Barnardo’s v Buckinghamshire and the interpretation of pension schemes

Emily Campbell examines the legal implications of Barnardo’s v Buckinghamshire and others [2018] UKSC 55.

Relatively few pensions cases reach the Supreme Court[1]. Pensions cases frequently throw up questions of construction, being a point of law, which makes it relatively simple for an unsuccessful employer to obtain permission to appeal to the Court of Appeal. By contrast, an appeal to the Supreme Court, as well as adding an additional layer of expense to already expensive litigation, requires the identification of an arguable point of law of general public importance. As Lord Hodge commented in his judgment in the Supreme Court in Barnardo’s[2] (at [11]):-

“This court gave permission to appeal on the understanding that there might be clauses in many pension schemes which contained similar wording. But it is not clear whether this is so.”

On the basis of my own research, this is a novel reason for granting permission to appeal.

The Barnardo’s appeal raised a short question of interpretation of a clause in the Barnardo staff pension scheme trust deed, which defines the phrase “Retail Prices Index”, the expression used for the purposes of the indexation of pensions and deferred pensions.

The key words in Rule 53 were as follows:-

“‘Retail Prices Index’” (i) means the general Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval.

(ii) 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.” [emphasis added]

The Supreme Court, in an unanimous judgment delivered by Lord Hodge, agreed with the majority of the Court of Appeal that the italicised words did not confer on the trustees power to adopt a different index whilst the RPI has not been discontinued. Instead the words meant the same as “the RPI or any index that replaces the RPI and is adopted by the trustees”. Accordingly, it dismissed the employer’s appeal.

In substance, the Supreme Court accepted that the meaning of the wording was ambiguous, because Lord Hodge stated (at [20]): “…the draftsman has chosen to use the word ‘replacement’ which does not naturally suggest the selection of an alternative to an option which remains available. It is, nonetheless, capable of bearing that meaning and one must look to the context for guidance”. However, the Court was particularly influenced by the use of the word “replaced” in the second sentence as well as the grammatical construction used in the phrase “a replacement adopted by the trustees”, which the Court considered suggested that the RPI must first be replaced and that the trustees should adopt the replacement.

Therefore, the Court did not favour the reasoning of the Chancellor in his dissenting judgment in the Court of Appeal, where he said (at [89]): “It is, in my judgment, far more likely that the draftsman using his own drafting style was seeking to follow the suggestion made in IR12 to the effect that the Trustees might wish to choose a replacement index other than RPI and to submit it for approval to the Pension Schemes Office… I accept… that there would have been business common sense, even in 1988, in including a discretionary power in the Trustees (even without an employer’s veto) to change the index in case it ceased properly to reflect the level of inflation”. In relation to this argument, Lord Hodge stated (at [29]):-

“[W]hile it may have been desirable to have that flexibility, the draftsman appears to have put his or her faith in the suitability of the officially-produced index and not to have foreseen the circumstances in which the RPI ceased to be seen as an appropriate index for the cost of living. Only by relying on hindsight can weight be given to this consideration; and that is not legitimate”.

The rise of literalism?

Outside the context of pension schemes, there is evidence of a recent shift in the law on the interpretation of instruments. Three recent lectures are worthy of a name-check in this context:-

1. Lord Sumption’s Harris Society annual lecture (available on the Supreme Court website): “A Question of Taste: The Supreme Court and the Interpretation of Contracts”;
2. Lady Justice Asplin’s APL prestige lecture (available on the APL website): “It’s all a matter of interpretation”; and
3. Lord Hoffman’s reply to Lord Sumption in the October issue of the LQR (available on Westlaw): (2018) 134 LQR 553: “Language and lawyers”.

Authoritative modern statements on the relevance of context date back to decisions of Lord Wilberforce in the 1970’s, one of which (which was referred to in Barnardo’s) was Prenn v Simmonds [1971] 1 WLR 1381. As Lady Justice Asplin describes in her lecture, for most of the period since then, the tide was running in favour of a purposive/contextual approach, as opposed to a textual or literalist approach. Lord Hoffman, who retired in 2009, was especially influential, and his contributions in the area are well known. In particular, in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913, Lord Hoffman stated the principle very broadly. In a well-known passage, he said:-

“Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.”

Since then, we have had cases such as Arnold v Britton [2015] UKSC 36 and Wood v Capita Insurance Services Ltd [2017] UKSC 24, which have been interpreted as sounding a retreat from what might be described as the Lord Hoffman approach. Lady Justice Asplin, who spoke of a “change in the direction of the wind, if not an ebbing tide” stated her conclusion as follows:-

“…it seems to me that the imposition of commercial common sense, if that is what the court was ever doing, is much less likely and that the factual matrix is perhaps closer to that which Lord Wilberforce would have recognised that it was a decade ago.”

As Lord Sumption said in his lecture:-

“It is I think time to reassert the primacy of language in the interpretation of contracts. It is true that language is a flexible instrument. But let us not overstate its flexibility. Language, properly used, should speak for itself and it usually does. The more precise the words used and the more elaborate the drafting, the less likely it is that the surrounding circumstances will add anything useful. I do not therefore accept that the flexibility of language is a proper basis for treating the surrounding circumstances as an independent source from which to discover the parties’ objective intentions.”

These are extrajudicial statements. More formally, the position is as stated by Lord Hodge in Wood (giving the judgment of the Court[3]) at [15]

“The recent history of the common law of contractual interpretation is one of continuity rather than change. One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation”.

So, the formal position is thus: Oceania is at war with Eastasia. Oceania has always been at war with Eastasia.

Whose intention is relevant? A special rule for pension schemes?

It is clear from the Barnardo’s judgment, where Lord Hodge cited Arnold and Wood (at [13]), that these developments are also relevant in the context of pension schemes. However, it is right to question whether there is something else going on in that field.

A good starting point might be the argument put to the Supreme Court by Andrew Simmonds QC on behalf of the members in Barnardo’s. He commented that the members gave value for their rights and explained: “… the rules are the definitive source for the members to consult and ascertain what their rights are.” He referred to the practice of employers providing booklets with disclaimers (sometimes known as “health-warnings”), which deferred to the scheme rules. He then submitted: “…care should be taken not to apply mechanically or mechanistically … principles that have been developed in relation to bilateral contracts if that would result in rules being interpreted in a way that the reasonable member would not understand”, particularly in relation to the calculation of benefits.

What do we have here? Is it like the observer effect in quantum physics, i.e. the theory that simply observing a situation necessarily changes it? The idea that judges should bear in mind that pension schemes benefit and therefore may be read by members is not new. [Cases referred to with an * below were cited by Lord Hodge in Barnardo’s].

At first instance in National Grid v Laws [1997] PLR 157, Robert Walker J stated (at [70]):

“in a case where the scope of a power of amendment and the validity of a particular amendment are in issue, examination of the history of the matter is plainly permissible and indeed indispensable. In other cases my instinct would be … to stick to the current text as a general rule, while bearing in mind that the text of any long established pension scheme is likely to be a patchwork. There is a serious policy issue here: it is often hard enough for trustees and their advisers (and even harder for    members or pensioners who may not have easy access to advice) to interpret a pension scheme as it stands, without also having to delve into the archaeology of the scheme.”

So too, in Spooner v British Telecommunications* [2000] PLR 65, Jonathan Parker J stated (at [75]):-

“To my mind, a pension scheme is not to be regarded as on all fours, so far as ‘matrix’  is concerned, with a commercial contract … A new member joining a pension scheme cannot, by definition, have any relevant intention in relation to its meaning or effect: the most he can have is an understanding of its meaning and effect. Moreover, the understanding of the new member must, in my judgment, be based on the terms of the scheme itself. To my mind it cannot be right that, in order to understand what the scheme means, a new member is obliged to undertake a process of historical research, the requisite materials for which may well not be readily available to him.”

In a similar vein, see BESTrustees v Stuart* [2001] PLR 283, Neuberger J at [33]:

“In this connection, I bear in mind that a pension scheme is likely to continue for a substantial period of time and that those most affected by them and entitled to protection from the trustee, the employer and indeed the court, will be people who are comparatively poor, who will not have easy access to expert legal advice, and who will not know what has been going on in relation to the management of the Scheme. In those circumstances, it seems to me that protection of the beneficiaries requires the court to be very careful before it permits a departure from the plain wording and plain requirements of the trust deed. Further, it is not as if this was a case where at the date of the trust deed there was a difference of identity between the trustee and the employer: they were the same person even then. Accordingly, I think the court should be particularly careful before effectively overriding the requirement that there is some sort of written record which can be said to amount to an authority within the meaning of clause 16 of the definitive deed.”

See also, Safeway Ltd v Newton* [2018] PLR 2, Lord Briggs at [22]:

“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.”

Finally, in Barnardo’s itself (at [14]-[15]), Lord Hodge stated:-

“…Fourthly, the scheme confers important rights on parties, the members of the pension scheme, who were not parties to the instrument and who may have joined the scheme many years after it was initiated. Fifthly, members of a pension scheme may not have easy access to expert legal advice or be able readily to ascertain the circumstances which existed when the scheme was established.

 Judges have recognised that these characteristics make it appropriate for the court to give weight to textual analysis, by concentrating on the words which the draftsman has chosen to use and by attaching less weight to the background factual matrix than might be appropriate in certain commercial contracts …”

I would suggest that there are numerous problems with the idea that the principles of construction of pension schemes should be influenced by the perceived need of lay members themselves to be able to read the trust deed and rules:-

1. Where does this leave the statement of Millet J in In re Courage Group’s Pension Schemes [1987] 1 WLR 495, 505 (said to be approved by Lord Hodge in Barnardo’s at [16]) that there are no special rules of construction applicable to a pension scheme? It seems to me that the position is that pensions schemes are indeed, on the basis of recent case-law, to be construed differently from commercial contracts;
2. How does all this sit with the law of rectification, the effect of which is that material secret from the members may (subject to certain defences which they may be able to raise) affect their rights?
3. The Court was not overly anxious to protect the expectations of the members, when in a series of decisions it declined to give legal effect to user-friendly announcement letters and booklets regarding benefit changes such as equalisation;
4. Literalism is all very well, but what about ambiguous provisions (of which Barnardo’s was an example), where different readers (or different judges) can give different interpretations? A member without the benefit of legal advice is not going to derive much assistance from reading an ambiguous provision, whether or not background context is relevant;
5. The idea that trust deeds should be written in a manner which can be read by members without expert assistance is unrealistic. When I buy a car, I do not expect to understand the detail of what is going on under the bonnet;
6. The role of the Courts in interpretation is to ascertain the intentions of the parties, objectively expressed. Language belongs to the people, not to governments and still less to unelected judges. A self-denying ordinance such as the exclusion of contextual material which is in fact relevant to an understanding of language is a form of judicial legislation and goes beyond the proper function of the Courts;
7. Experience shows that members are not typically objective when reading documents. They cannot be as they have a financial interest. They are neither a bystander nor (frequently) reasonable. A member is likely to read a document in the manner most favourable to the member; and
8. Legal advisers to members have access to IR12 and will frequently request historic scheme material before giving an opinion on interpretation. There can therefore be no difficulty in taking it into account.

There is therefore a good deal of reason for frustration and cynicism. As Lady Justice Asplin stated at the end of her lecture: “I’m not sure that we have progressed much further than the universal truth that a contract must mean whatever the requisite number of Supreme Court judges say that it means”.

And finally: Section 67?

The effect of the Court’s decision is that it did not need to deal with the members’ cross-appeal, or even hear argument about it.  Accordingly, the decision of the Court of Appeal stands, at least as obiter or “judicial dicta”; and the first instance decisions[4] which have considered the point are left undisturbed – probably to the relief of the profession. The expectation is therefore that a power to replace the index will not be caught by section 67 of the Pensions Act 1995.

However, a word of warning. In the Court of Appeal, Lewison LJ reasoned thus (at [56]):-

“It seems to me that if a person has a right to ‘A or B’ one cannot say that he has an accrued right to A. He has a right to one or other of them. As Newey J put it a member has the right to an increase consistent with the definition; or as Vos J put it the member has a right to a future increase at RPI or any other suitable cost of living index selected by the Trustees. I agree with both of them. I do not consider that here is a default rule in the way that Mr Simmonds suggested. On the basis of Mr Rowley’s construction of the definition, the trustees have a choice; and until that choice has been exercised, it is not possible to say that the member has a right to an increase measured in any particular way”

The Barnardo’s litigation does not answer the question of what provisions will be interpreted as giving a right to “A or B” rather than a default provision which is stated to be capable of modification.

Brian Green QC and Emily Campbell acted for the employer in the application to the Supreme Court for permission to appeal and in the appeal which followed when permission was granted.

 

[1] National Grid plc v Mayes [2001] 1 WLR 864 and Bridge Trustees v Yates [2011] UKSC 42 being two examples of occupational pension scheme cases which did.

[2] Barnardo’s & ors v Buckinghamshire & ors [2018] UKSC 55, on appeal from the Court of Appeal [2016] EWCA Civ 1064.

[3] The Court in Wood included Lord Clarke of Stone-cum-Ebony, who had given the judgment of the Court in Rainy Sky SA v Koomkmin [2011] UKSC 50 (a case described by Lady Justice Asplin as one adopting an approach which “may well be seen in the future as the high water mark of the commercial common sense approach”) and Lord Sumption, who referred in his lecture to “shifts of judicial approach”.

[4] See Danks v QuinetiQ Holdings Ltd [2012] EWHC 570 (Ch) and Arcada Group Ltd v Arcadia Group Pension Trust Ltd [2014] EWHC 2683 (Ch).