22: High Court: ‘natural and ordinary’ reading of scheme’s rules requires pension increases based on RPI not CPI

Consumer Prices IndexIn the recent case of Carr v Thales Pension Trustees Ltd, the High Court has upheld the Pension Ombudsman’s determination that the rules of the Thales UK Pension Scheme required increases pensions in payment to be made in line with the Retail Prices Index (RPI), rather than the Consumer Prices Index (CPI).

In April 2011, the government changed the inflation measure for indexation and revaluation increases for public sector pensions from RPI to CPI, which generally runs at about 0.5 to 1 percentage point lower. This change was subsequently extended to the minimum statutory increases required for private sector pensions. However, the government did not introduce a statutory power allowing schemes to switch automatically to CPI where RPI was ‘hard-coded’ into the scheme rules.

This has led to disputes over the interpretation of pension increase provisions when schemes have attempted to switch to CPI and reduce benefit payments. As this latest decision illustrates, each case depends on the precise drafting of the relevant rules and particular difficulty arises where rules are ambiguous or inconsistent.

Mr Carr complained to the Pensions Ombudsman after the trustees of the Thales UK Pension Scheme informed him that increases to pensions in payment should have been based on CPI, not RPI. Mr Carr argued that the Thales Scheme rules ‘hard-coded’ RPI as the index for increases.

The dispute hinged on the interpretation of two ‘limbs’ of the increase rule which had become inconsistent with each other since the government switched to CPI. The rule stated that pensions in payment would be increased by ‘the percentage increase in the retail prices index […]subject to a maximum of 5% [LIMB 1] as specified by order under […] the Pensions Schemes Act [LIMB 2]’. When this rule was drafted in 2000, the order mentioned in limb 2 specified RPI. However, from 2010, the order specified CPI.

The High Court has now dismissed an appeal by Thales and upheld the Pension Ombudsman’s original decision that RPI was hard-coded into the rules. The courts’ approach to the interpretation of pension scheme rules is to focus on the words in the document and not external matters. The ‘natural and ordinary’ reading of words should be the starting point and in this case, the rule gave primacy to the first limb. The second limb of the rule did not set up a rival indexation rate, but further described the rate identified in the first limb.

The decision emphasis the difficulty in predicting the outcome of cases involving the interpretation of inconsistent or ambiguous scheme rules. The High Court judge himself commented that it is not always easy to articulate precisely why one reading of a disputed phrase seems more natural and ordinary than another. Legal advice should be sought if there is uncertainty.

Further change is coming for trustees and members following the government’s announcement that from 2030 at the latest, RPI will be phased out and replaced by CPIH (a variant on CPI which includes owner-occupier housing costs). A joint consultation by the government and the UK Statistics Authority, which closes on 21 August 2020, is seeking views on how this switch should be implemented and whether it should be brought in sooner. See our previous blog here.

In preparation for the change, trustees should take specialist advice to ensure they are prepared for any potential impact on their scheme’s funding. In due course, it may be necessary to consider whether amendments to scheme rules are required to remove references to RPI and to reflect the effect on individual benefits.