Sackers’ James Bingham analyses the recent court cases on requests to change inflation indexation, explaining that despite the string of losses, employers will still continue to look at the courts with a glimpse of hope as a positive verdict could shed tens of millions of pounds in liabilities.
Most notably, we have seen further cases where employers are asking the courts to rule on whether the powers in pension scheme rules will permit a move away from the retail price index as the basis by which pensions in payment are increased. The names of Atos, Arup, Britvic and Thales (again) can be added to the roll, alongside already familiar cases on this subject such as Barnardo’s and BT.
These cases show a familiar trend of the courts construing these provisions restrictively and ruling against the employer’s desired interpretation.
But what does this mean for the future? Given the succession of unsuccessful applications, can we expect employers to lose heart and, instead, pin their hopes on legislative change at some point in the future, which would assist in managing the liabilities that arise for the payment of pension increases?
Some finance directors may be prepared to spend a few hundred thousand pounds on a court application, even where that application has a less than 50 per cent chance of success, if the potential upside is in the tens or even hundreds of millions of pounds
Do the maths…
As with many things in life, the financials are crucial. Employers have brought applications in the hope that they will succeed because of the significant upside of a successful outcome.
While the costs of a court application are far from insignificant, they are a drop in the ocean compared with the cost savings that would result from finding that the index used for increasing pensions in payment could be switched from the RPI to the consumer price index.
Even on a relatively small scheme, a simple switch to pay increases in line with the CPI rather than the RPI can result in a £100m-plus saving.
Is it a case of throwing good money after bad?
But as an employer, after watching the steady stream of unsuccessful applications on this subject, there may be a feeling that the courts are against employers — or, perhaps, on the members’ side. However, the recent decisions do reiterate a key point around this type of application.
Ultimately, the employer is asking the court to construe a provision of that scheme’s rules. As Mr Justice Nugee made very clear in the Atos decision, the court is construing the rule before it on the basis of that wording and the surrounding factual context.
How the court may have construed similar, or dissimilar, provisions in the past is not relevant to the question of construction. The key is what a reasonable person would take the words of this rule to mean.
In addition, in construing the provisions of the scheme rules, the court will take into account the wider context within which this particular provision was introduced. In the Britvic case, we saw this in action as the judge made it clear that his decision as to how to construe the provision in question was highly sensitive to its facts.
So what might this mean for an employer?
There is no getting away from the fact that applications of this nature have not gone in employers’ favour in recent times.
There may be a temptation to await the outcome of the ongoing consultation on the proposals to address the shortcomings in the RPI. However, at this stage it is not clear what the consequences of any such reform will be and, crucially, when this might be implemented.
A window between 2025 and 2030 may feel a long way away, and there would be many rounds of annual increases to be paid ahead of this time.
This may mean that for many employers, faced with large deficits and increasing financial pressures, the possibility of wiping an enormous sum off the pension scheme liabilities would remain an extremely tempting prospect.
In mathematical terms, some finance directors may be prepared to spend a few hundred thousand pounds on a court application, even where that application has a less than 50 per cent chance of success, if the potential upside is in the tens or even hundreds of millions of pounds.
Even though the courts’ stance on such applications may seem clear by the fact that construction of scheme rules is not precedent-driven, paired with a potentially monumental upside will mean that this continues to be an issue brought before the courts throughout the coming decade.
James Bingham is a partner at Sackers
