Barnardo’s v Buckinghamshire & Ors [2018] UKSC 55

Barnardo's sought to switch its pension scheme indexation from RPI to CPI to reduce the scheme's deficit. The Supreme Court held that the trust deed only permitted trustees to adopt a replacement index if the RPI itself had been officially discontinued.

Facts

Barnardo’s, the well-known charity and sponsoring employer, operated the Barnardo Staff Pension Scheme, which had been adopted in 1991 with effect from 1 April 1988 and amended subsequently. Rule 30 of the scheme provided for pensions in payment to be increased annually by the lesser of 5% or the percentage rise in the Retail Prices Index (RPI). Rule 53 contained the disputed definition of “Retail Prices Index”, which referred to the General Index of Retail Prices published by the Department of Employment “or any replacement adopted by the Trustees without prejudicing Approval”.

Barnardo’s wished to switch the indexation measure from RPI to the Consumer Prices Index (CPI), which it considered a more appropriate measure of inflation and which would reduce the scheme’s deficit. The RPI had not been discontinued by the official statistical body. Representatives of the scheme members opposed the change, contending it would over time reduce their benefits. The trustees sought a ruling and adopted a neutral stance.

Issues

Lewison LJ in the Court of Appeal had identified the central question. As Lord Hodge reproduced it, the issue was whether the definition meant:

(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 interpretation involves a two-stage process requiring prior official replacement of the RPI; the second permits trustees unilaterally to choose a new index whether or not the RPI continues to be published.

Arguments

Appellant (Barnardo’s)

Mr Brian Green QC argued the clause should be read as “RPI or any alternative adopted by the trustees”. He submitted that: the trustees’ discretion would be redundant if a replacement only operated upon official replacement of the RPI; the requirement of not prejudicing CIR Approval indicated a real risk of unsuitability that would not arise with an officially produced replacement; in 1991 it was inherently improbable the Government would discontinue the RPI; and the second sentence of the Definition, which referred to indexing “in line with” the RPI, was irrelevant because that phrase only appeared in the Appendix.

Respondents (Member Representatives)

The members contended that the clause did not empower the trustees to depart from the RPI for indexation purposes while the RPI continued to be officially published.

Judgment

Approach to construction of pension schemes

Lord Hodge confirmed that the general principles of contractual interpretation set out in Rainy Sky, Arnold v Britton and Wood v Capita applied, but emphasised that pension schemes have distinctive characteristics warranting greater weight to textual analysis. These include that they are formal documents drafted by specialist lawyers, are designed to operate long-term, confer rights on members who were not parties and joined later, and members may lack access to expert advice or knowledge of original background circumstances. He endorsed the approach of Lord Briggs in Safeway Ltd v Newton:

the Deed exists primarily for the benefit of non-parties, that is the employees upon whom pension rights are conferred whether as members or potential members of the Scheme, and upon members of their families (for example in the event of their death). It is therefore a context which is inherently antipathetic to the recognition, by way of departure from plain language, of some common understanding between the principal employer and the trustee, or common dictionary which they may have employed, or even some widespread practice within the pension industry which might illuminate, or give some strained meaning to, the words used.

Textual focus does not exclude purposive construction or correction of obvious mistakes, but it constrains reliance on background factual circumstances which would not be readily accessible to members.

The Court’s reasoning

Lord Hodge upheld the first interpretation for eight reasons:

(1) The word “replacement” does not naturally suggest the selection of an alternative to an option which remains available, although it can bear that meaning. (2) The word order and grammar of “a replacement adopted by the trustees” suggests the RPI must first be replaced and then the trustees adopt the replacement, indicating a sequence of events. (3) The existence of trustee discretion and the CIR Approval proviso did not undermine this view: in 1991 there were several official price indices, and a cautious draftsman could foresee multiple possible official replacements requiring trustee selection. (4) Importantly, the second sentence of the Definition referred to the RPI being “replaced or re-based”. Re-basing could only be performed by the official body, and consistency suggested the same body was contemplated as effecting any “replacement”. The Appendix, which formed part of the rules under Clause 3 of the Deed, used the same construction to refer plainly to official replacement. (5) The CIR guidance in IR 12 was unhelpful because the draftsman chose different language from that guidance. (6) The earlier 1978 scheme’s differently worded definition provided no real assistance, as the 1988 rules were a wholesale re-drafting. (7) Providing for official replacement of a cost-of-living index has rational purpose, given that the UK Government had changed its official index in 1946 and 1956. Hindsight regarding the RPI’s later loss of favour could not be used. (8) The court must construe the scheme without preconceptions favouring sponsor or members.

Lord Hodge rejected Vos LJ’s dissenting view that inflexibility favoured Barnardo’s interpretation; the draftsman appeared to have put faith in the official index and could not have foreseen its later unsuitability, and reliance on hindsight was illegitimate.

Implications

The decision is significant for the construction of pension scheme trust deeds. It reinforces that, while the general principles of contractual interpretation apply, pension schemes attract a more text-focused approach because they are professionally drafted long-term instruments conferring rights on absent members who cannot be expected to know the original commercial context. Background factual matrix carries less weight than in ordinary commercial contracts.

Practically, the case affects sponsoring employers and trustees considering whether they may switch indexation from RPI to CPI in order to manage scheme deficits. Whether they may do so depends on the precise wording of the relevant indexation definition. Where the wording requires a “replacement” to be “adopted” by trustees, the natural reading—particularly where adjacent provisions refer to replacement or re-basing in a manner contemplating action by the official statistical body—is that trustees may only adopt a successor index after the RPI has been officially replaced.

The Supreme Court was careful not to lay down a wider rule. As Lord Hodge noted, although permission to appeal had been granted on the understanding that similar clauses might exist in many schemes, it was not clear that this was so. Each scheme will turn on its own wording. The decision also confirms that hindsight regarding the later perceived unsuitability of the RPI cannot be used to construe a 1991 deed, and that the court will not strain language in favour of either employer or members. Because the appeal was dismissed, the cross-appeal on subsisting rights under sections 67 and 67A-67I of the Pensions Act 1995 did not require determination.

Verdict: Appeal dismissed. The Supreme Court unanimously held that, on the proper construction of Rule 53, the trustees were not empowered to adopt an alternative index to the RPI unless the RPI had first been officially replaced.

Source: Barnardo's v Buckinghamshire & Ors [2018] UKSC 55