or a replacement of that Index not prejudicing Approval), immediately prior to the dates when the period began and ended with appropriate restatement of the later figure if the Index has been replaced or re-based during the period."
At the time when the rules came into force Inland Revenue requirements were contained in a statement of practice known as IR12. The particular point to emerge from IR12 was that it permitted pensions in payment to be increased and deferred pensions to be revalued in certain specified ways, including by reference to "increases in the cost of living". A footnote to that statement said:
"Increases in the cost of living may be measured by the index of retail prices published by the Department of Employment or by any other suitable index agreed for the particular scheme by the Superannuation Funds Office."
It is now necessary to say something about the indices that were in existence at the time when the 1988 rules came into force. The history of measuring changes in prices is contained in a report by Mr Paul Johnson, the Director of the Institute for Fiscal Studies, addressed to the UK Statistics Authority. Although the report itself long post-dates the rules, its historical parts are uncontroversial. The UK Government had been collecting data on prices since 1914. At that time the index was intended to measure the costs faced by working class households and was called the Cost of Living Index. A committee convened after the end of the Second World War was asked to consider the future of the Cost of Living Index. It recommended stopping the index in 1947, and replacing it with the Interim Index of Retail Prices. The recommendation was accepted and the Interim Index of Retail Prices replaced the Cost of Living Index. In 1956 the Interim Index was itself stopped and replaced by the Index of Retail Prices. It was a comparison of changes in prices for a basket of different goods and services. Mr Johnson comments that:
"This measure was to evolve in time to become the Retail Prices Index (RPI)."
It is not entirely clear when the Index of Retail Prices became the Retail Prices Index, but it does appear that it did so by a...
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