Construction of pension scheme documents


5 mins

Posted on 19 Jul 2022

Construction of pension scheme documents

How will courts construe pension scheme rules?

The wonderful world of Defined Benefit pension schemes often feels like a living and breathing example of the maxim “the law of unintended consequences”. Pension scheme trust deeds and rules were drafted many years – often many decades – ago by a generation of advisers who didn’t foresee or understand the commercial and legal context in which schemes would operate in 2022. The recent case of De La Rue Plc & Ors v De La Rue Pension Trustee Ltd & Anor offers valuable insight into how the Courts treat construction of pension scheme rules and highlights, once again, the importance of trustees determining pension increase rates correctly.

Background and scheme provisions

In De La Rue, the Court was asked to assess and construe members’ entitlement to deferred revaluation.

Deferred revaluation is the rate at which members’ pensions, for members who have left service but not yet reached retirement age, must be increased annually to take account of inflation. Annual interest rates published under the Pension Schemes Act 1993 provide a legal minimum annual level of inflation proofing for deferred benefits. As well as these statutory increases, specific wording in scheme rules can provide for additional increases.

The scheme’s sponsoring employer and trustees adopted different views of the revaluation rule, and sought the Court’s determination. The relevant rule (rule 17) in the De La Rue scheme provided as follows:

“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 than that provided at Rule 21”.

Rule 21 governed the increases applicable to pensions in payment (i.e. pensions which are currently being paid to retired members), rather than revaluation of deferred benefits, and provided increases by reference to a cost of living index subject to a cap of 5% and a minimum level of 3% for service prior to 2005.

Effectively what was before the Court was a question of interpretation of which “rate” of revaluation should be applied. Should it be the statutory increases provided for under the Pension Schemes Act, or should it take into account the potentially higher limits that were written into the De La Rue rules (albeit under the provisions dealing with increases to pensions in payment, not deferred revaluation)?

The scheme employer argued for a narrow interpretation of the deferred revaluation rule, which meant that members just received revaluation at the statutory level provided for under the Pension Schemes Act. The second respondent, as a representative beneficiary of the membership, argued for a wider interpretation, namely that benefits should be revalued by the greater of statutory increases and the cost of living index, capped at 5%. Very importantly, if the representative beneficiary’s argument succeeded, it would have translated to a £20 million increase in liabilities against the current funding basis of the scheme.

How did the Court construe revaluation?

The Judge sided with the employer’s more narrow interpretation and held that members were only entitled to statutory revaluation. Specifically, the Court held that when looking at questions of interpretation, it must defer to the words chosen by the draftsman. The Judge took the view that if the intention had been to allow for an increase in deferred benefits greater than that allowed for by rule 17 (i.e. a greater level of increases than that set out under the Pension Schemes Act 1993), then this should have been spelt out with an express provision. He also noted that even if there had been an intention to change the nature of the revaluation entitlement by cross-referring to rule 21, this had been done in rather obscure language.  In addition, although there is a principle of interpretation which allows the Court to consider parties’ conduct before and after the rule was written into the scheme, this principle should only be engaged where the terms of the rule were “truly ambiguous”. There was, in the Judge’s view, no such ambiguity in rule 17, and he concluded that this provision just restated what “the mandatory provisions of the law would provide in any event”.  In other words, members were only entitled to the statutory revaluation under the Pension Schemes Act – not the more generous increases provided for under rule 21.

What does this mean for schemes and sponsors?

Of course, every case around interpretation will be specific to its own facts and the wording of the scheme rules in question. The case does, however, perhaps illustrate a literalist tendency towards interpretation, albeit with the possibility for the Court to import a degree of purposive analysis where the context so requires. No doubt further cases around interpretation of old scheme provisions will follow in the next few years, and De La Rue shows, given the funding consequences for the scheme, the importance of schemes and sponsors getting interpretation right.

Andrew Campbell

  • Partner & Head of Pensions
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