Arcadia Group Ltd v Arcadia Group Pension Trust Ltd & Anor [2014] EWHC 2683 (Ch)

[2014] EWHC 2683 (Ch)Case No HC14001096
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
IN THE MATTER OF THE ARCADIA GROUP PENSION SCHEME
AND IN THE MATTER OF THE ARCADIA GROUP SENIOR EXECUTIVES PENSION SCHEME
Venue Rolls Building, Royal Courts of Justice, 7 Rolls Buildings, Fetter LaneDate 31/07/2014
London, EC4A 1NL
Before
MR JUSTICE NEWEY
Between
ARCADIA GROUP LIMITEDClaimantARCADIA GROUP PENSION TRUST LIMITEDDefendantsAG SENIOR EXECUTIVES PENSION TRUSTEE LIMITEDDefendant
Mr Keith Rowley QC and Miss Elizabeth Ovey (instructed by PricewaterhouseCoopers Legal LLP) for ClaimantMr Andrew Simmonds QC (instructed by Mayer Brown International LLP) for DefendantsHearing Hearing dates: 23-25 June 2014
JudgmentMr Justice Newey :
[1]This case concerns two pension schemes, the Arcadia Group Pension Scheme (“the AGPS”) and the Arcadia Group Senior Executives Pension Scheme (“the AGSEPS”), where the claimant, Arcadia Group Limited (“Arcadia”), is the principal employer. The defendants are the trustees of the schemes.[2]The issues raised by the proceedings relate to the extent, if any, to which the Consumer Prices Index (“CPI”) published by the Office for National Statistics (“the ONS”) can be adopted in place of its Retail Prices Index (“RPI”) for the purposes of calculating increases in pensions in payment and (in the case of the AGPS) revaluation of deferred pensions.[3]The trustees of the AGSEPS and AGPS are to be appointed to represent all members of the schemes (and persons claiming under them) in whose interests it is to argue for answers to the issues different from those contended for by Arcadia. The context Indices

The context

[4]RPI and CPI are both, of course, measures of inflation. RPI is the older of the two, dating back to the 1950s, and was in the past the dominant index in the United Kingdom. In more recent times, however, CPI, which was first published in the 1990s, has become the most commonly-used index. Early last year, the National Statistician concluded that RPI does not meet international standards, and a variant of RPI referred to as “RPIJ” (which uses the “Jevons”, as opposed to the “Carli”, method) began to be published. The present position is that the ONS provides figures for CPI, RPI and RPIJ.

Approval and registration of pension schemes

[5]In the past, an occupational pension scheme had to be approved by the Inland Revenue if it was to enjoy the tax advantages available in relation to such schemes. The Inland Revenue published practice notes known as “IR12” that explained when such approval would be given. IR12 first appeared in 1979, and revised versions were issued in October 1991, July 1997 and March 2001.[6]The position changed in 2006 as a result of changes introduced by the Finance Act 2004. Pension schemes are now registered with HM Revenue & Customs (“HMRC”), not approved by them. It is no longer necessary for HMRC to subject a pension scheme’s provisions to detailed scrutiny.

Revaluation

[7]Statutory provision for the revaluation of deferred pensions was first introduced in the Social Security Act 1985. From 1991, initially under the Social Security Act 1990 and subsequently under the Pension Schemes Act 1993, the benefits payable to a member of a pension scheme whose pensionable service ended before he attained normal pension age have had to be augmented in respect of each of the intervening years by at least the lesser of a set percentage (5% as regards service until 6 April 2009, 2½% as regards later service) and “the percentage which appears to the Secretary of State to be the percentage increase in the general level of prices in Great Britain” during that year. In practice, the Secretary of State always used RPI as the measure of the “increase in the general level of prices” up to 2010. On 8 July 2010, however, the Minister of State for Work and Pensions announced that CPI would in future be used for revaluation purposes. For 2011 onwards, therefore, the “increase in the general level of prices” has been determined on the basis of CPI.

Increases in pensions in payment

[8]Statutory requirements for pensions in payment to be increased to take account of inflation have existed since the 1990s. The Pensions Act 1995 (“the 1995 Act”) stipulated that, with effect from 6 April 1997, pensions in payment earned by service from that date had to rise each year by, as a minimum, the “revaluation percentage” used for the statutory revaluation of deferred pensions. In 2004, the 1995 Act was amended to provide that, as regards pensions earned by service from 6 April 2005, the annual increase was to be the lesser of the “revaluation percentage” and 2½%. In practice, therefore, pensions had to be raised by the lower of(a) RPI and(b) 5% insofar as a pension was attributable to service from 6 April 1997 up to 5 April 2005 and 2½% to the extent that the pension derived from service after that date. Following, however, the switch from RPI to CPI mentioned in the previous paragraph, a pension in payment must now rise each year by at least the lesser of (a) CPI and (b) 5% insofar as a pension was earned by service up to 5 April 2005 and 2½% to the extent that the pension stems from service after that date.

Guaranteed minimum pensions

[9]Under legislation in force from 1978, it was possible for employment to be contracted out of the State Earnings Related Pension Scheme, with consequential reductions in national insurance contributions. Contracting out depended on the provision of guaranteed minimum pension benefits (or “GMPs”) under an occupational pension scheme.[10]GMPs are subject to a special statutory regime with respect to pension increases and revaluation and are not governed by the provisions outlined above. The questions I have to decide relate only to the excess of a member’s pension over the GMP. The schemes The AGSEPS

The schemes

[11]The AGSEPS was established in 1972 as “The Burton Group Senior Executives Pension Scheme”. The scheme’s first definitive deed, executed in 1974, contained no provision either entitling members to have pensions in payment increased or for the revaluation of deferred pensions. Indexation was first mentioned in the scheme’s documentation in a deed of variation dated 29 July 1982. A clause headed “Maximum benefits” imposed limits on the benefits that a member could receive without the prior consent of the Inland Revenue. As regards pensions in payments, these were not to exceed specified amounts as “increased by reference to the proportionate increase in the Index”. The term “Index” was defined to refer to: “the Index of Retail Prices published by the Department of Employment (or any replacement of that Index)”.[12]A further deed of variation, dated 7 October 1985, introduced a new set of rules with effect from 1 September 1982. These provided for pensions in payment to increase each year, but the aggregate of such increases since the date on which the pension started to be paid was not to exceed “the percentage rise since that date in the Index of Retail Prices published by the Department of Employment (or any replacement of that Index)”.[13]That set of rules was replaced by a new one, effective from 1 November 1993, under a deed of variation dated 12 December 1997. Once again, pension increases were not to exceed “the percentage rise … in the Index of Retail Prices published by the Department of Employment (or any replacement of that Index)”. The employer could award pension increases additional to the set percentages for which the rules provided “subject to Revenue Limits”. “Revenue Limits” were summarised in an appendix. This stated, among other things, that the maximum pension could be “increased whilst in payment at 3% pa. compound or (if greater) in line with RPI”. The expression “in line with RPI” was explained in these terms: “‘in line with RPI’ over a period means in proportion to increases between figures for the months in which that period begins and ends in the General Index of Retail Prices published by the Department of Employment (or a replacement of that index not prejudicing Approval), with appropriate restatement of the later figure if the Index has been replaced or rebased during the period.” “Approval” was stated to mean “treatment of the Scheme as an exempt approved scheme under Chapter I of Part XIV of the [Income and Corporation Taxes Act 1988]”.[14]The rules relating to the AGSEPS were amended again pursuant to a deed of variation of 31 March 2006. As revised, they stipulated (in rule 13.2) that the aggregate of pension increases was not to exceed “the percentage rise … in the Retail Prices Index (or any replacement of that Index)”. The “Retail Prices Index” was stated to mean:
“the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue”
. The definition of “in line with RPI” in the “Revenue Limits” appendix remained unchanged.[15]The AGSEPS is at present governed by the deed and rules annexed to a deed of variation dated 15 September 2009. Rule 13.2 stipulates that the aggregate of pension increases since a pension commenced to be paid:
“will not exceed the percentage rise since that date in the Retail Prices Index (or any replacement of that Index)”
. By rule 1.1, “Retail Prices Index” means:
“the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of HM Revenue and Customs”
. Although pension schemes must nowadays be registered with, rather than approved by, HMRC, a “Revenue Limits” appendix states that the maximum pension “may be increased whilst in payment at 3% compound or (if greater) in line with RPI”, and “in line with RPI” is defined in the terms set out in paragraph 13 above.[16]The AGSEPS no longer has any active members. Those who were then active members became deferred members in 2010. Further, no one is currently eligible to join the scheme.

The AGPS

[17]The AGPS came into being rather later than the AGSEPS. It was set up in 1991 as “The Burton Group Pension Fund”, and a definitive deed was executed on 15 March 1994. The rules introduced by this deed provided both for increases to pensions in payment and for deferred pensions to be revalued. Pensions in payment were to go up by the lower of 5% and the percentage rise in the “Retail Prices Index”. A deferred pension was, as regards the excess over the “Basic GMP”, similarly to be “increased each year by 5% per annum compound or, if less, the percentage increase in the Retail Prices Index over that year”. The term “Retail Prices Index” was given the following meaning: “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue”.[18]An appendix to the rules was devoted to “Revenue Limits”. Like its AGSEPS equivalents, it explained that the maximum pension could be “increased whilst in payment at 3% pa. compound or (if greater) in line with RPI”, and the definition of “in line with RPI” mirrored that for the AGSEPS.[19]The rules were amended by a deed of variation dated 28 February 2006 and then again, somewhat more significantly, by a deed of variation dated 26 March 2009. The rule dealing with revaluation now provided that the “excess over the Basic GMP” was, “in respect of the part of the pension which relates to Pensionable Service completed on and after 6 April 2009”, to be increased “as required by the Revaluation Requirements [i.e. the statutory requirements] in relation to that part of the pension”.[20]The scheme’s current rules were brought in by a deed of variation dated 29 December 2010. The rules dealing with revaluation and pension increases were not changed in ways that matter for present purposes. Pensions still fall to be increased (under rule 10) by the lower of a specified percentage or “the percentage rise in the Retail Prices Index”, and the “Retail Prices Index” continues to be defined (in an appendix devoted to definitions) as:
“the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue”
. Further, to the extent that a pension exceeds the “Basic GMP”, it is to be increased as required by the “Revaluation Requirements” in respect of service from 6 April 2009 and otherwise (by rule 6(2)(b)): “each year by 5% per annum compound or, if less, the percentage increase in the Retail Prices Index over that year”.[21]“Revenue Limits” continue to apply to some extent. The term is defined as “the maximum amount of a benefit which the Scheme could pay or the maximum amount of contribution that could be paid by or for a member without prejudicing Approval”. “Approval” is defined as follows:
“the approval of the Scheme as an exempt approved scheme by the HM Revenue & Customs under Chapter I of Part XIV of the Taxes Act. Whether something would have prejudiced Approval is to be determined in accordance with the publication IR12(2001) (known as the Occupational Pension Scheme Practice Notes) published by the former Inland Revenue Pension Scheme Office on 23 March 2001, as that publication stood immediately before 6 April 2006 (save that any reference in that publication to ‘the permitted maximum’ shall be deemed to be a reference to ‘the Permitted Maximum’).”
[22]As with the AGSEPS, all active members of the AGPS became deferred members in 2010, and the scheme is closed to new members.

The issues

[23]I am asked to determine four issues that arise in relation to both the AGSEPS and the AGPS. These can be summarised as follows: i) Whether the definition of “Retail Prices Index” in each scheme’s documentation confers a power on anyone to select an index other than RPI for the purposes of that definition; ii) If so, whether the power is exercisable by(a) the trustee of the relevant scheme,(b) Arcadia or(c) the trustee and Arcadia jointly; iii) If the power exists, whether CPI would be both “similar” to RPI and “satisfactory” for the purposes of HMRC within the meaning of the definition of “Retail Prices Index”; and iv) Whether section 67 of the Pensions Act 1995 precludes the selection of CPI for use in relation to past service.[24]A final issue is specific to the AGSEPS. It raises the question of whether the definition of “Retail Prices Index” found in the scheme’s 2009 rules took effect as regards active members as at(a) 6 April 1997 or(b) 31 March 2006.

Is there power to select an alternative index?

[25]It is common ground that the decision of the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 provides helpful guidance as to how the interpretation of the AGSEPS and AGPS documentation should be approached. Lord Hoffmann, giving the judgment of the Board in thatcase, explained in paragraph 21:
“in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson’s speech that this question can be reformulated in various ways which a court may find helpful in providing an answer—the implied term must ‘go without saying’, it must be ‘necessary to give business efficacy to the contract’ and so on—but these are not in the Board’s opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”
A little earlier in the judgment, Lord Hoffmann had said:
“17 The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls. 18 In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.”
[26]The Belize case was recently discussed by Arden LJ (with whom Jackson and Fulford LJJ agreed) in Marks and Spencer plc v BNP Paribas Securities Trust Company (Jersey) Ltd [2014] EWCA Civ 603. In the course of her judgment, Arden LJ made, among others, the following points: i) The Belize test for the implication of a term “requires the court to ask whether the agreement has the meaning that such a term would achieve, because, even though the parties did not expressly include that term in their agreement, that is what their agreement means” (paragraph 23); ii) A party seeking to establish an implied term must show “not simply that the term could be a part of the agreement but that a term would be part of the agreement” (paragraph 24); iii) The Court will not imply a term unless it is “necessary that the agreement should contain such a term to achieve the parties’ express agreement, purposively construed against the admissible background” (paragraph 26). On the other hand, a party “does not show that a term is unnecessary simply by showing that the parties’ agreement could work without the implied term” (paragraph 28); iv) The starting point is that, “if there is no express term, none should be implied because if the parties intended that a particular term should apply to their relationship they would have included a term to that effect, rather than left it to implication” (paragraph 25).[27]Mr Keith Rowley QC, who appeared for Arcadia with Miss Elizabeth Ovey, argued that it is implicit in the definitions of “Retail Prices Index” used for the AGSEPS and AGPS that there was to be power to select an index other than RPI. Each scheme’s governing documentation states that “Retail Prices Index” refers to RPI “or any similar index satisfactory for the purposes of” the Inland Revenue/HMRC. It is apparent from this wording, Mr Rowley submitted, that the “Retail Prices Index” need not be RPI. The “Retail Prices Index” can be either RPI or any other similar index meeting the requirements of the relevant definition.[28]Mr Rowley sought support for his contentions in IR12 and the “Pension Schemes Office Manual” that the Inland Revenue formerly published. The 1979 version of IR12 allowed pension schemes to take account of increases in the cost of living as measured “by the index of retail prices published by the Department of Employment or by any other suitable index agreed for the particular scheme by the Superannuation Funds Office”. Later editions of IR12 featured the expression “retail prices index”. The 1991 version allowed for pensions to be augmented to reflect “the rise in the retail prices index”, which was defined as:
“the index of retail prices compiled by the Department of Employment or any other index agreed for use by a particular scheme by the Pension Schemes Office”
. The 1997 version of IR12 used the same definition in a similar way, and by 2001 the “Retail Prices Index” (capitalised) was stated to mean:
“the index of retail prices compiled by the Department of Employment or any other index agreed for use by a particular scheme by IR SPSS [of which the Pension Schemes Office had become a part]”
. The “Pension Schemes Office Manual” advised staff that RPI was “the most commonly used index for calculating cost of living increases” and continued (at paragraph 7.1.12):
“If any other index is proposed ask the practitioner to explain why it is considered more appropriate. Refer the case to the Section Manager when a reply is received.”
[29]Mr Rowley argued that it can be seen from these materials(a) that a pension scheme that used an index other than RPI could potentially enjoy the approval of the Inland Revenue and(b) that it was contemplated that an index other than RPI could be adopted in preference to RPI rather than because that index had ceased to exist. A different index might be “agreed for use by a particular scheme”, and a person putting forward a scheme utilising another index was to be asked why it was thought “more appropriate”. The draftsmen of the scheme documentation with which I am concerned will similarly, Mr Rowley suggested, have intended it to be possible for the AGSEPS and AGPS to adopt an index other than RPI regardless of whether RPI remained in being. In this connection, Mr Rowley drew attention to similarities between IR12 and the schemes’ documents. Both, he observed, use “Retail Prices Index” as a term of art rather than a mere synonym of RPI, and the schemes’ definitions of RPI track that found in IR12.[30]For his part, Mr Andrew Simmonds QC, who appeared for the trustees of the schemes, submitted that the AGSEPS and AGPS must use RPI unless and until RPI is discontinued or replaced. It was to cater for this eventuality, Mr Simmonds argued, that the words “or any similar index satisfactory for the purposes of [the Inland Revenue/HMRC]” were included in the schemes’ definitions of “Retail Prices Index”. Mr Simmonds suggested that, had it been intended that there should be a power of selection between indices, the documents would have identified who was to exercise that power on behalf of the schemes. Here, Mr Simmonds contrasted the definition of “Index” at issue in Danks v QinetiQ Holdings Ltd [2012] EWHC 570 (Ch), [2012] PLR 131 which, as Mr Simmonds pointed out, referred to “the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees” (emphasis added). Mr Simmonds further contended that it is significant that the defined expression is “Retail Prices Index” rather than “a more neutral expression such as ‘the Index’”. On this aspect, Mr Simmonds relied on this passage from Lord Hoffmann’s speech in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101:
“The judge declined to regard the terms total land value and minimum guaranteed residential unit value as indicative of an intention that [minimum guaranteed residential unit value] was to be the minimum Chartbrook would receive as the land value of a flat because both terms were defined expressions. They might just as well have been algebraic symbols…. But the contract does not use algebraic symbols. It uses labels. The words used as labels are seldom arbitrary. They are usually chosen as a distillation of the meaning or purpose of a concept intended to be more precisely stated in the definition. In such cases the language of the defined expression may help to elucidate ambiguities in the definition or other parts of the agreement: compare Birmingham City Council v Walker [2007] 2 AC262, 268. I therefore consider that Lawrence Collins LJ was right to take into account the connotations of contingency to be derived from the defined terms”
(emphasis added).[31]On balance, however, I take the view that Mr Simmonds’ interpretation of the circumstances in which the AGSEPS and AGPS can depart from RPI is unduly narrow. My reasons include these: i) The definitions of “Retail Prices Index” used in the schemes’ documentation do not in terms stipulate that a “similar index satisfactory for the purposes of [the Inland Revenue/HMRC]” can be adopted only if RPI has been discontinued or replaced; ii) While the approach advocated by Mr Rowley might be said to go beyond the express wording of the definitions, so does Mr Simmonds’. Mr Simmonds accepted that he was in effect reading in the words “if not available” between “or” and “any similar index”; iii) It is apparent, I think, that there must be some power of selection between indices. Suppose, for example, that RPI had been discontinued and the Inland Revenue had indicated that it would regard either of two other indices as a satisfactory substitute. As Mr Simmonds accepted during submissions, it could hardly be supposed that no one would have been able to choose between the indices. Similarly, were the ONS to decide to scrap RPI now, leaving RPIJ and CPI, it would surely be possible for someone to decide which of them was to replace RPI for the purposes of the schemes. The question, then, must be as to the scope of the power of selection, not as to whether one exists at all; iv) Whether or not the label “Retail Prices Index” reflects an expectation that the relevant index will be RPI, it is clear from the definitions of the expression that it need not be. The definitions expressly allow for the possibility that the “Retail Prices Index” will be a “similar index satisfactory for the purposes of [the Inland Revenue/HMRC]”; v) It is fair to infer that, when they prepared the schemes’ documents, their draftsmen had in mind the requirements of the Inland Revenue, as seen in IR12 and the “Pension Schemes Office Manual”. Since those materials indicated that the Inland Revenue would potentially be willing to permit a scheme to adopt an index other than RPI, the scheme’s documents could be expected to cater for that, too; vi) As mentioned above, the AGSEPS rules limit pension increases to the percentage rise in “the Retail Prices Index (or any replacement of that Index)”. Specific provision is thus made for replacement. That tends to suggest (albeit, perhaps, not very strongly) that the words “or any similar index satisfactory for the purposes of HM Revenue and Customs” (in the definition of “Retail Prices Index”) were intended to cover something other than mere replacement.[32]One of Mr Rowley’s submissions was to the effect that members of the AGSEPS and AGPS would be protected against any potential abuse of a power of selection by the implied obligation of good faith that was recognised in Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 1 WLR 589. I am not myself convinced that the implied duty of good faith would give that much protection. The authorities suggest that the duty is quite limited (see Prudential Staff Pensions Ltd v Prudential Assurance Co Ltd [2011] EWHC 960 (Ch), [2011] PLR 239, at paragraphs 118-153, and IBM United Kingdom Holdings Ltd v Dalgleish [2014] EWHC 980 (Ch)) and the AGSEPS trust deed purports to provide that Arcadia can exercise its powers “without regard to any implied duty of good faith”. However, it seems to me that the schemes’ members will be sufficiently protected if any power of selection cannot be exercised without the concurrence of the trustees – a subject to which I shall turn in a moment.[33]In all the circumstances, it seems to me that the better view is that the definitions of “Retail Prices Index” operate to confer powers to select an index other than RPI as the “Retail Prices Index” and that those powers are not confined to circumstances in which RPI has been discontinued or replaced. On balance, I consider that, read against the relevant background, each of the definitions would reasonably be understood to mean that there is a power of selection unconstrained by any requirement for discontinuance or replacement of RPI.

Who can exercise the power?

[34]The next issue is who can exercise the power of selection between indices that, in my view, exists. Sensibly, Mr Simmonds did not contend that the power is exercisable by the trustees on their own. The question I have to decide therefore is whether the power is conferred on Arcadia alone or requires the concurrence of the trustee of the relevant scheme for its exercise.[35]Mr Rowley argued that the power of selection is vested in just Arcadia. In support of this submission, he suggested that it is in principle for an employer to determine what pension benefits he is prepared to make available to his employees. He referred in this context to Smithson v Hamilton [2007] EWHC 2900 (Ch), [2008] 1 WLR 1453. At paragraph 87 of his judgment in that case, Sir Andrew Park said:
“A decision to have a pension scheme and the consequential decisions about the structure and design of the scheme are matters for the employer, or at least matters primarily for the employer.”
[36]While, however, an employer may be principally responsible for the initial design of a pension scheme, it does not follow that he is entitled to exercise whatever powers he chooses to provide for. The point is an obvious one, but can be illustrated by reference to the AGSEPS and AGPS. The documentation for each scheme confers powers that are not exercisable by Arcadia alone. As regards the AGPS, for example, the trustee is empowered to augment benefits or increase pensions with Arcadia’s consent, and the power of amendment, although exercisable by Arcadia, requires the consent of the trustee.[37]In fact, the power of selection between indices apart, Arcadia cannot alter any of the benefits of members of the schemes on its own. With both the AGSEPS and the AGPS, changes to such benefits can be made only by the trustee of the relevant scheme or by Arcadia with the consent of the trustee. It would be odd if the (less explicit) power of selection between indices was, uniquely, capable of being exercised by just Arcadia.[38]It might also be said that the trustees of the AGSEPS and AGPS can be seen as natural spokesmen for the schemes. That, perhaps, tends to suggest that they were intended to be involved in any exercise of the power of selection.[39]I therefore agree with Mr Simmonds that each power of selection between indices is vested in Arcadia and the relevant trustee jointly.

Would CPI be a “similar” index which is “satisfactory” for the purposes of HMRC?

[40]Mr Simmonds accepted, I am sure correctly, that CPI is a “similar” index to RPI within the meaning of the definitions of “Retail Prices Index” used for the AGSEPS and AGPS. There is no issue, either, as to whether CPI is “satisfactory for the purposes of [the Inland Revenue/HMRC]” in the context of increases to pensions in payment. In an email of 14 April 2014, a Mr Surry of HMRC said that HMRC “would consider CPI a satisfactory index for increases in pension payments”.[41]HMRC have been asked to confirm, too, that they regard CPI as a satisfactory index to use for the revaluation of deferred pensions. So far as I know, however, there has as yet been no response from HMRC on this point. Perhaps the request has been overlooked. Be that as it may, the question arises whether I can conclude that CPI is “satisfactory for the purposes of the Inland Revenue” in relation to revaluation when HMRC have not stated that to be the case.[42]In my view, I can. It seems to me that an index must be treated as “satisfactory for the purposes of the Inland Revenue” if there are no grounds on which HMRC could properly or reasonably consider it other than satisfactory for their purposes. That, as it appears to me, is the position as regards using CPI for the revaluation of AGPS pensions. Given that(a) pension schemes are no longer approved by HMRC but merely registered with them,(b) CPI has received Government endorsement and is now used for statutory revaluation of pensions and(c) the use of CPI rather than RPI should not be in any way prejudicial to HMRC, I cannot see that there is any basis on which HMRC could, as matters stand, consider CPI to be anything but satisfactory for their purposes as regards the revaluation of pensions under the AGPS. The position could, I suppose, change in the future if, say, the statutory framework relating to pensions were altered.[43]It follows, to my mind, that CPI is a “similar index satisfactory for the purposes of [the Inland Revenue/HMRC]” within the meaning of the definitions of “Retail Prices Index” used for the AGSEPS and AGPS.

What (if any) impact does section 67 of the Pensions Act 1995 have?

[44]Section 67 of the 1995 Act, as amended, renders voidable the exercise of a power to make a “regulated modification” to an occupational pension scheme unless certain conditions are satisfied. The term “regulated modification” encompasses a “protected modification” (which is not relevant for present purposes) and a “detrimental modification” (which is). “Detrimental modification” is defined by section 67A(4) of the Act to mean:
“a modification of an occupational pension scheme which on taking effect would or might adversely affect any subsisting right of– (a) any member of the scheme, or (b) any survivor of a member of the scheme.”
[45]The expression “subsisting right”, which is used in the definition of “detrimental modification”, is itself defined, by section 67A(6) of the 1995 Act, as follows:
“‘Subsisting right’ means– (a) in relation to a member of an occupational pension scheme, at any time– (i) any right which at that time has accrued to or in respect of him to future benefits under the scheme rules, or (ii) any entitlement to the present payment of a pension or other benefit which he has at that time, under the scheme rules, and (b) in relation to the survivor of a member of an occupational pension scheme, at any time, any entitlement to benefits, or right to future benefits, which he has at that time under the scheme rules in respect of the member.”
By virtue of section 67A(7) of the Act, the “subsisting rights” of an active member of a pension scheme are to be determined as if he had opted to terminate his pensionable service immediately before the relevant time. In Aon Trust Corpn v KPMG [2005] EWCA Civ 1004, [2006] 1 WLR 97, Jonathan Parker LJ accepted that “‘entitlement’ refers to a pension already in payment, whereas ‘accrued right’ refers to a member’s current right to a future pension” (see paragraph 181 of the judgment).[46]Mr Simmonds’ position is that section 67 of the 1995 Act would apply to a decision to use CPI rather than RPI in relation to benefits attributable to past service. According to Mr Simmonds, relevant members of the AGSEPS and AGPS have a “subsisting right” to increases based on RPI and exercise of the power to select an alternative (and less generous) index would therefore constitute a “detrimental modification” within the meaning of the 1995 Act.[47]Mr Rowley, in contrast, argued that members’ “subsisting rights” do not entitle them to have pensions increased and revalued by reference to RPI as opposed to CPI. What members (and those claiming under them) are entitled to (so it is said) is pension increases and revaluation on the basis of the index in use at the time the particular calculation falls to be made. In other words, members have a “subsisting right” to have their pensions increased and revalued in accordance with the “Retail Prices Index” (as defined for the purposes of the scheme), but that right does not extend to RPI being used rather than “any similar index satisfactory for the purposes of [the Inland Revenue/HMRC]” that Arcadia and the trustees might choose in substitution for RPI.[48]Mr Rowley invoked the decision of Vos J in Danks v QinetiQ Holdings Ltd to support his submissions. Mr Simmonds, however, contended that I should not follow Danks v QinetiQ Holdings Ltd. He said that the case was inconsistent with the Court of Appeal’s decision in Aon Trust Corpn v KPMG and wrongly decided.[49]The pension scheme at issue in Aon Trust Corpn v KPMG provided, by rule 7.1, for a member to be entitled to a pension calculated in accordance with rule 7. Rule 7.2 stated that the annual amount of a member’s pension was to be calculated as follows:
“(1) by taking the total amount of the contributions paid by him and his Employer into the General Fund during or in respect of each Contribution Period up to and including the Contribution Period ending 31 March 2000 and multiplying it by the appropriate factor determined from the Tables in Appendix A in accordance with sub-Rule 7.3 in order to give the amount of pension derived from each Contribution Period; (2) by increasing the amounts determined in accordance with paragraph (1) of this sub-Rule by bonuses declared pursuant to sub-Clause 8.4 … and/or by reducing them by any adjustments made pursuant to sub-Clause 8.5; and (3) by aggregating the amounts of pension determined in accordance with paragraphs (1) and (2) of this sub-Rule …”
. Clauses 8.4 and 8.5, to which there was reference in rule 7.2, were in these terms:
“Surplus revealed by actuarial valuation 8.4 If an actuarial valuation or interim review of the [Pre-2000] Fund shows a surplus the Trustees may, with the consent of the Principal Employer and after taking the Actuary’s advice and after making any such amendments to the Trust Deed and/or the Rules as may be necessary, decrease the contributions of any Member and/or increase (by declaration of bonuses or interim bonuses or otherwise) the benefits or future benefits of any Member or other person entitled to receive any benefit from the [Pre-2000] Fund. Deficiency revealed by actuarial valuation 8.5 If an actuarial valuation of the [Pre-2000] Fund reveals a deficiency in the [Pre-2000] Fund’s resources, the Trustees may with the consent of the Principal Employer make such adjustments and amendments to the benefits secured or thereafter accruing for or in respect of the Members as are necessary in the opinion of the Trustees after taking the Actuary’s advice to secure the continued solvency of the [Pre-2000] Fund.”

Deficiency revealed by actuarial valuation

[50]It was argued on behalf of the employer that the powers in clauses 8.4 and 8.5 were “powers of adjustment which are integral to the process of calculating the amount of a member’s pension entitlement prescribed by rule 7.2” (paragraph 96 of the judgment). On that basis, it was submitted that there was “no entitlement under the scheme to a pension calculated without reference to the powers of adjustment in clauses 8.4 and 8.5” (paragraph 103). It was suggested that: “an exercise of the clause 8.5 power does not effect any change in a member’s right to his pension, since his only right is a right to a pension in the amount which results from the complete calculation process, including any adjustment under clause 8.4 or clause 8.5”.[51]The Court of Appeal, however, rejected that approach and held that section 67 of the 1995 Act was applicable. Jonathan Parker LJ, with whom Mummery and Chadwick LJJ agreed, said:
“178. … In my judgment the power in clause 8.5 to reduce benefits where the Scheme is in deficit is plainly a power to ‘modify ' the Scheme within section 67(1) …. I do not accept [counsel for the employer’s] submission that the reference to ‘the scheme’ in section 67(1) is a reference only to the terms of the scheme as recorded in the scheme documents. In my judgment, the modification of a benefit under the scheme in the exercise of an express power in the scheme to make such a modification is self-evidently a modification of the scheme …. 182. I have already rejected [counsel for the employer’s] submission that on the true construction of the Scheme clause 8.5 is an integral part of the calculation process, and I have no hesitation in rejecting his further submission that for that reason section 67(2) does not apply to any exercise of that power. To my mind, the ingenuity of that argument is matched only by its artificiality.”
Earlier in his judgment, Jonathan Parker LJ had said:
“165. … I conclude that [counsel for the employer’s] basic submission must be rejected. So far as the clause 8.4 power to increase benefits is concerned, the declaration of a bonus will give the member the right to an increased pension. But it does not follow that the member has no right to a pension under rule 7 until the Trustee has considered whether or not to exercise that power (and, it may be, decided not to exercise it, or to exercise it not by declaring a bonus but by reducing contributions). The same consideration applies, in my judgment, to the clause 8.5 power. In my judgment it does not follow from the existence of that power that a member has no right to a pension under rule 7 until the Trustee has taken a decision as to whether the power should be exercised, and if so how. 166. The correct analysis in law, in my judgment, is that on the true construction of the Scheme a member has an accrued right to a pension under rule 7 in the (unadjusted) amount calculated by aggregating the total amounts referred to in rule 7.2(1), but subject to any adjustments made under clause 8.4 or clause 8.5. I therefore reject the notion that that calculation produces only a ‘provisional’ sum (to quote [counsel for the employer]). In my judgment, to read the Scheme in that way is to attempt to force a square peg into a round hole.”
[52]The pension scheme with which Vos J was concerned in Danks v QinetiQ Holdings Ltd provided for pensions to be increased and revalued by reference to the “Index”, which, as already mentioned, was defined to refer to:
“the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees”
. Thus, rule 49.1 stated that a pension was to be “increased while in the course of payment on 1 April each year by an amount equal to the percentage increase in the Index over the period of 12 months ending on the preceding 30 September (or such other period as the Trustees may decide)”, and rule 49.4 stipulated that a deferred pension was to be increased by “the percentage increase in the Index over the period commencing on the 30 September immediately preceding the date on which the Member ceased to be in Pensionable Service and ending on the 30 September immediately preceding Normal Pension Date or the date of earlier payment of the preserved benefits or such other period as the Trustees may decide”.[53]As he explained in paragraph 53 of his judgment, Vos J had to decide whether:
“i) in respect of pensions in payment, the right to have their pensions in payment increased at RPI is a benefit to which the members are now entitled, so that any adverse change in the Index would be a detrimental modification to their subsisting rights; and ii) in respect of deferred members, the right to have their pensions revalued by reference to RPI is a right to future benefits … which has already accrued to or in respect of those members, so that any adverse change in the Index would be a detrimental modification to their subsisting rights.”
In other words, the questions before Vos J were (as he noted in paragraph 54):
“whether the member with a pension in payment has a present entitlement to a pension that will be increased at RPI every year, and whether the member with a deferred pension now has an accrued right to revaluation on the basis of RPI, when he takes his pension in the future.”
[54]Vos J concluded that selection of CPI in place of RPI would not involve a detrimental modification to “subsisting rights” and, hence, that section 67 of the 1995 Act did not apply. Vos J’s reasoning can be seen from the following passages from his judgment:
“55. … In our case, the possibility of adjustment is in fact a right to adjustment under Rules 49.1 to 49.3 for pensions in payment, but that right (‘each pension …shall be increased’) is not a right to have an increase at a particular rate, since it is only a right to have an increase each April ‘by an amount equal to the percentageincrease in the Index …’, and the Index is defined as being RPI or ‘or any othersuitable cost of living index selected by the Trustees’. Thus, the point is really one of timing. A member with a pension in payment, who has had an increase under Rule 49.1 at RPI on 1st April 2011 (for example) could not have that increase reduced without there being a detrimental modification. But, in advance of the next Rule 49.1 increase date (1st April 2012), the member has no entitlement to an increase at any specific rate, since the Trustees always retain a power to change the Index by which the increases are to be calculated. To repeat the point, the member has only a right to a future increase at RPI ‘or any other suitable cost of living index selected by theTrustees’. The difference in Aon was that the members with pensions in payment were entitled to pensions calculated in accordance with rule 7, and the exercise of the Clause 8(5) reduction would obviously have been a detrimental modification. Here the entitlement is only to a future increase at a rate that the Trustees have power to change. 56. The same logic applies to deferred pensions …. 59. That this is the correct construction is made clear if you read the definition of ‘Index’ into the provisions of Rules 49.1 to 49.4 …. That shows that the member’s entitlements or accrued rights are to an increase by an amount equal to the percentage increase in the ‘[RPI] or any other suitable cost ofliving index selected by the Trustees’.”
[55]Vos J said this about Aon Trust Corpn v KPMG (in paragraph 61 of his judgment):
“Aon did not decide anything to the contrary. The right to an increase in the pension in payment or the deferred pension under Rule 49 at a particular or specific rate is not an entitlement or an accrued right until the calculation has been done, as it was in Aon under rule 7 when the pension was taken, and as it is here when the Rules 49.1 to 49.3 increases are calculated for pensions in payment on 1stApril every year, and when the revaluation under Rule 49.4 is undertaken at the moment the deferred pension becomes a pension in payment.”
[56]As I have said, Mr Simmonds’ case was that Danks was wrongly decided. He argued that Vos J failed to recognise that contingent and defeasible rights qualify for protection under section 67 of the 1995 Act and that there is no satisfactory distinction between Danks and Aon. Mr Simmonds suggested that section 67 applies wherever there is a default position. It would thus be in point if a scheme provided for pensions to increase by “RPI or such other rate as the trustees might select”. If, on the other hand, a scheme entitled members to annual increases “at such rate as the trustees shall from time to time determine”, there would be no yardstick to which members could claim entitlement before each increase was awarded.[57]Were they well-founded, Mr Simmonds’ submissions could have unattractive consequences. Suppose, for example, that in a period of very high inflation pension scheme documentation were drafted which provided for pensions in payment to be increased by 10% per annum or, in the event of RPI rising by less than that and the trustees so determining, the increase in RPI. It would seem to follow from Mr Simmonds’ contentions that a member could claim to have pension attributable to service while that provision was in force raised by 10% each year even though(a) the terms of the rule had always allowed for a lower rate to be set,(b) the rule had been replaced many years earlier and(c) inflation was now negligible. As this example indicates, drafting technique could assume surprising importance. Section 67 would bite if a draftsman had created a default position even though he could equally well have achieved his aims without doing so.[58]On balance, it seems to me that Vos J’s analysis in Danks v QinetiQ Holdings Ltd must have been correct. Far from being persuaded that that casewas wrongly decided, I respectfully agree with the decision. The better view, I think, is that members have a “subsisting right” to increases and revaluation at rates consistent with the definitions of “Retail Prices Index”, but not to increases and revaluation specifically by reference to RPI.

Which members of the AGSEPS are affected?

[59]As mentioned earlier (paragraph 14 above), the definition of “Retail Prices Index” that I have held confers a power of selection between indices was introduced into the AGSEPS documentation by a deed of variation dated 31 March 2006. That deed provided for the rules of the scheme to be amended so that: i) The definition of “Retail Prices Index” was added to rule 1, which contains defined terms; and ii) Rule 13.2 came to read:
“The aggregate of increases under Rule 13.1 since the date on which the pension commenced to be paid will not exceed the percentage rise since that date in the Retail Prices Index (or any replacement of that Index).”
It had previously read:
“The aggregate of increases under Rule 13.1 since the date on which the pension commenced to be paid shall not exceed the percentage rise since that date in the Index of Retail Prices published by the Department of Employment (or any replacement of that Index).”
It had previously read:[60]The 2006 deed of variation stated that some of the amendments it made, including the definition of “Retail Prices Index”, were effective from 6 April 1997. Amendments in respect of which no specific date was given were, however, stated to be effective from the date of the deed (i.e. 31 March 2006). On the face of it, the amendment to rule 13.2 was in this category.[61]Mr Rowley, however, argued that the deed of variation should be understood as amending rule 13.2 with effect from 6 April 1997, the date from which the definition of “Retail Prices Index” was to be effective. Mr Rowley submitted that the term “Retail Prices Index” is not used elsewhere in the AGSEPS deed and rules in a context that is capable of taking effect from 6 April 1997. Were, therefore, the amendment to rule 13.2 read as operating only from 31 March 2006, the definition of “Retail Prices Index” could have served no practical purpose in respect of the nine-year period between 1997 and 2006.[62]I have not been persuaded. The 2006 deed of variation provided by its express terms for amendments including that to rule 13.2 to become effective on the date of the deed, and I do not think it clear that the deed contained any relevant mistake. Even supposing, however, that there was a mistake, it is impossible to know that it related to the date on which the amendment to rule 13.2 was to take effect (31 March 2006) rather than that from which the definition of “Retail Prices Index” was stated to be effective (6 April 1997).[63]In short, I consider that the amendment to rule 13.2 took effect on 31 March 2006. That means that members of the AGSEPS who had already left service by then cannot be affected by the power of selection arising from the definition of “Retail Prices Index”.

Conclusions

[64]I can summarise my conclusions as follows: i) The definitions of “Retail Prices Index” applicable in respect of the AGSEPS and AGPS operate to confer powers to select an index other than RPI; ii) Each such power of selection is exercisable by Arcadia and the trustee of the relevant scheme jointly; iii) CPI is a “similar index satisfactory for the purposes of [the Inland Revenue/HMRC]” within the meaning of the definitions of “Retail Prices Index” used for the AGSEPS and AGPS; iv) Section 67 of the 1995 Act does not preclude the selection of CPI for use in connection with benefits derived from past service; and v) The amendment to rule 13.2 of the AGSEPS rules that was made by a deed of variation of 31 March 2006 took effect on that date.

Cited in 3 later judgments