74: High Court finds in favour of employer on revaluation in deferment rule

The High Court decision in De La Rue Plc & Ors v De La Rue Pension Trustee Ltd & Anor [2022] EWCH 48 (Ch) (De La Rue) provides another useful example of how the courts construe pension scheme rules and the inherent risks contained in uncertain or poorly worded governing documents.

Background

The court was asked to decide the rate at which pensions revalued in deferment. Rule 17 of the Scheme’s rules provided:

‘Increases in deferred benefits: In relation to a Member of the Final Salary Section only, short service benefits before they come into payment shall be revalued in accordance with Chapter II of Part IV of the Pension Schemes Act 1993. This rule shall only apply if it would provide a greater increase in deferred benefits than that provided at Rule 21.’

Rule 21 set out the rates of increase on pensions in payment and provided for increases in line with cost-of-living index subject to a maximum of 5% and (in respect of pensionable service prior to 1 April 2005) a minimum of 3%.

The principal and participating employers argued that deferred members were entitled only to statutory minimum revaluation. The purpose of the link to Rule 21 was to preserve the value of a contingent spouses benefit on the death of a pensioner from deferment – it essentially ensured that they would receive 50% of the member’s pension with increases on pensions in payment and subject to statutory minimum revaluation requirements.

The Scheme trustee took a neutral role in proceedings and a representative pensioner member argued that deferred benefits should be revalued by the greater of: statutory revaluation; and cost of living index subject to a maximum of 5% and (in respect of pensionable service prior to 1 April 2005) a minimum of 3% ie Rule 21 set out a ‘scheme specific rate of revaluation’, notwithstanding it referred to pensions in payment, with statutory revaluation operating as an underpin.

Decision

Trower J held in favour of the employers. In reaching that decision, the judge followed the established approach to construction which provides that the courts should concentrate primarily on the language chosen by the draftsman. The value of background facts and historic documentation is constrained by the text and the conduct of the parties before and after the rules are adopted is only really of value when the text is genuinely ambiguous. However, literalism does not ‘rule the day’ and the courts should construe provisions to give reasonable and practical effect to the scheme.

In this instance, either construction of Rule 17 would have arguably lead to a reasonable and practical solution and both could be commensurate with the purposes of the scheme. This meant that textual analysis was key and ultimately, the judge found in favour of the employer. The revaluation of deferred pensions, being a one-off increase at retirement, is conceptually different to annual increases to pensions in payment and accordingly the provisions of Rule 17 were an unclear way of providing for a scheme specific rate of revaluation.

Essentially, if the draftsman had intended to provide for this, there were clearer ways of expressing and achieving it and the judge did not identify any reason for construing the rule in favour of the representative beneficiary. It was potentially helpful to the employer in that context that there was a coherent and workable application of the rule to contingent spouses’ benefits.

Comment

For the employers, the decision avoids a potentially material increase in liabilities but its implication for other schemes in a similar situation will depend wholly on the specific wording in their rules. The judge found in favour of the employer on the basis of textual construction but could conceivably have reached a different decision which would also have been consistent with the purposes of the scheme. De La Rue is a reminder of the limited value of backgrounds facts and historic documentation and the conduct of the parties when it comes to construing the effect of a particular rule.