De La Rue, the banknotes manufacturer, has avoided adding £20m to its pension scheme’s liabilities after a judge ruled in its favour over how certain members’ deferred benefits should be revalued.
The case hinged on the wording of the scheme’s rules that deal with how the scheme revalued pensions before they are paid, and which section of the scheme’s rules applied to deferred benefits. The benefits in question were termed ‘short service benefits’, which are accrued by early leavers of the scheme.
The scheme sponsor argued that these benefits were to be revalued in line with the method set out by the Pension Schemes Act 1993, which involves adding a sum equal to “appropriate revaluation percentage” to their benefits.
The reference to revaluation in its deferred benefits rule did not include a more generous, scheme-specific revaluation mechanism than the statutory approach other than in narrow circumstances, it claimed.
The judgment shows the dangers lurking in historic pensions documentation
John Gordon, Ashurst
In opposition, the High Court considered whether these benefits should instead be revalued by a more generous method that would see these increase by as much as 5 per cent every year, in accordance with a separate section of the scheme’s rules.
This could alter the revaluation of Mark Crickett’s benefits, a member who became entitled to a deferred pension when his pensionable service ended in 2010, and whose pension began paying out in 2020. Crickett represented members as a defendant at the hearing.
Should these benefits be revalued at the higher measure, the De La Rue scheme, which had a funding deficit of £142m according to its last actuarial valuation at the end of 2019, and a £353m deficit on a buyout basis, would see its liabilities increase by more than £20m.
Confusion reigns in the rules
The case was brought by the sponsor seeking clarity over the pension increase rules for deferred benefits. It considered the revaluation of deferred benefits and the indexation of pensions in payment. The scheme’s rule covering increases in deferred benefits references the revaluation of pensions.
Ordinarily, it is not unusual for revaluation rules to apply the statutory minimum or something more generous on a scheme-specific basis, according to Suzie Kemp, senior associate at Norton Rose Fulbright, but this would be clearly set out in the revaluation rules.
The member was concerned that the reference to the indexation of a pension in its payment rules was a scheme-specific mechanism for revaluing deferred members’ benefits. The confusion arose because of the reference to pension increases in the revaluation rules, with no explanation as to why the reference was there.
Both sides agreed that it would be possible to operate a “better-off” mechanism if it provided a greater increase than indexation. But De La Rue argued that if that was what was logically intended, this would have been clear in the rules.
Judge Mr Justice Trower sided with the employer. It was concluded that by referring to the scheme’s pension increase rule, the rules provided that the better off calculation for pension increases made sense for certain survivors, but that did not mean amending the revaluation rule for all members.
While the ruling will save De La Rue an additional chunk of pension liabilities, the decision will still come at a cost to the sponsor.
“Even this interpretation requires some undoing and then redoing what revaluation increases have been provided, so this isn’t an ideal solution for the employers,” Irwin Mitchell partner Penny Cogher observed.
“They will incur additional costs, on top of those of funding the whole litigation — either directly or indirectly through the scheme.”
A De La Rue spokesperson said: “The court’s ruling provides welcome clarity on the true interpretation of a provision in De La Rue’s pension scheme trust deed. De La Rue, the trustee of the pension scheme and a representative pensioner cooperated in bringing this claim so that all parties could achieve certainty on the proper application of the scheme’s provisions.”
‘Obscure and poorly expressed’
The judge criticised the wording of the scheme’s rules, concluding his ruling that “the language of the offending rule is obscure and poorly expressed”.
Last year, soft drinks manufacturer Britvic successfully slashed its liabilities with an appeal to a 2020 ruling, which allowed it to change its inflation index to the consumer price index from the retail price index.
Kemp said she has observed a leaning towards textual analysis by judges in such cases.
Britvic reduces deficit contributions on back of index change
Soft drinks manufacturer Britvic saw a reduction in its pension liabilities following a change to the inflation index used by the Britvic Pension Plan.
“What the judge is doing is looking at the actual meaning of the rules and the words in the rules, rather than looking at the background,” she said.
“What is important here is the drafting at the beginning, and that words are of paramount importance, rather than intention, and the judges won’t deviate from what the actual words of the scheme say.”
John Gordon, counsel at Ashurst, warned that “the judgment shows the dangers lurking in historic pensions documentation”.
