0370 1500 100

Two cases to be heard by the Court of Appeal next year

Barnardos – meaning of Index for RPI/CPI purposes

The pension trustees went to the High Court for directions (instructions) as to what the wording of the pension scheme rules meant about Index. Essentially the rules allowed a replacement index to be used and the pension trustees wanted to know, with CPI, was there now a replacement index for these purposes? The judge, Warren J was clear. While RPI continues, this is the index to use. CPI could only be used if there is no longer any RPI. As various financial institutions need RPI, it is unlikely ever to go completely, so the pension trustees are unlikely to be able to use the definition of Index as a way of changing from RPI to CPI.

Comment: The use of the words replacement index is fairly common in many scheme rules so this is an important case. Trustees and employers might want to revise the legality of any changes from RPI to CPI if they have been done in reliance upon such words and this is something we can assist with. With the change from RPI to CPI generating, for some schemes, substantial savings, and with some scheme’s documentation being unclear on what the right index is, we can expect some more RPI/CPI cases in due course.

Sterling Insurance - had the Scheme been properly closed to future accrual?

The Scheme was closed to future accrual through a Deed of Variation using the Scheme’s amendment power. This amendment purported to break the final salary link for those scheme members who were active members at the date when the Scheme was closed to future accrual. However, the question was whether the provisions of the Scheme’s amendment power made sense and whether their proper interpretation was to require an amendment to be made that kept the final salary link. The restriction in the amendment power that had to be interpreted by the judge, Nugee J, was the meaning of “benefits accrued due” which is an odd phrase.

The court agreed that “due” usually meant something that was owing and payable so “accrued due” meant a payment that had fallen due for payment as opposed to a payment not yet due. However, with this interpretation, the restriction would only have a very limited effect as there are few examples in a well-run scheme of payments accrued due but not paid. Also, as the scheme was set up in 1998, the restrictions imposed by s67 of the Pensions Act 1995 would mean that this restriction was of no real value. Given this, and various other points of interpretation, Nugee J decided he could impose his own interpretation of the phrase. This was done under the court’s power to correct mistakes in construction which it can use if it is satisfied there is a mistake and what the mistake is. According to the judgment, there is no limit to the court’s power to correct the mistake but a strong case is needed.

Here the court decided “due” was a mistake as its inclusion didn’t fit with the rest of the proviso in the amendment power. So, the court decided to construe the power as if the word “due” were not there. This has a huge impact as it means the final salary link was there throughout and would have to be maintained for past and future service. It also means the Scheme’s administration has to be re-worked for the relevant group of employee members from 2004 onwards.

Comment: It’s not unusual for the wording and meaning of parts of an amendment power to be unclear. This decision seems to take us further down the road of having to apply to court in each case where there are ambiguities in the scheme’s amendment power for the court to decide how they should be interpreted. This causes obvious difficulties if the court gives the amendment power a different meaning to the one that has been applied in the past so it’s not surprising, the decision is being appealed in the Court of Appeal.

The case also shows that it is worth reviewing how some past schemes closures have been implemented – not all of them properly considered the restrictions imposed by the scheme’s amendment powers. Much more weight has been given in recent years to the Courage decision - this is where the concept of the final salary link comes from when a scheme is closed for future accrual if there is the right type of wording in the scheme’s amendment power.

Key Contact

Penny Cogher