Soft drinks manufacturer Britvic has had its attempt to reduce the inflation-proofing it provides for its defined benefit pension scheme rejected by the High Court.
According to law reporting service Law360, the High Court rejected Britvic's interpretation of powers under its pension scheme rules, meaning it will have to continue to base its pension increases on the retail price index.
Judge David Hodge ruled that the company can only implement a higher rate than the one mentioned in the scheme rules, but not a lower one, such as the consumer price index.
RPI generally runs at about 1 percentage point higher than CPI and is currently 2.2 per cent, compared with 1.5 per cent for CPI. Compounded over the years, the choice of the less generous index can result in pensioners losing thousands of pounds, despite CPI being considered a more accurate index.
In the decision handed out on January 17, the judge said that by including the phrase "and any other rate" in parentheses, the draftsman of the pension rules could not have intended that the so-called altering power of the employer allowed it to apply either a higher or a lower rate of increase each year, as argued by Britvic.
The judge, totally and searingly, rejected Britvic’s interpretation of the RPI provisions of its 2003 plan, saying Britvic (and essentially its lawyers) were pushing an 'obsessive literal interpretation' of the provisions
Penny Cogher, Irwin Mitchell
According to Law360, Mr Hodge stated that members of the scheme had the most ‘reasonable and practical’ submission and that material provided in the case proved that the draftsman understood there would be guaranteed increases each year, capped in line with the rise of the RPI or another, higher rate that the employer could decide on.
Britvic has until January 29 to file an application for permission to appeal.
A Britvic spokesperson said: “We sought the court’s interpretation of the Britvic Pension Plan rules and its judgement will inform our decision-making going forwards. We will communicate with our members at the appropriate time.”
For Stephen Scholefield, partner at Pinsent Masons, this ruling shows that “it all turns on the precise words used by an individual scheme, and how those are interpreted against any relevant background”.
“Even though lots of guidance has been given by the court as to how scheme rules should be interpreted, this is not always easy to do. A strict literal approach needs to be balanced against having a reasonable and practical effect, about which different parties often have different views.”
Ruling contradicts previous agreement
Penny Cogher, partner at Irwin Mitchell, noted that this is not a surprising decision, given the way of other cases on the proper interpretation of RPI rules have gone, such as BT or Barnardo’s.
She said: “The judge, totally and searingly, rejected Britvic’s interpretation of the RPI provisions of its 2003 plan, saying Britvic (and essentially its lawyers) were pushing an 'obsessive literal interpretation' of the provisions.
“Such a statement is not made lightly by a judge. Has pension litigation got out of hand? A company like Britvic cannot start this type of pension litigation without being given at least a 60 per cent chance of success from its specialist pension lawyers and counsel.”
However, this decision contradicts a previous interim agreement that was approved by the High Court in September.
Pensions Expert reported at the time that Britvic’s scheme trustees received the go-ahead to instruct the administrators to pay increases on all pensions already being paid out in line with a provisional rate requested by the company until the final outcome of the case was decided.
Ms Cogher questioned this decision, noting that agreeing with this type of request is “highly unusual”.
“It should only be granted where there is a very high chance of success – or preferably not granted at all, as it means that the plan members have not been receiving the benefits they should have been receiving under the plan.
“It messes with their income and their income tax position, and disturbs the plan’s usual administration processes.”
Consultation on RPI coming in March
Litigation about changes to the index used for pension increases might come to an end, since the government announced the intention to make changes to RPI in September 2019, with a consultation due in January.
Pensions experts predict RPI limbo for years to come
Experts have condemned delays in publishing a long-awaited consultation on reforms to the retail price index, since its outcome could radically alter the fortunes of pension funds and pensioners.
However, earlier this month, Chancellor of the Exchequer Sajid Javid announced that the consultation will be launched alongside the UK Budget in March, with a response expected before the parliamentary summer recess.
While the policy has been proposed in response to the UK Statistics Authority's condemnation of RPI as a legacy index and poor measure of inflation, experts say the move will hurt some schemes and pensioners if compensation is not provided.
Consultancy LCP has calculated that the change could swing defined benefit funding levels by as much as 10 per cent, depending on the wording of their liability promises and their investment strategy.
