Construction of pension scheme – Claimant being principal employer of occupational pension scheme – Defendants being trustees of pension scheme – Construction of rules governing scheme

Royal Mail Group Ltd v Evans and others: Chancery Division: 11 June 2013

The claimant, (Royal Mail) was the principal employer of the Royal Mail Senior Executive Pension Plan (the Executive Pension Plan), an occupational pension scheme. The defendants were the trustees of that plan. The governing documentation of the Executive Pension Plan was a Definitive Trust Deed and Rules dated 31 March 2010 (the 2010 Deed and Rules).

Rule 19.2 of the 2010 Deed and Rules provided that 'A member who becomes or is treated by the Principal Employer as becoming a Section A Member with effect from 1 April 2001 and who had previously been a member of Sections A or B of POPP [Post Office Pension Plan] and who had been entitled to have their pension in payment or in deferment increase without limitation in line with the retail prices index shall continue to be so entitled under this Scheme. This will apply both to the Pensionable Service accrued to the date of their leaving the POPP and also to their Pensionable Service accrued under this Scheme.'  

Rule 17 of the Executive Pension Plan provided that 'That part of each pension in payment that exceeds any GMP will increase in each year by the lower of: (a) the percentage increase in the retail prices index over the preceding year on a date decided by the Trustees; and (b) 57% … For Members to whom Rule 19.2 applies, pensions in payment will be increased in accordance with those provisions instead of this Rule 17. Pensions paid for less than a year may be increased by a smaller amount …'. The instant proceedings concerned a part 8 claim which raised a single issue, namely the correct construction of the Executive Pension Plan.

Royal Mail submitted that, on the true construction of the 2010 Deed and Rules, none of the relevant members of the scheme had an entitlement under POPP to have their pension increase in line with the retail prices index (RPI). Their entitlement under POPP was to have their pensions increased in line with increases to public sector pensions, which would mean that the members were entitled to increases in accordance with the consumer prices index (CPI) because that was the index which was adopted at the instant time in relation to public sector pensions.

The extra cost to the Executive Pension Plan, and to Royal Mail of using RPI rather than CPI was about £20m for past service liabilities as at 31 March 2010. Royal Mail contended that the effect of rule 19.2 and rule 17.2 was to continue the entitlement of that group of members to uncapped increases pursuant to the Pensions Increase Act 1971 and continued the members' former entitlement under the POPP and not something new. Accordingly, Royal Mail submitted that rule 19.2 and rule 17.2 of the 2010 Deed and Rules should be construed to mean that the relevant members continued to be entitled to have their pensions increased (in payment or deferment) by the increases which would be applicable as a result of the rules applicable under Section A or B of the POPP as the case might be as they stood as at 31 March 2001.

The court ruled: It was settled law that, where the construction of contracts and other instruments were concerned, the process was first, one of interpreting the words the parties had used. The court had to ascertain the meaning which a document would convey to a reasonable person having all the background knowledge, which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

The words used in the document should be given their ordinary and natural meaning and had to be read in the context of the background matrix of fact. Where there were two possible interpretations, the weight to be given to the commercial consequences must depend on the degree of ambiguity of the language concerned. It was settled law that a pension scheme should be construed so as to give a reasonable and practical effect to the scheme. It was necessary to test competing permissible constructions against the consequences they produce in practice; and each new provision should be considered against the circumstances prevailing at the date when it was adopted (see [34], [35], [38], [39] of the judgment).

Applying settled law, rule 19.2 and rule 17.2 of the 2010 Deed and Rules should be construed to mean that the relevant members continued to be entitled to have their pensions increased (in payment or deferment) by the increases which would be applicable as a result of the rules applicable under Section A or B of the POPP, as the case might be, as they stood as at 31 March 2001 (see [55], [86] of the judgment). Rule 17.2 and rule 19.2 would be construed in the way in which Royal Mail put forward (see [77] of the judgment).

Christopher Nugee QC (instructed by CMS Cameron McKenna LLP) for Royal Mail; Brian Green QC (instructed by Baker and McKenzie LLP) for the trustees.