Northumbrian Water Limited v Northumbrian Water Pension Trustees Limited & Anor [2026] EWHC 1952 (Ch)

[2026] EWHC 1952 (Ch)

Case No PE-2025-000004

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

BUSINESS LIST (ChD) PENSIONS

Venue 7 Rolls Building, Fetter Lane, London, EC4A 1NL

Date 3 August 2026

Before

MR JUSTICE RICHARD SMITH

Between

NORTHUMBRIAN WATER LIMITEDClaimant

(1) NORTHUMBRIAN WATER PENSION TRUSTEES LIMITEDDefendants

(2) JOHN MCGOVERNDefendant

Michael Tennet KC and Thomas Robinson KC (instructed by Stephenson Harwood LLP) for Claimant

Keith Bryant KC (instructed by CMS Cameron McKenna Nabarro Olswang LLP) for First Defendant

Fenner Moeran KC (instructed by Osborne Clark LLP) for Second Defendant

Hearing Hearing dates: 27 & 28 April 2026

Approved Judgment

This judgment was handed down remotely at 10.30am on Monday 3 August 2026 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

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MR JUSTICE RICHARD SMITH

[1]This judgment relates to the Part 8 claim commenced by Northumbrian Water Limited (NWL), the sponsoring employer of the Northumbrian Water Pension Scheme (Scheme). NWL seeks directions from the Court as to the proper interpretation of certain rules of the Scheme concerning a category of members within its ‘WPS Section’ (WPS Section). Specifically, the Court’s directions are sought in relation to rules 4.9 and 4.10 of the WPS Section in the latest Trust Deed dated 22 June 2017 (Rule(s) or Rule 4.9 and/ or 4.10 (as appropriate) and 2017 Trust Deed). Rules 4.9 and 4.10 concern the provision of certain increases for pensions in, respectively, payment or deferment in respect of pre-2008 pensionable service of WPS Section members. B. The circumstances of the claim

[2]The Scheme has been in significant deficit for some years. The last formal actuarial valuation as at 31 December 2022 indicated a deficit on the statutory ‘technical provisions’ basis of £181.5m, meaning that 81.5% of its liabilities were funded. This represented a decrease from 82.6% as at the prior valuation in December 2019.

[3]Rules 4.9(2) and 4.10 provide for the pensions of certain WPS Section members attributable to pensionable service before 1 January 2008 to increase each year by a “Guaranteed Amount” of 5% or, if lower, the percentage increase in the Retail Prices Index in the preceding calendar year (RPI). They also provide for such pensions to increase by a further amount if RPI in the preceding calendar year has increased by more than 5% p.a. and, following Scheme actuary consultation, the Trustee considers that such excess can be paid without an increase in the Employer’s ordinary annual contributions as determined in the manner indicated under Rule 4.9(2).

[4]RPI increased by more than 5% p.a. in the calendar years 2021-2023, not having done so for many years. NWL and the First Defendant, the Scheme trustee (Trustee), have corresponded over the proper meaning of Rule 4.9 and whether the Trustee should be paying pension increases above the Guaranteed Amount in respect of those years, particularly where, as here, the Scheme is in substantial deficit. Certain related issues have been identified for the Court’s resolution. C. The conduct of the proceedings

[5]The parties served a number of witness statements, albeit none of the witnesses was called to give evidence, there being no disputed factual issues for my resolution.

[6]Mr Matthew Williams, CFO for the corporate group of which NWL forms part, provided a witness statement setting out relevant factual background.

[7]The Second Defendant, Mr John McGovern (D2), filed two witness statements explaining his willingness to be a representative beneficiary and how his pensionable service gives him an interest in the disputed issues.

[8]Mr Duncan Wilsher also prepared two statements on behalf of the Trustee, explaining(i) the Trustee’s neutral role

(ii) how the issues in the claim affect 2003 members and have a potential value, according to the Scheme actuary, of some £26m

(iii) the documents provided to the other parties and related searches undertaken and

(iv) its communications with Scheme members. The Trustee also confirmed its view that NWL and D2 are appropriate parties to act as representatives in the proposed representation orders.

[9]As to this last point, NWL seeks an order under CPR, Part 19.9 that D2 represents those beneficiaries and participating employers (present or future) in whose interests it would be to establish the greatest scope for full RPI pension increases. I accept that the requirements of Part 19.9 are met here:(i) the case concerns property subject to a trust viz the Scheme and

(ii) on the terms of the proposed order, the people to be represented are a class of persons who have the same interest. These requirements are also met with respect to the proposed order that NWL be appointed to represent those present and future beneficiaries and participating employers in whose interests it would be to establish the narrowest scope for full RPI increases.

[10]Although D2 and NWL are not required to be members of the class proposed to be represented, D2 joined the Scheme as an active member in 1979 and he is currently a pensioner member of the WPS Section. As such, he is directly affected by increases to pensions in payment deriving from his pre-2008 pensionable service and is a member of the class that it is proposed he represent. The same is true of NWL. I also agree that, given the size of Scheme membership, joinder of all members would be impossible and that a representation order in the terms sought by NWL would further the overriding objective and should therefore be made. I do so.

[11]Finally, NWL and D2 each instructed an expert in actuarial science pursuant to the directions order of Deputy Master Jefferis dated 1 April 2025, namely Mr Tayyebi of Barnett Waddingham (instructed by NWL) and Mr Derek Benstead of First Actuarial (instructed by D2). They also prepared a joint statement. There was considerable common ground between them. Neither was called to give oral evidence. D.

(a) Public ownership

[12]The pension arrangements for former employees of the water industry have quite some history to them. As part of the reorganisation of the water industry under the Water Act 1973, the Water Companies’ Association Pension Scheme, later known as the Water Companies Pension Scheme (WCPS), was established. The WCPS was required to provide benefits not less in amount, and on terms not less favourable than, the ‘standard water company scheme’. That ‘standard’ was designated as the Local Government Superannuation Scheme, another public sector pension scheme. At that time, pensions in payment under the local government scheme increased over time in line with the RPI. Such increases were not capped.

(b) Privatisation

[13]The water industry was later privatised in 1989 and the regional water authorities transferred to privately owned companies. The water and sewerage undertakings of Northumberland Water Authority were transferred to a holding company known as Northumbrian Water Group plc (NWG), later to NWL. NWG was one of a number of employers that established a new pension scheme on 30 June 1988 known as the Water Pension Scheme (WPS), other employers including Yorkshire Water plc, Welsh Water plc and North West Water Group, as well as other companies providing training and research in the water industry.

[14]Later that year, the provision of water industry pensions was the subject of a question in Parliament to the Secretary of State (SoS) concerning:- “ … what arrangements the Government are making to ensure that water authority employees can continue to be members of an index-linked pension scheme”.

[15]The SoS answered on 25 November 1988 in the following terms:- “[e]ach authority is offering a “mirror image scheme”, so called because it will offer the same benefits, including full index linking, for the same level of contribution by employees as the local government superannuation scheme. …..

(c) The WPS

[16]The WPS was such an “additional alternative”. The WPS was established by an interim deed dated 30 June 1988, later governed by a definitive deed dated 27 February 1992. The WPS involved multiple different principal employers (NWG, North West Water Group plc, Welsh Water and Yorkshire Water Plc). The WPS was ‘segregated’ by reference to employer,(i) the ‘own cost’ principle limiting a participating employer’s liability to the provision of benefits for members formerly in its service

(ii) WPS assets divided into ‘units’ allocated to the different employers which could not be used to provide benefits in respect of members in the service of any other employer and

(iii) separate memorandum accounts maintained for each participating employer in the Scheme showing all revenue transactions, including the payments of benefits and contributions (Clauses 5.02-5.04 of the 1992 definitive deed).

[17]Rule 18 of the 1992 WPS deed contained a pension increase rule in almost identical terms to Rules 4.9 and 4.10 save for reference to the statutory regime for pension increases which was only introduced later. D2 emphasises that the common language of the corresponding provisions in the WPS Section rules ties them right back to the 1992 WPS definitive deed.

[18]That deed was replaced by a definitive deed and rules dated 17 October 1996. The WPS continued to be segregated by employer but it also became sectionalised upon the introduction of a ‘New Section’ to provide an alternative benefits structure to the ‘WPS Section’, including its own indexation provision. The 1996 WPS deed pension increase rule (also Rule 18) was again in almost identical terms to Rules 4.9 and 4.10.

(d) Lyonnaise UK Pension Scheme

[19]In 1988 and 1989, a French company, Lyonnaise des Eaux (Lyonnaise), acquired four water companies that had participated in the WCPS and established the Lyonnaise UK Pension Scheme for their employees pursuant to an interim deed dated 1 November 1990, later replaced by a definitive deed and rules dated 16 November 1994. This scheme went on to become the Scheme in its current form. It then took the transfer of the relevant members and assets from WCPS, providing benefits to those transferring members in relation to past service. Although there was a single benefit structure, the Lyonnaise UK Pension Scheme was segregated by employer, the 1990 Interim Deed and 1994 Definitive Deed requiring separate ‘sub-funds’ for each participating employer from which the liabilities in respect of each participating employer’s employees and former employees were met, subject to their possible merger.

[20]It appeared to be common ground that segregation came about, in part, because of historical regulatory restrictions concerning the cross-subsidisation of the costs of schemes spanning different geographical areas. NWL posited another reason, namely the proper fiscal treatment of registered occupational pension schemes and the fact that deduction of the cost of scheme contributions was not permissible under the relevant tax legislation where those contributions were not attributable to the employer’s own business. D2 pointed out that contributions to registered (formerly ‘exempt approved’) pension schemes enjoyed a special exception and that such contributions (including to multi-employer schemes) were no impediment to deductibility and, therefore, not a reason for segregation.

(e) Lyonnaise acquires NWG

[21]In 1995, Lyonnaise acquired NWG. Following that acquisition, the Scheme was amended by a deed of alteration dated 25 March 1998 to create the new ‘WPS Section’ (alongside the ‘LUKPS Section’, comprising all members except for WPS Section members). The beneficiaries and assets of the NWG section within the WPS were then transferred to the newly created WPS Section by means of a transfer agreement dated 6 April 1998. The Scheme also changed its name to the Northumbrian Lyonnaise Pension Scheme. Under the Lyonnaise UK Pension Scheme, two separate benefit structures operated under, respectively, the LUKPS Section rules and the WPS Section rules, with the Northern, Southern and Lyonnaise Europe sub-funds providing benefits in accordance with the former rules and the WPS sub-fund in accordance with the latter (clause 4 of the 1998 deed). (f) The WPS Section of the Northumberland Lyonnaise Pension Scheme

[22]Before the NWG acquisition, the Scheme’s pension increase rule provided for increases to pensions in the same percentage as specified in the Pensions Increase (Review) Order then in force. However, the pension increase rules in the WPS Section (then Rule 6 - Indexation) were in materially identical terms to the indexation rule in the WPS. The WPS Section has maintained a pension increase rule in such terms since 1998 albeit with different internal referencing, now expressed to be subject to s.51 of the Pensions Act 1995 (providing for mandatory statutory increases) and (not relevant here) later expanded to encompass pensions accrued by post-January 2008 service.

[23]At the time of the transfer of the NWG section of the WPS into the Scheme in 1998, certain announcements or statements were made as to the operation of the pension increase rules in the WPS Section. It appears to be common ground that none of these statements is determinative of the issues before the Court, albeit NWL relies on them for as affording some assistance on certain construction issues. The Transfer Deed dated 6 April 1998 itself refers (at Recital (J)) to an announcement sent on 27 February 1998 advising active members, deferred pensioners and pensioners of the transfer of benefits earned under the WPS in respect of pre-1998 pensionable service. This announcement explained how the benefit entitlement of all members in respect of WPS membership would be carried forward unchanged to the Lyonnaise UK Pension Scheme. The announcement also specifically confirmed the continuity of arrangements for pension increases, including that “if the rise in the [RPI] exceeds 5% a full RPI increase will be paid provided the Scheme Actuary confirms that the Scheme’s resources are sufficient to meet the cost.” D2 emphasised that this was no more than a summary in a single sentence of Limbs 1A, 1B and 2 which cannot supply the meaning for these provisions.

[24]Rule 2.4 of the WPS Section in the 1998 deed provided that each employer would pay such contributions as may be required from time to time of it under clause 18. Clause 18(c), in turn, provided that the level of contributions was subject to the agreement of the trustees to the extent required by s. 58 of the Pensions Act 1995. S.58, which took effect from 6 April 1997, required at s.58(4) a scheme schedule of contributions to have been previously agreed by the trustees and managers and the employer. If no such agreement had been reached, the schedule was required to reflect rates of contributions determined by the trustees or managers sufficient to secure the minimum funding required. The 1995 Act also introduced a statutory valuation regime on a triennial basis. The minimum funding requirement (MFR) required the value of the assets of the scheme to be not less than the amount of the liabilities of the scheme. D2 emphasises that this statutory underpinning did not prevent additional contributions being made outside that regime.

(g) Subsequent events

[25]In 2002, there was a transfer into the Scheme from the Water Mirror Image Pension Scheme, resulting in the creation of a third section, the ‘MIS’ Section.

[26]In 2003, the Scheme was renamed the Northumbrian Water Pension Scheme.

[27]By a deed dated 18 December 2007, the Scheme was amended with effect from 1 January 2008 so that it closed to new members and benefits relating to pensionable salary were accrued thereafter on a different basis.

[28]The MFR regime was abolished with effect from 30 December 2005 with the introduction of the Statutory Funding Objective (SFO) under the Pensions Act 2004.

[29]By a deed dated 17 December 2010, the Scheme’s sub-fund provisions were deleted and, by clause 4A, the assets of the Scheme could, unless otherwise stated, now be used for any purpose consistent with that deed and its rules, including meeting the contributions due from an employer to the DC Section of the Scheme.

[30]In December 2021, RPI was measured at 7.5%. On 21 February 2022, the Trustee wrote to NWL expressing its view that, given the terms of Rule 4.9, it was obliged to pay pension increases of the Guaranteed Amount as well as the excess. NWL expressed its disagreement with that interpretation given the Scheme’s material funding deficit. The parties’ exchanges led to the issue of this claim in March 2025.

[31]In the meantime, NWL and the Trustee entered into an asset-backed funding arrangement in October 2023 to fund the Scheme’s deficit. The arrangement was drafted with the issue before the Court carved out. Although the Scheme is now funded differently, this does not therefore affect the resolution of that issue and is not relied on by any party as relevant for that purpose. E. Overview of Rules 4.9 and 4.10

[32]As noted, Rule 4.9 of the WPS Section of the Scheme (as set out in the Trust Deed dated 22 June 2017) concerns increases to pensions in payment, Rule 4.10 increases to pensions in deferment, both with respect to pre-2008 pensionable service. Both rules also apply to pensions arising out of, as here, transfers into the Scheme. However, they only apply to pensions exceeding what is known as the “Guaranteed Minimum Pension” (GMP), being that part of a ‘contracted out’ pension reflecting the element of state pension not provided by the state as a result of reduced National Insurance contributions.

[33]Rule 4.9 provides that:- “(2) Subject to section 51 of the PA 95 (indexation) the Trustees shall with effect from the Increase Date increase pensions in payment as follows:- (a)(i) the part of a pension which is attributable to Pensionable Service before 1 January 2008 will increase by:(a) (A) the Guaranteed Amount, and

(b) (B) in addition, the excess over the Guaranteed Amount if in the calendar year ending immediately before the Increase Date the Price Index has increased by more than 5%, provided that after consulting the Actuary they consider that this can be done without an increase in the Employer’s ordinary annual contributions as determined under General Rule 4.4 following the Actuary’s initial recommendation or most recent actuarial valuation. [The parties have termed Rule 4.9(2)(a)(i)(B) “Limb 1A”. In relation to the WPS Section, “Increase Date” is defined as 1 April in any calendar year and, for the other sections of the Scheme, the date specified in the Increase Order by reference to which increases are made pursuant thereto (currently slightly later in April). “Employer’s ordinary annual contributions” is not a defined term in the 2017 Trust Deed although the expression was used as a section heading in the 1992 and 1996 WPS. The further (undefined) term “Actuary’s initial recommendation” can also be traced back to the WPS. General Rule 4.4 provides that each participating employer shall pay such contributions to the Scheme as may be required from time to time of it under clause 18 of the 2017 Trust Deed.]

(c) (C) If the Trustees do not consider the condition set out in the proviso to (B) above is satisfied, they shall in addition to the Guaranteed Amount increase pensions in payment by such part of the excess over the Guaranteed Amount (if any) as they consider prudent having regard to the Actuary’s advice. [The parties have termed Rule 4.9(2)(a)(i)(C) “Limb 1B”.] (ii) If at any Increase Date the Trustees increase the part of a pension in payment which is attributable to Pensionable Service before 1 January 2008 by a percentage which is less than the increase in the Price Index in the calendar year ending immediately before the Increase Date, they shall at the following Increase Date (and at subsequent Increase Dates should a shortfall still exist) in respect only of a pension which has been in payment for at least one month before the original Increase Date pay so much of the shortfall as they determine to be appropriate having considered the advice of the Actuary, provided that (i) they have met the current year’s increase in full, and (ii) the Actuary has confirmed that no increase in the Employer’s ordinary annual contributions would result or the Employer has confirmed his willingness to meet the associated costs under General Rule 4.4. [The parties have termed Rule 4.9(2)(a)(ii) “Limb 2”.] (3) ………… (4) An Employer may direct the Trustees that the pensions currently payable to and in respect of Members formerly in its employment shall be increased to a greater extent than set out above. Before the Trustees comply with the Employer’s direction, they shall ascertain on the advice of the Actuary the associated cost, and satisfy themselves that the Employer has sufficient resources to fund the proposed increase.” (a)(i) the part of a pension which is attributable to Pensionable Service before 1 January 2008 will increase by: (A) the Guaranteed Amount, and (B) in addition, the excess over the Guaranteed Amount if in the calendar year ending immediately before the Increase Date the Price Index has increased by more than 5%, provided that after consulting the Actuary they consider that this can be done without an increase in the Employer’s ordinary annual contributions as determined under General Rule 4.4 following the Actuary’s initial recommendation or most recent actuarial valuation. [The parties have termed Rule 4.9(2)(a)(i)(B) “Limb 1A”. In relation to the WPS Section, “Increase Date” is defined as 1 April in any calendar year and, for the other sections of the Scheme, the date specified in the Increase Order by reference to which increases are made pursuant thereto (currently slightly later in April). “Employer’s ordinary annual contributions” is not a defined term in the 2017 Trust Deed although the expression was used as a section heading in the 1992 and 1996 WPS. The further (undefined) term “Actuary’s initial recommendation” can also be traced back to the WPS. General Rule 4.4 provides that each participating employer shall pay such contributions to the Scheme as may be required from time to time of it under clause 18 of the 2017 Trust Deed.] (C) If the Trustees do not consider the condition set out in the proviso to (B) above is satisfied, they shall in addition to the Guaranteed Amount increase pensions in payment by such part of the excess over the Guaranteed Amount (if any) as they consider prudent having regard to the Actuary’s advice. [The parties have termed Rule 4.9(2)(a)(i)(C) “Limb 1B”.] (ii) If at any Increase Date the Trustees increase the part of a pension in payment which is attributable to Pensionable Service before 1 January 2008 by a percentage which is less than the increase in the Price Index in the calendar year ending immediately before the Increase Date, they shall at the following Increase Date (and at subsequent Increase Dates should a shortfall still exist) in respect only of a pension which has been in payment for at least one month before the original Increase Date pay so much of the shortfall as they determine to be appropriate having considered the advice of the Actuary, provided that (i) they have met the current year’s increase in full, and (ii) the Actuary has confirmed that no increase in the Employer’s ordinary annual contributions would result or the Employer has confirmed his willingness to meet the associated costs under General Rule 4.4. [The parties have termed Rule 4.9(2)(a)(ii) “Limb 2”.]

[34]In summary, Rule 4.9 makes clear that the statutory provisions relating to increases to pensions in payment (s.51 of the Pensions Act 1995) apply notwithstanding the increases provided by that rule. It is common ground that this provision is not material to this case, the guaranteed rates of increase under Rule 4.9(2)(a) always exceeding the statutory minimum.

[35]Rule 4.9(2)(a)(i)(A) increases the pension in payment (in excess of GMP) by the “Guaranteed Amount”, representing the preceding calendar year’s RPI increase, capped at 5%.

[36]Limb 1A (Rule 4.9(2)(a)(i)(B)) concerns whether the excess over the Guaranteed Amount can be paid where such RPI increase exceeds 5%. This is only concerned with whether the whole of that excess can be paid and, only then if, after actuarial consultation, the Trustee considers that this can be done without an increase in the employer’s ordinary annual contributions following the actuary’s initial recommendation or most recent actuarial valuation. D2 notes here that, although the actuarial consultation will involve the Trustee taking advice, an actuarial valuation is not required. (As noted, Rules 4.9 and 4.10 were in near identical terms to Rule 18 of the WPS save that, following the addition of the ‘New Section’ under the 1996 WPS deed, the question of whether the increase could be paid without an increase in the employer’s ordinary annual contributions encompassed a potential contributions increase under the New Section as well as under the WPS Section.)

[37]If the Trustee does not consider that Limb 1A is satisfied, Limb 1B (Rule 4.9(2)(a)(i)(C)) provides that it shall increase pensions by that part of the excess of the full amount of such RPI increase over 5%, if any, as it considers prudent to pay having regard to the actuarial advice.

[38]Limb 2 (Rule 4.9(2)(a)(ii)) is concerned with the situation in which the full RPI increase was not paid in a previous year and the determination of what part, if any, of the relevant shortfall it would be appropriate to pay in a subsequent year. In these circumstances, provided the pension had been in payment for at least one month in the year in which the shortfall occurred, the Trustee will pay as much of the shortfall as it considers appropriate provided that(i) it has met the current year’s increase in full

(ii) the shortfall has not already been made up and

(iii) the Scheme actuary confirms that no increase in the employer’s annual contributions would result or the employer has confirmed its willingness to meet the associated costs.

[39]Rule 4.9(2) permits the employer to increase the pensions in payment and deferment to a greater extent than already indicated subject to the Trustee first ascertaining on Scheme actuary advice the related cost and satisfying itself as to the sufficiency of the employer’s resources.

[40]I have not set out Rule 4.10 in the body of this judgment but it provides for increases to pensions in deferment by the same percentage as applies to pensions in payment. In that sense, Rule 4.10(2)(a) is ‘parasitic’ on Rule 4.9(2)(a). F. Valuation and post-valuation investigation

[41]Subject to s.224 of the Pensions Act 2004 (relating to the statutory funding regime), the Trustee is required to select Scheme valuation dates not longer than three years from the prior valuation (clause 15(1)). The Trustee is also required, as soon as practicable after each valuation, to cause the Scheme actuary to carry out an investigation of the financial state of the Scheme and to report his conclusions in writing to the Trustee and each participating employer and to make such recommendations as it thinks fit regarding the Scheme (clause 15(2)).

[42]These provisions were not materially different from the corresponding rules in the 1992 and 1996 WPS deeds (both at clause 10) although it is appropriate to note the reference in(i) the 2017 Trust Deed to the statutory regime operating after the 1992 and 1996 WPS deeds and

(ii) the WPS deeds to the Scheme commencement date. D2 says that the latter ties in with the reference in Limb 1A (persisting in Rule 4.9) to the “Actuary’s initial recommendation”. Although no valuation would be carried out immediately on inception of the Scheme, there would still have been actuarial advice and a related recommendation as to the level of employer contributions. G. Employer contributions

[43]As noted, General Rule 4.4 of the 2017 Trust Deed provides that each participating employer shall pay such contributions (if any) to the Scheme as may be required from time to time of it under clause 18 of the Trust Deed. Clause 18, in turn, provides that, subject to certain provisos, each participating employer is required to pay to the Trustee such contributions as NWL determines to be appropriate, having regard to the members employed by it and to the advice of the Scheme actuary. Clause 18 is also subject to the relevant provisions of Part 3 of the Pensions Act 2004, including the requirement for the Trustee to set funding which meets the statutory funding regime.

[44]The corresponding provisions of the 1992 and 1996 WPS in Rules 10 and 7 respectively included reference to “ordinary annual contributions”. That term was not defined but features in the different iterations of Limb 1A, including under the 2017 Trust Deed. Those Rules provided that such contributions were to be determined by the relevant principal or associated employer, acting on the advice of the Scheme actuary, at a level to “secure the benefits of those Members in or formerly in its Service”. D2 pointed to the fact that such actuarial advice was not required to take the form of a valuation. NWL says that employer contributions would ordinarily be determined under both the WPS and the WPS Section of the Scheme by reference to the periodic valuations and related actuarial advice.

[45]NWL also placed some emphasis on clause 18 as perpetuating in the 2017 Trust Deed an ‘own cost principle’ within the employer contribution regime of the Scheme despite the desegregation of the different funds in 2010. Although acknowledging that fixing employer contributions required reference to members, D2 was equally emphatic that an ‘own cost principle’ (as used in Clauses 5.02-5.04 of the WPS) did not persist in the Scheme, positing that this may have been unnecessary given that segregation did persist in the Scheme after 1998. (This is relevant to Issue 1.6.)

[46]Finally, clause 18A of the 2017 Trust Deed requires the Trustee, having taken Scheme actuary advice, to prepare and maintain a schedule of contributions setting out the amount and timing of contributions by participating employers and members (complying with the Pensions Act 2004). H. Expert actuarial evidence

[47]Before turning to the issues for decision, it is appropriate to note the position with respect to the expert actuarial evidence.

(a) Overview

[48]This was intended to provide the Court with a background understanding of various matters, including(i) how a defined benefit scheme operates

(ii) how such schemes are (and have been) funded

(iii) how the Scheme’s employer contributions would have been determined in 1996

(iv) the statutory and Scheme requirements for increases to pensions in deferment and in payment

(v) whether “ordinary annual contributions” in Rule 4.9 has a particular meaning as a matter of actuarial practice

(vi) how the experts might expect the Scheme actuary to operate under Rule 4.9, including with respect to consultation with the Trustee and

(vii) how the former sub-funds rules and segregation might impact the determination of employer contributions or Rule 4.9. The experts recognised that a number of these issues are properly legal matters but I have paid appropriate regard to their evidence by way of background, as to which, there appeared to be much common ground, including that Rule 4.9 must have been envisaged to operate in the ‘real world’, both experts considering the question of funding and employer contributions to that funding in that light.

(b) Scheme funding and employer contributions

[49]As to the funding process, the expert evidence explains that:-(i) This involves the trustee obtaining assets in advance to meet the cost of future benefit payments through an appropriate level of (member and employer) contributions and the investment returns earned on them. NWL says that the funding process is essentially forward looking;

(ii) The trustee decides how the assets of the scheme are to be invested in consultation with the employer having regard to the return and risk they consider acceptable to the scheme’s circumstances. That investment strategy informs the actuarial assumptions which may be considered appropriate for funding purposes, in particular the assumed rate of investment return;

(iii) Assumptions are also made (usually after actuarial consultation and advice) about the scheme’s future financial and demographic experience;

(iv) Those assumptions, in turn, are incorporated by the actuary into a calculation of the ‘value’ of the scheme’s future benefit payments, which can be compared against the level of the assets available to support future pension liabilities;

(v) This process is carried out at regular intervals, usually every three years as part of a ‘triennial valuation’ process. Such regular valuations allow the actuary to take account of actual past experience and to update the assumptions about the scheme’s future experience;

(vi) The comparison of the assets held by the scheme against the present value of the entitlements arising from accrued benefits for past service results in the valuation showing either a ‘surplus’ or ‘deficit’, a positive or negative difference between the value of the assets and of the accrued benefits;

(vii) A deficit would typically require additional contributions to be paid to the scheme to correct the deficit;

(viii) Such calculations are carried out at the level of the total assets and liabilities within the scheme (or, for a formally sectionalised scheme, within each of the separate sections) rather than assessing funding at individual member level;

(ix) Such calculations permit updated contribution levels for the scheme to be determined; (xi) The manner of split of total contribution requirement will be determined by the rules of the scheme; (xii) The options available for the employer to pay its share of the contributions are determined after a negotiation between the trustees (after actuarial consultation) and employer and within constraints imposed by the rules of the scheme and the requirements of any overriding legislation or regulations; (xiii) Further adjustment may be made to the contribution levels to ensure that adequate funding is provided to fund those expenses which continue to be met from the scheme; and (xiv) For any scheme open to the accrual of additional benefits, there will also be an assessment of the cost of providing the benefits that will accrue over a future period.

(c) Prudence

[50]The assumptions by reference to which a scheme’s assets and liabilities are calculated have for some time been chosen on a “prudent” basis. Mr Tayyebi explains that ‘prudent’ is generally understood as a greater than 50% chance of the scheme’s future experience being more favourable than the outcome envisaged by the relevant assumption(s). He also says that a review of the appropriate levels of prudence in the valuation assumptions would normally be carried out at each triennial valuation. D2 says that the actuarially recognised meaning of “prudent” cannot sensibly be transposed onto Limb 1B, for which purpose, the term simply means fiscally sensible. I. Statutory regime

[51]As for the statutory funding regime, clause 18 of the 2017 Trust Deed states that the Scheme’s provisions for setting employer contributions are subject to the operation of Part 3 of the Pensions Act 2004 which came into effect in late 2005. This provides that:-(i) The pension scheme is required to have “sufficient and appropriate assets to cover its technical provisions” in accordance with the SFO (s.222(1));

(ii) “Technical provisions” means “the amount required, on an actuarial calculation, to make provision for the scheme’s liabilities” (s.222(2));

(iii) Scheme trustees are required to prepare a written statement of funding principles (s.223);

(iv) They are also required to obtain actuarial valuations every year or at intervals of not more than three years if they obtain actuarial reports for the intervening years (s.224(1));

(v) The valuations are prepared by the scheme’s actuary, valuing the scheme’s assets and calculating its technical provisions (s.224(2));

(vi) If, having obtained an actuarial valuation, it appears to the trustees that the SFO was not met on the effective date of the valuation, they must prepare a recovery plan (or revise the scheme’s existing one) (s.226(1));

(vii) Such recovery plan is required to set out the steps to be taken to meet the SFO and the period from the date of the valuation over which that is to be achieved (s.226(2));

(viii) The scheme’s trustees must also prepare, review and (if necessary) revise a “schedule of contributions” (s.227(1));

(ix) Such schedule is defined as a statement showing the rates of contributions payable towards the scheme by or on behalf of the employer and active members of the scheme and the dates by which such contributions are to be paid (s.227(2)); and

(x) The Occupational Pension Schemes (Scheme Funding) Regulations 2005 provide that contribution schedules must be reviewed and, if necessary, revised within 15 months of the effective date of each actuarial valuation.

[52]The experts agree that the Pensions Act regime did not change the essential nature of the funding exercise, albeit Mr Benstead identifies the requirement to value a scheme’s assets using market value rather than a discounted income valuation as a fundamental change. Mr Tayyebi considers this aspect more nuanced.

[53]Drawing the various threads together, NWL says that the total amount of an employer’s ordinary annual contributions, as determined following a valuation, is therefore an amount intended to eliminate a funding deficit over a set period. As that period progresses, contributions are paid into the Scheme and investment returns are received. The Scheme’s resources include the right to future committed employer contributions. At a particular point in time, such as when the Trustee comes to operate Rule 4.9, the Trustee can assess whether the remaining contributions payable, plus investment returns that are anticipated, will still be enough to eliminate the deficit. NWL also says that Rule 4.9 asks the question whether the Scheme’s resources are at such a level that, if further pension increases are paid, the Scheme will still reach full funding if it only receives the contributions already committed by the employer, or whether payment of further increases will require more money from the employer than it has already committed to pay.

[54]Mr Tayyebi also notes the possibility of special valuations between triennial valuations or changes to the level of employer contributions between valuations without undertaking a new one. This might occur when there is a significant fall in value of scheme assets or a grant of significant benefit improvements. However, he says that such events are exceptional and that there is rarely a sense of urgency over any changes in the total contribution requirements since they will be carried out with a view to allowing the scheme to have enough assets to pay its benefits over the long term.

[55]D2 notes the experts’ agreement that the term “ordinary annual contributions” in Rule 4.9 is not one of actuarial ‘art’. It could encompass contributions to(i) benefit accrual of active members

(ii) the cost of death benefit insurance

(iii) Scheme expenses and

(iv) contribution rate adjustments in response to the Scheme’s funding position. However, its scope is properly a legal matter. Likewise, the experts agree that whether the award of ‘above cap’ increases to WPS Section members should be considered by reference to the financial position of the Scheme as a whole, or just to those assets which can properly be attributed to the WPS Section, is a legal question. J. Interpretation of the Scheme - legal principles

[56]There was no real difference between the parties as to the principles to be applied in the interpretation of the Rules save perhaps as to the emphasis at least to be placed on their historical role within the Scheme and, earlier still, in the WPS. As to how the principles of contractual interpretation fall to be applied to pension scheme documentation, both parties referred me to Barnardo’s v Buckinghamshire

[2018] UKSC 55

in which Lord Hodge held that:

“14. A pension scheme, such as the one in issue on this appeal, has several distinctive characteristics which are relevant to the court's selection of the appropriate interpretative tools. First, it is a formal legal document which has been prepared by skilled and specialist legal draftsmen. Secondly, unlike many commercial contracts, it is not the product of commercial negotiation between parties who may have conflicting interests and who may conclude their agreement under considerable pressure of time, leaving loose ends to be sorted out in future. Thirdly, it is an instrument which is designed to operate in the long term, defining people's rights long after the economic and other circumstances, which existed at the time when it was signed, may have ceased to exist. Fourthly, the scheme confers important rights on parties, the members of the pension scheme, who were not parties to the instrument and who may have joined the scheme many years after it was initiated. Fifthly, members of a pension scheme may not have easy access to expert legal advice or be able readily to ascertain the circumstances which existed when the scheme was established. 15. Judges have recognised that these characteristics make it appropriate for the court to give weight to textual analysis, by concentrating on the words which the draftsman has chosen to use and by attaching less weight to the background factual matrix than might be appropriate in certain commercial contracts: Spooner v British Telecommunications plc [2000] Pens LR 65, Jonathan Parker J at paras 75-76; BESTrustees v Stuart [2001] Pens LR 283, Neuberger J at para 33; Safeway Ltd v Newton [2018] Pens LR 2, Lord Briggs, giving the judgment of the Court of Appeal, at paras 21-23. In Safeway, Lord Briggs stated (para 22): “the Deed exists primarily for the benefit of non-parties, that is the employees upon whom pension rights are conferred whether as members or potential members of the Scheme, and upon members of their families (for example in the event of their death). It is therefore a context which is inherently antipathetic to the recognition, by way of departure from plain language, of some common understanding between the principal employer and the trustee, or common dictionary which they may have employed, or even some widespread practice within the pension industry which might illuminate, or give some strained meaning to, the words used.”

I agree with that approach. In this context I do not think that the court is assisted by assertions as to whether or not the pensions industry in 1991 could have foreseen or did foresee the criticisms of the suitability of the RPI, which later emerged in the public domain, or then thought that it was or was not likely that the RPI would be superseded. 16. The emphasis on textual analysis as an interpretative tool does not derogate from the need both to avoid undue technicality and to have regard to the practical consequences of any construction. Such an analysis does not involve literalism but includes a purposive construction when that is appropriate. As Millett J stated in In re Courage Group's Pension Schemes

[1987] 1 WLR 495

, 505 there are no special rules of construction applicable to a pension scheme but “its provisions should wherever possible be construed to give reasonable and practical effect to the scheme”. Instead, the focus on textual analysis operates as a constraint on the contribution which background factual circumstances, which existed at the time when the scheme was entered into but which would not readily be accessible to its members as time passed, can make to the construction of the scheme.” “the Deed exists primarily for the benefit of non-parties, that is the employees upon whom pension rights are conferred whether as members or potential members of the Scheme, and upon members of their families (for example in the event of their death). It is therefore a context which is inherently antipathetic to the recognition, by way of departure from plain language, of some common understanding between the principal employer and the trustee, or common dictionary which they may have employed, or even some widespread practice within the pension industry which might illuminate, or give some strained meaning to, the words used.” I agree with that approach. In this context I do not think that the court is assisted by assertions as to whether or not the pensions industry in 1991 could have foreseen or did foresee the criticisms of the suitability of the RPI, which later emerged in the public domain, or then thought that it was or was not likely that the RPI would be superseded.

[57]As to the use of past pension scheme documentation for construction purposes, in BBC v BBC Trustees Ltd

[2024] EWCA Civ 767

, Lewison LJ expressed (at [20]) “some scepticism about whether it is useful to delve into the archaeology of a pension scheme, when current members of the scheme may have joined many years after the scheme was initially established. …”. However, he had earlier noted (at [18]) “[t]he obvious inference from the re-adoption of a clause in the pension scheme without modification is that the same words do not change their meaning”. D2 relies to that end on Rule 4.9 having originally featured in the (pre-statutory funding regime) WPS, later re-adopted in the Scheme without material modification. K. The issues arising on NWL’s claim

[58]The issues arising on NWL’s claim and the related arguments have been set out in summary tabular form by way of a list of issues which (subject to NWL’s clarification of one point during the hearing) reflected their respective positions thereon, albeit developed in the parties’ skeleton arguments and orally at the hearing. A number of these issues have been agreed, that agreement also reduced to separate tabular form (updated during the hearing). NWL invited the Court to record the parties’ related agreement in this judgment. I am content to do so. (a) Issue 1.1 – “Ordinary annual contributions” under Limb 1A

[59]Issue 1.1 concerns the meaning of “Employer’s ordinary annual contributions as determined under General Rule 4.4 following the Actuary’s initial recommendation or most recent actuarial valuation.” NWL and D2 agree that this phrase in Limb 1A includes all contributions designed to address a funding deficit in the Scheme revealed by a valuation (irrespective of their precise form and whether or not they are fixed after a valuation or imposed outside the triennial valuation cycle but simply to update existing contribution levels (for example, in light of developing external circumstances)). NWL and D2 further agree that the phrase does not include exceptional contributions or contributions triggered by special action or a benefit augmentation requested by the employer.

[60]As was made clear at the hearing, NWL and D2 also agree that the word “following” in the phrase “following … the most recent actuarial valuation” in Limb 1A has a temporal meaning and does not, for example, refer to adoption of the methodological approach used by the Scheme actuary in performing the valuation. (b) Issue 1.2 – actuarial consultation under Limb 1A

[61]NWL and D2 also agree that, when “consulting the Actuary” for the purposes of Limb 1A, such consultation must address the question of whether, in the Scheme actuary’s opinion, the payment of a full RPI increase would lead to an increase in the employer’s ordinary annual contributions. (c) Issue 1.3 – increase in ordinary annual contributions under Limb 1A

[62]Although NWL and D2 are agreed as to the meaning of “Employer’s ordinary annual contributions” under Limb 1A, they disagree as to how the Trustee is to go about assessing what amounts to an increase therein. Five possible interpretations have been posited, namely whether “an increase in the Employer’s ordinary annual contributions” refers to:-(i) As D2 contends as his primary position, an immediate increase in the employer’s ordinary annual contributions in advance of the next scheduled triennial valuation (Interpretation

1.3.1 ); and/ or

(ii) As NWL contends as its primary position, an increase at the next scheduled triennial valuation (or any subsequent one) to the level(s) of the employer’s ordinary annual contributions currently payable (e.g. under the existing schedule of contributions) (Interpretation

1.3.2 ); or

(iii) As NWL contends as a fallback, an increase in the employer’s ordinary annual contributions that would result if one took the most recent triennial valuation and factored in the costs of paying a full RPI increase (and revaluation) (Interpretation

1.3.3 ); or

(iv) As D2 contends as a fallback, an increase in the employer’s ordinary annual contributions that would result if one took the most recent triennial valuation, updated it on one of the bases identified, and factored in the cost of paying a full RPI increase (and revaluation) (Interpretation

1.3.4 ); or

(v) Something else.

[63]The parties addressed this issue at some length at the hearing. Interpretation 1.3.1/ 1.3.2 – D2’s position

[64]In terms of the linguistic analysis, D2 emphasises that the continuing reference to “Employer’s ordinary annual contributions” and “following the Actuary’s initial recommendation” in Limb 1A in the 2017 Trust Deed militates in favour of an interpretation that ties it back to the 1992 and 1996 WPS deeds where the same language featured.

[65]D2 also notes that the further words “as determined under General Rule 4.4 following the Actuary’s initial recommendation or most recent actuarial valuation” modify the preceding words “employer’s ordinary annual contributions” rather than “an increase in” such contributions. General Rule 4.4 of the 2017 Trust Deed and, through it, clause 18, are therefore concerned with establishing the level of employer contributions, not increases therein.

[66]D2 also places emphasis on the draftsman tying the words “Employer’s ordinary annual contributions” to “as determined under General Rule 4.4 following the Actuary’s initial recommendation or most recent actuarial valuation”. The draftsman could simply have ended the sentence with the former phrase. In part, the extended phrase (and its reference to General Rule 4.4) tied the former to a particular type of contribution rather than, for example, special type contributions. However, it also fixed the clause 18 employer contribution rate for the purpose of any increase therein as that which followed the most recent actuarial valuation.

[67]As such, D2 says that any increase following, or contemplated to follow, a future actuarial valuation is not an increase in the employer’s ordinary annual contributions as determined following the most recent actuarial valuation. Any such increase would be by reference to the employer’s ordinary annual contributions following the most recent actuarial valuation, albeit in the next set of contributions. Although NWL suggests that the words “Employer’s ordinary annual contributions as determined under General Rule 4.4 following the …. most recent actuarial valuation” are the ‘baseline’ or ‘comparator’ against which to test any increase, the words do not say that any increase falls to be tested by reference thereto.

[68]If the draftsman had wanted to assess if there is to be an increase at any time and in any way, the language could have been limited to “an increase in the Employer’s ordinary annual contributions”. The draftsman could also have said “an increase at any time, now or in the future, in the Employer’s ordinary annual contributions.” They did not. Rather, they used language which fixed the contributions to be increased as those determined following the latest actuarial valuation. NWL’s interpretation ignores the qualification of what contributions are being increased. If you determine contributions following the 2022 actuarial valuation and you then determine contributions following the 2025 actuarial valuation, the latter does not represent an increase in contributions as determined following the 2022 actuarial valuation. It is an increase in contributions full stop. That is not the language of Rule 4.9.

[69]Nor is D2 seeking to ‘read in’ the word “immediate” to the proviso. That just happens to be what is required on its language before the Limb 1A proviso is triggered. In that regard, “immediate” is somewhat flexible in this context. The crucial thing is that the relevant contributions increase must come before the next valuation.

[70]As for the contextual analysis, there is no pragmatic reason to expand on, or derogate from, the express words of Rule 4.9. Although NWL says that it would be sensible in the circumstances of the Scheme’s current funding regime and the funding of such schemes generally to ensure in advance that the money is available to pay for these pension increases, that is not the be all and end all. To construe Rule 4.9 by reference to the workings of the statutory regime is unnecessary. Actuarial input will be essential to the assessment of the Scheme’s funding needs at the next triennial valuation as envisaged by s.276 of the Pensions Act 2004 but, even if actuarial advice is contemplated for Rule 4.9 as well, the former does not drive its interpretation. Rule 4.9 is not tied to the statutory regime which was not even in place or contemplated in 1992. Legislative changes may be made from time to time but that does not alter the meaning of Rule 4.9 or the long-term operation of the Scheme. It is perfectly possible in any event within the legislative scheme to revise the schedule of contributions without the need for a valuation, for example following the review of any recovery plan. The suggestion that it is overwhelmingly likely that any increase in contributions would be triggered by an actuarial valuation is NWL’s assertion.

[71]Moreover, as a practical matter, actuarial valuations are also looking to the future, in this case three years apart (both on a statutory and Scheme basis). Determining whether there should be some sort of contributions increase three years or less into the future is likely to prove very difficult to work out, particularly where you are looking to establish by the increase date what has to happen, giving only a period of three months or so following the published RPI rates for the prior year. By contrast, the statutory regime allows up to 15 months for actuarial valuations. The proper question under Rule 4.9 is whether the potential expense of an increase to pensions currently in payment is significant enough to trigger a contributions increase now. That may depend on whether the Scheme has a surplus but it may not. Rule 4.9 does not require this.

[72]D2 says that there is the additional difficulty of working out whether and to what extent a potential increase in pension payments might be the cause of any contributions increase as opposed to other factors such as the payment of discretionary benefits, the results of revaluation or changes in mortality rates or investment returns. With these complications, it would be a precarious course to look at what might be assessed in the future compared to the simpler identification of whether a potential pensions increase would materially impact the security of Scheme benefits so as to engage the proviso.

[73]D2 also says that NWL’s reliance on the announcement issued contemporaneously with the 1998 WPS Transfer Deed does not advance the analysis, being an inaccurate and subjective statement of interpretation, the important point being that the deed was intended to replicate in the Scheme the WPS.

[74]NWL relies on the use of the word “immediate” in Rule 4.9(2)(b)(i)(B) concerning contribution increases with respect to post 1 January 2008 accrual. However, as noted, it is not contended by D2 that such a word fell to be implied in Limb 1A rather than that was the outcome as a matter of its proper interpretation. In any event, that sub-rule was introduced in 2007, long after Rule 4.9 first featured in the Scheme (and in the WPS). That sub-rule clearly does not bite upon a provision that already existed. Moreover, it was really making clear and replicating what was already implicit in Limb 1A but with the added benefit of the consent of the employer.

[75]Likewise, NWL’s reliance on other parts of the Scheme’s increase provisions which have regard to the employer’s resources do not assist either, those provisions being concerned with when the employer asks for, or consents to, the augmentation of benefits. In those circumstances, it is unsurprising that there should be a check by reference to the employer’s ability to pay this. The position is different with respect to Limb 1A which is non-discretionary and not subject to the employer’s agreement.

[76]Accordingly, D2 says in relation to issue 1.3 that the obvious and necessarily correct answer is that put forward under Interpretation1.3.1 of the claim form. It literally cannot be Interpretation 1.3.2. Interpretation 1.3.1/

1.3.2 – NWL’s position

[77]NWL prefaced its submissions by pointing out that Limb 1A does not itself contemplate that there will be an increase in ordinary annual employer contributions. Rather, the question posed is a hypothetical one as to whether a full RPI increase can be applied to pensions in payment without one.

[78]As for the rival interpretations, NWL says that, under Interpretation 1.3.2, the only purpose of the language of “Employer’s ordinary annual contributions as determined under General Rule 4.4 following […] the most recent actuarial valuation” is to identify the contributions which form the baseline when assessing whether there has been an increase. In this context, as is common ground, “following” simply has a temporal meaning - the determination of the contributions follows the valuation or they are fixed in light thereof. As such, the relevant baseline against which any contributions increase falls to be assessed in this case is the level of contributions to be paid by the employer under the 2019 recovery plan and schedule of contributions.

[79]On that basis, the only question for the Trustee is whether pensions in payment could be increased by the full RPI in the relevant year without the employer having to increase the contributions it has already committed to pay under that recovery plan. Under Interpretation 1.3.2, provided an increase is foreseeable, there is no restriction or gloss on the nature of the contributions increase needed to fund the pension increase. Nor under this interpretation is there any contrived or artificial methodology for assessing whether the existing contributions will have to increase. The Trustee need only ask what is going to happen if pensions in payment are increased by the full RPI.

[80]NWL says that this accords with the natural meaning of Limb 1A. There is no indication that anything but a straightforward and ‘real-life’ assessment of the future consequence for employer contributions is required. The question for the Trustee when making that assessment is, taking account what has occurred since the last valuation (for example, changes in assets and liability values) and the cost of full RPI increases, does the Scheme remain on track to get back to full funding on the existing path of the recovery plan and related contributions schedule or will the Trustee need to come back to the employer for more money if it pays these pension increases.

[81]NWL says that, because the focus is on the simple question of what will, in fact, happen, the precise timing of any demand for increased contributions does not matter or arise. An anticipated increase will suffice whenever it would result. The scale of the Scheme’s funding problems could, in theory, be so bad that a proposed full RPI increase might require an out-of-cycle valuation and contributions increase (as envisaged by interpretation 1.3.1). However, Limb 1A is not confined to that situation. In real life, the level of contributions needed to fully fund the Scheme and provide pension increases would be assessed at a forthcoming scheduled triennial valuation. The approach and assumptions adopted at the last valuation will be out of date such that those likely to be adopted at the forthcoming valuation should be considered instead.

[82]Any methodology which requires the Trustee to assess whether employer contributions will increase on a basis which does not reflect real life will increase the risk of disconnect between the Trustee’s assessment of whether increases can be afforded and what then actually happens when contributions are next reviewed. As the experts agree, that assessment can accommodate the Scheme’s experience since the previous valuation and any changes to the approach for setting the ongoing funding basis which might be anticipated when the assessment is undertaken. Limb 1A already envisages Scheme actuary input and, as the experts agree, there is nothing impractical or difficult from an actuarial perspective with what is envisaged by interpretation 1.3.2.

[83]Although D2 appears to suggest that it would be impossible to determine the level of future contributions in advance of a future valuation, the question is not the exact level of contributions but whether they are going to increase. Determining the latter question is eminently possible. Likewise, there are multiple answers to the suggestion that it might be disproportionate to require a revaluation based on what is suggested to be a small relative increase in liabilities. Interpretation 1.3.2 does not require the Trustee to conduct a valuation rather than to anticipate what is likely to happen at the next valuation which the experts agree can be done. Moreover, a small percentage increase in pensions represents a not insignificant capital cost in terms of additional funding required. Cost reduction and simplification of the process may be desirable but they should carry limited weight in the context of additional employer contributions potentially running into the millions and the potential impact on the Scheme and other members if increased pensions are paid without the resources in place to cover them.

[84]As for interpretation 1.3.1 contended for by D2, NWL had anticipated in its skeleton argument that D2 would seek to imply the word “immediate” before the words “increase in the Employer’s ordinary annual contributions” in Limb 1A. That argument did not materialise in D2’s skeleton. However, NWL advances various reasons why interpretation 1.3.1 cannot be correct.

[85]First, if the drafter of Rule 4.9 had intended that Limb 1A consider only whether an immediate increase to contributions was required, that could and would have been stated explicitly as it was in Rule 4.9(2)(b)(i)(B) concerning that part of a pension attributable to post-2008 pensionable service where a prior RPI increase exceeding the Guaranteed Amount had not previously been paid in full. The use of the word “immediate” there is said to make sense because the employer’s ‘safety net’ was different, namely NWL’s consent. In those circumstances, the pension increase will be paid so long as the state of Scheme funding is not so bad as to require an “immediate” increase in employer contributions, in which case, that employer’s choice is understandably removed given the potential funding threat. Although the anticipated implied term argument did not materialise, the same point arises that the result contended for by D2 could have been straightforwardly achieved by expressly limiting the scope of Limb 1A to “immediate” employer contributions increases.

[86]In his skeleton argument, D2 says that the words of Limb 1A cannot mean some sort of relative increase to the existing Employer’s contribution rate which might arise at a future valuation as envisaged by Interpretation 1.3.2 since that would not be an increase in the contributions “as determined … following the most recent actuarial valuation” rather than an increase by reference to those contributions, albeit in the next set of contributions. NWL says that the word “in” cannot bear the weight that D2 seeks to place on it. As a matter of their ordinary and natural meaning, the words “increase in … contributions” mean the same as an increase to or compared to or by reference to those contributions. Those phrases are equally apt to identify whether the contributions currently payable by the employer will have to increase as a result of a full RPI increase to pensions. There is no warrant to suggest that reference to the contributions determined at the last valuation is also intended to qualify or restrict what would otherwise naturally amount to an increase in the comparator contributions.

[87]Although it is common ground that the process of construction should have regard to the practical consequences and that scheme provisions should, wherever possible, be construed to give it reasonable and practical effect, Interpretation 1.3.1 would also produce results and draw distinctions which are not coherent from a practical and commercial perspective. If it was clear in the period leading up to the next valuation that the existing schedule of contributions would have to be increased after the next valuation date to meet a full RPI pension increase, no useful purpose would be served construing Limb 1A in a way that meant that that was not an increase in ordinary annual contributions. This would also lead to arbitrary outcomes, the payment of any increase potentially turning on whether the next valuation happened to occur one month before or one month after the relevant increase date even though the Scheme funding position would be substantially the same at both valuation dates.

[88]The practical effect would also be to weaken the Scheme’s finances, a full RPI increase having to be paid (possibly over multiple years) in circumstances in which it was already clear that ordinary annual contributions would have to be increased at the next valuation date and the employer may not be able to afford them. However, on D2’s construction, the pension increase would have to be paid, it could not be reversed later and any funding shortfall would increase to the detriment of other members.

[89]Employer affordability is also a concern reflected in Rule 4.9. Rule 4.9(4), for example, permits employers to direct the Trustee to pay larger increases than full RPI but subject to the Trustee satisfying itself that the employer has sufficient resources. On NWL’s interpretation, the question of affordability is already addressed by no pension increase being paid where an increase in employer contributions would be required. However, on D2’s interpretation of Limb 1A, the employer would have to pay pension increases to full RPI whether or not it could afford to pay them, save in the limited situation of when an emergency increase in contributions was required.

[90]In this regard, although D2 says that an increase in contributions following an unscheduled valuation under the Pensions Act 2004 would be an increase capable of engaging the proviso, there is no distinction in principle between an unscheduled and a scheduled valuation and no warrant linguistically within Rule 4.9 for drawing one. An unscheduled valuation is a normal valuation that has taken place ahead of the time it was originally scheduled.

[91]D2 also says that another scenario in which the proviso to Limb 1A might be engaged is where the employer decided (without a valuation) to increase contributions under the Scheme rules and outside the 2004 Act. NWL says that this is unrealistic since decisions as to the level of what might be considered ‘ordinary annual contributions’ are invariably made under the statutory regime with its overriding requirement that the scheme must have sufficient and appropriate assets to cover its liabilities or technical provisions and the statutory valuation, contribution schedule and recovery plan mechanisms. Any increase beyond the statutory basis will therefore be voluntary and unlikely to satisfy the requirements of Limb 1A. That is not to say that specific voluntary contributions could not be made without a valuation, but it would not be an ordinary annual contribution.

[92]Following D2’s analysis to its logical conclusion, any increase in ordinary annual contributions that follows, or is anticipated to follow, a new valuation would not engage Limb 1A. Given the overwhelming likelihood that such increases (immediate or otherwise) would be determined following a valuation, D2’s construction would render the proviso to Limb 1A largely otiose. That seems unlikely. To the contrary, and consistent with NWL’s position that any schedule of contributions or revision thereto will follow a valuation, it is implicit from the proviso itself that the existing comparator schedule of contributions is based on a valuation.

[93]Nor does the fact that the Scheme might, in the ordinary course, have to make minor payments that will not result in an immediate need for a new valuation and further contributions assist D2. If anything, this rather makes NWL’s point for it, albeit the figure at stake here is anything but minor. Increased contributions would be required after the next valuation and cannot be ignored for Limb 1A purposes.

[94]NWL also says that D2 derives no support from any other source and that his position is inconsistent with the extrinsic evidence of what members were told was the purpose of the clause when the WPS Section was established, namely that the Scheme would pay the full RPI increase if its resources were sufficient to meet the cost. Interpretations 1.3.3/ 1.3.4 – D2’s position

[95]Interpretation 1.3.3 looks back to the outcome of the last valuation and factors in the cost of a full RPI increase. Interpretation 1.3.4 looks back to the approach, methodology and assumptions used in the last valuation and considers whether and how to update them, before updating the outcome and then factoring in the cost of a full RPI increase.

[96]It is fair to say that D2 was not enthusiastic about either Interpretation. D2 notes that Limb 1A does not require a hypothetical recalculation of the triennial valuation, whether updated or otherwise. He also says that this would not be of practical relevance. If there were no actual increase to the employer contributions, a revaluation would add nothing to the current position. If the recalculation was directed to whether this would materially increase employer contributions at some point in the present or future, this would have been stated in Rule 4.9. Finally, D2 questioned why a revaluation exercise, let alone a revaluation using updated factors for one likely relatively minor element of the Scheme’s overall funding, should be undertaken. The exercise would be disproportionate to the issue. If, however, these interpretations are to be preferred, D2 says that the Court should adopt Interpretation 1.3.4 in preference to 1.3.3. Although more involved, the process envisaged by Interpretation 1.3.4 more accurately reflects the actual financial circumstances of the Scheme. Interpretations 1.3.3/ 1.3.4 – NWL’s position

[97]NWL’s ‘fallback’ position is interpretation 1.3.3. It arises if, contrary to the suggested ‘real world’ and forward-looking approach of interpretation 1.3.2, Rule 4.9 requires the Trustee to look back to the last valuation. If so, NWL says that there is nothing in Rule 4.9 to tell the Trustee to make the assumptions and/ or take the approach from that valuation and update this or identify what should be updated. NWL says that, in these circumstances, the Trustee should simply take the result of that last valuation and ask if it discloses sufficient resources in the Scheme to fund a pension increase above 5% (Interpretation 1.3.3). This is said to be a quick and easy test to apply. This would permit a full RPI increase to be paid where the last actuarial valuation had disclosed a surplus sufficient not to impact the contributions fixed at that time, alternatively if the amount of the full RPI increase was sufficiently small and involved sufficiently little additional cost as not to merit disturbing the level of contributions fixed by the last valuation, for example if the impacts were within the margin of error used within it.

[98]NWL says that Interpretation 1.3.3 is simple and reflects the “common sense” notion that significant additional benefits can be afforded only if there are sufficient resources already within the Scheme to meet the cost. A simple approach is also commercially sensible. The rule has to be operated every year and this approach should not entail significant cost. It also makes sense in the context of timing under Rule 4.9, with limited time from when it is known that RPI has increased by more than 5% in the prior year to undertake any involved actuarial calculations before the increase is to start to be paid (or not). As such, Interpretation 1.3.3 is said to be the quickest and easiest way for the Trustee to apply the test in Limb 1A. If Rule 4.9 is construed as directing attention back to the last valuation, Interpretation 1.3.3 is closer to the words of the rule and gives a more practical outcome than Interpretation 1.3.4.

[99]Interpretation 1.3.4 requires the Trustee to assess whether contributions will increase by reference to the assumptions and approach of the last valuation, with some aspects rolled forward or updated by the Scheme actuary, albeit which aspects and to what extent is not clear to NWL. NWL says that it makes no sense to adopt an approach that requires the Trustee to make an assessment by looking backwards to the last and inevitably outdated valuation and perform limited updating. There is nothing in the language of Rule 4.9 to mandate that result, let alone indicate what aspects of the approach from the last valuation should be updated. Although NWL recognises that any future valuation will have regard to the position at the last valuation, that is not the same as saying that a future valuation will be “rolled forward” from the last one. There may be a wide range of changes between valuations which are more than merely rolling forward or updating the last. Issue 1.3 – discussion/ conclusion

[100]To recap, Limb 1A is concerned with whether the excess over the Guaranteed Amount should be paid where, in the immediately preceding calendar year, RPI has increased by more than 5%. This will be paid if, after consulting the Scheme actuary, the Trustee considers it can be done without an increase in the employer’s ordinary annual contributions.

[101]As noted, Limb 1A is in materially the same language as the corresponding provisions of the WPS and draws upon the other language of that scheme (such as “Employer’s ordinary annual contributions” and the Scheme actuary’s “initial recommendation”).

[102]Rule 4.9 does not countenance a particular methodological approach to determining when a relevant increase in contributions falls to be considered. As such, I had no difficulty in rejecting Interpretations 1.3.3 and 1.3.4 for which, as both parties seemed to acknowledge, there was no warrant in the language of Limb 1A.

[103]Limb 1A is more open-textured and is concerned with the potential impact on employer ordinary annual contributions in the scenario of a potential pensions increase of an ascertained amount. As at the date of the assessment, that pensions increase has yet to occur and may not do so depending on its impact. The scenario is therefore forward looking and hypothetical. Moreover, that hypothetical does not seek to identify the level of any potential contributions increase rather than whether there will be an increase at all.

[104]The potential increase for the purpose of the proviso is in “the Employer’s ordinary annual contributions as determined under General Rule 4.4 following the Actuary’s initial recommendation or most recent actuarial valuation.” Setting aside the position when the Scheme was established (and the actuary made its initial recommendation as to required employer contributions), the proviso therefore contemplates that the Scheme actuary has already undertaken a valuation, following which, there has been a determination of employer’s annual ordinary contributions. The 2017 Trust Deed contemplates regular triennial valuations. (The WPS envisaged the same.) Although the phrase “Employer’s ordinary annual contributions” is not used there, clause 18 contemplates the determination of employer contributions after advice from the Scheme actuary. (Again, the WPS envisaged the same.) Clause 18A of the 2017 Trust Deed provides additionally for the preparation of a contributions schedule.

[105]Under the 2017 Trust Deed, the determination of employer contributions to be paid by each participating employer is stated to be a matter for NWL. However, it is also subject to Part 3 of the Pensions Act 2004. Specifically, the level of contributions is subject to such agreement from the Trustee as the Act requires. Although not (yet) affected by the statutory funding regime, the level of employer’s contributions payable under the 1992 and 1996 WPS deeds as determined by the relevant employer was subject to trustee agreement. I agree, however, that even though Rule 4.9 (and its terminology) has its roots in the WPS, its re-adoption by the Scheme with express reference to, and against the background of, the new statutory regime, forms part of the relevant context against which Limb 1A now falls to be construed, even if not earlier contemplated.

[106]D2 says that, linguistically, an increase to employer contributions which follows or might follow a future actuarial valuation is not an increase in the employer’s ordinary annual contributions as determined following the most recent actuarial valuation. Any such increase would be by reference to the employer’s ordinary annual contributions following the most recent actuarial valuation, albeit in the next set of contributions. I found this analysis strained. Employer contributions might, for example, have been determined following the most recent valuation in 2019 to be x. After consulting the Scheme actuary, the Trustee may consider in March 2022 that an increase in pension payments based on the full RPI experienced during 2021 would require future employer contributions larger than x to be paid. However, the Scheme finances may be such that payment of those increased contributions do not need to kick in until after the next scheduled triennial valuation due to be reported later in 2022.

[107]There did not seem to be any linguistic reason why, in those circumstances, the proviso was not engaged. That envisaged increase can naturally and ordinarily be described as an increase in the employer contributions as determined following the 2019 valuation. The fact that it could also be similarly described as an increase to, by reference to or compared to those earlier determined contributions does not alter that. Indeed, as I have noted, Limb 1A is looking forward to something that has not yet occurred and might not do so. I agree that the reference to the most recent actuarial valuation identifies the baseline against which a potential contribution increase on account of a full RPI increase in the prior calendar year falls to be tested.

[108]Limb 1A does not identify any particular circumstances in which the proviso is (or is not) engaged beyond the scenario mentioned. D2 argued that the “increase” envisaged by Limb 1A was “an immediate increase in the Employer’s ordinary annual contributions in advance of the next scheduled triennial valuation.” However, Limb 1A does not say this even though the language of an “immediate” increase was introduced later in Rule 4.9 from 2008.

[109]Rather, as Limb 1A itself envisages (and envisaged in 1992 and 1996 before the statutory funding scheme was introduced), the valuation process will commonly be followed by the determination of employer ordinary annual contributions. It would therefore be unexceptional in my view, and consistent with the language of Limb 1A itself, for the next actuarial valuation and related contributions determination to crystallise any contemplated contributions increase for Limb 1A purposes.

[110]Moreover, if an increase in employer’s ordinary annual contributions following the next scheduled valuation were ‘off-limits’ for Limb 1A purposes, it was not clear what potential increases might yet be in scope. In his skeleton argument, D2 identified out-of-cycle actuarial valuations. However, if it were determined following such a valuation that the employer should pay larger contributions, this too would seem to fall foul of D2’s linguistic analysis. Nor was it clear, as a matter of principle, why the acceleration of the valuation process should make any substantive difference.

[111]D2 posited other examples, including a new set of contributions outside the Pensions Act 2004 regime. As noted, there was some debate as to whether this would be a voluntary contribution falling outside the scope of those contributions contemplated by Limb 1A, albeit the argument seemed ultimately to turn on the particular circumstances in which the contribution might have been made.

[112]D2 also identified revisions to the schedule of contributions within the regime for which a valuation was not required. Although such revisions are possible, I agree that the Pensions Act 2004 funding regime and its requirements for valuations, contribution schedules and recovery plans mean that contribution increases are more likely to occur following a valuation. However, it was not clear to me in any event why revisions to the contributions schedule made between valuations could not be accommodated within the proviso to Limb 1A as being a determination following the most recent valuation (even if not the most recent determination).

[113]Finally, D2’s somewhat limited examples did not indicate a coherent or principled basis for the operation of Limb 1A or address why determinations following later actuarial valuations might fall outside the proviso. That was rather reinforced by the potential arbitrariness of D2’s interpretation and how a future valuation might (or might not) be relevant for Limb 1A purposes depending on whether it occurred (perhaps shortly) after or before a relevant increase date.

[114]D2’s interpretation also rather failed to engage with the purpose and practical effect of Limb 1A. It is clear from its requirements as to when any full RPI increase might be paid that Limb 1A is concerned to ensure that there are sufficient resources available to fund it. On D2’s case, if it was anticipated at the relevant increase date that payment of a full RPI increase would require an increase in employer’s ordinary annual contributions at the next valuation date, the Trustee would still have to pay the pension increase, possibly over a number of years, in circumstances in which the relevant scheme may already be in significant deficit and the employer cannot afford to do so. I agree that this makes little sense and might operate to the potential detriment of other Scheme members and their security of benefits.

[115]Nor was I persuaded by D2’s argument as to the difficulties in identifying now whether an increase in contributions might be required in any future valuation. The expert evidence did not suggest particular difficulty. Nor would Limb 1A require the extent of any contributions increase to be identified in any event. I also agree that Limb 1A does not require the causation enquiry apparently envisaged by D2. The ‘test’ is more simply whether employer contributions will have to increase, as to which, on the terms of Rule 4.9, the payment of a full RPI increase would need to be a contributory factor.

[116]Given these matters, I agree that an increase in the Employer’s ordinary annual contributions within Limb 1A would encompass an immediate increase in such contributions (as envisaged by Interpretation1.3.1 ) and an increase at the next valuation (as envisaged by Interpretation

1.3.2 ). On the assumption that I acceded to its interpretation of Limb 1A (as I have), NWL invited me to grant certain declaratory relief to the effect that:-

(i) the test in Limb 1A requires a ‘real world’ assessment of whether, if pension increases are granted, employer contributions would have to increase in the future and that it is immaterial whether that would happen immediately or at a forthcoming scheduled actuarial valuation;

(ii) if the Trustee’s assessment is that the need for employer contributions would likely be reassessed at a forthcoming scheduled actuarial valuation rather than immediately, the assessment of whether contributions should increase should be on the basis and assumptions likely to be adopted at that forthcoming valuation, not the last; and

(iii) the Trustee’s assessment of the approach and assumptions likely to be adopted at a forthcoming valuation should take account of events and developments which have occurred since the last valuation and which are reasonably foreseeable as at the increase date.

[117]At the hearing, I indicated that, in deciding Issue 1.3, the Court was wary of circumscribing the Trustee’s approach to the exercise of its judgment under Limb 1A or how the Scheme actuary might go about the preparation of its related advice. One can well envisage, for example, circumstances in which it is readily apparent that a full RPI increase can (or cannot) be paid without an increase in employer’s ordinary annual contributions such that the level of related investigation or deliberation on the part of the Trustee and actuary may be more limited than in a more marginal case. Moreover, as NWL accepted in response to D2’s practical concerns about Interpretation 1.3.2, determining whether Limb 1A is engaged does not itself require a valuation to be undertaken. Finally, the term ‘real world assessment’ is a rather open-ended one.

[118]Nevertheless, I have decided under Issue 1.3 that Limb 1A requires an assessment of whether employer contributions would have to increase in the future if a full RPI increase is paid and that it is immaterial whether that would happen immediately or at a forthcoming scheduled actuarial valuation. As such, I agree that, if the Trustee considers that employer contributions would likely be reassessed at that valuation, it would be appropriate to consider the prospect of any increase in employer contributions by reference to the likely approach to be adopted then including, as NWL and D2 agree, all future events which are reasonably foreseeable as at the increase date. (d) Issue 1.4/ 1.8 – relevant considerations for Limb 1A purposes

[119]Issues 1.4 and 1.8 concern those matters to which the Scheme actuary and Trustee should properly have regard when applying the test under Rule 4.9(2)(a)(i)(b). NWL and D2 agree that they can and should consider whatever information and data is available at the time of its application, including information as to developments that have occurred or become reasonably foreseeable by the time of the assessment with a view to as accurate a determination as possible as to what contributions are likely to become payable in future. They further agree that, when applying that test, the Scheme actuary and Trustee can and should have regard to any impact on the security of Scheme members’ existing benefits if increases were granted. (e) Issue 1.5 – margin of prudence under Limb 1A

[120]NWL and D2 do not agree as to the degree of ‘confidence’ that might be required in any assessment by the Trustee of whether there will be an increase in “Employer’s ordinary annual contributions”. As a preliminary matter, there was some difference between NWL and D2 as to the proper approach of the Court to this issue. D2 contended that, so long as the Trustee’s decision on the question in Limb 1A of whether a full RPI increase “can be done without an increase in Employer’s annual contributions” is reasonable and rational, the Court should be wary of ‘over-glossing’ or interference.

[121]NWL agreed that the Trustee’s judgment on this question is subject to a margin of appreciation but maintained that the issue of the correct test to apply is a legal one on which the Court can give directions. In this regard, D2 does say that, to the extent necessary to canvass a gloss on this Limb 1A question, “can be done” mandates a possibility, not probability. A certainty would require something significantly firmer. “Can” connotes a reasonable or realistic possibility, both as an element of interpretation and as an element of the process of the Trustee forming a judgment. Issue 1.5 - NWL’s arguments

[122]NWL, by contrast, says that the term “can be done” does not again bear the weight D2 seeks to place on it. The meaning must be taken from the context and purpose of the provision as a whole. Looking at NWL’s arguments more granularly, it says that:-(i) The criterion for payment of full RPI pension increases under Limb 1A is the consequence of doing so for employer contribution levels. Limb 1A therefore limits pension increases to those that can safely be afforded without the Trustee seeking more money from the employer. No practical purpose would be served by turning the test of whether contributions will increase into a mere reasonable possibility that the employer will not have to fund them;

(ii) The operation of Limb 1A in this way could also jeopardise the security of other Scheme benefits, leading to the position in which the employer would become liable for additional contributions even if it was in no position to pay them. As already noted, concern about employer affordability features in other parts of the Scheme rules, including in Rule 4.9(4);

(iii) Perhaps most significantly, Rule 4.9 has three limbs to it. Limbs 1B and 2 are intended to address the situation in which there are doubts as to whether a full RPI pensions increase could be afforded under Limb 1A. Under Limb 1B, there might be insufficient money to pay an increase under Limb 1A but the Trustee can pay a part increase if it considers it prudent to do so. Under Limb 2, if a full RPI increase was not paid in a prior year, a shortfall can be caught up to the extent the Trustee later determines that to be appropriate and the other Limb 2 conditions are satisfied. These further powers to pay the pension increase mean that Limb 1A need not and should not be read so broadly as to include a situation of mere realistic possibility;

(iv) Relatedly, on D2’s construction of Limb 1A, Limb 1B would have little or no remaining scope. On D2’s analysis, Limb 1B would only cover a situation in which the Trustee had already concluded there was no realistic possibility of a full RPI increase being paid without increasing employer contributions. It is hard to see how the Trustee could ever satisfy itself that the part payment of that increase under Limb 1B would be a prudent thing to do, diminishing Limb 1B to a point that is not meaningful;

(v) The test under Limb 2 for making ‘catch-up’ pension increases requires the Scheme actuary to “confirm” that no increase in employer’s ordinary annual contributions “would” result from the payment of part of the shortfall as the Trustee determines to be appropriate. Such language does not suggest that the Scheme actuary would say that an increase was permissible where there was merely a possibility of an increase or a 50-50 chance. There is no reason why the draftsman would have imposed a different, more easily surmounted, test under Limb 1A, particularly when it is not subject to the same degree of discretion as Limb 2 and the payment of an increase could have consequences for benefit security.

[123]Accordingly, reading Rule 4.9 as a whole and in context, NWL says that increases were not intended to be conferred where there is material uncertainty about whether they would necessitate an increase in ordinary annual employer contributions. Although D2 relies on Limb 1A not expressly importing a prudence requirement in contrast to Limb 1B, the need for the latter relates to the particular role Limb 1B performs. Limb 1B cases are concerned with the situation in which the Scheme cannot afford the full RPI increase and the possibility that paying its excess resources may leave the Trustee in the position of having to go back to the employer for more money. Most cases under Limb 1A will not be so finely balanced. However, that does not mean that no prudence or degree of certainty that the increase can be afforded would be required under Limb 1A. That would be illogical given the approach to be taken under Limb 1B. Were it otherwise, the Scheme would have to spend all its resources on an increase the very result which the draftsman was seeking to avoid when drafting Limb 1B. Issue 1.5 - D2’s arguments

[124]Linguistically, the expression “can be done” encompasses possibility rather than probability, let alone certainty. Although Limbs 1B and 2 are part of an overarching structure, it is significant that they use different language. The Court will usually seek to give meaning to that different language. Limb 1B considers the question of prudence which inherently includes a margin of possibility. Limb 2 then goes to say what “would” result, as to which, there is no margin of possibility. As such, Limb 1A and Limb 1B are both dealing with possibilities rather than certainties, with Limb 2 highlighting that by way of comparison. The rationale for that distinction is that Limb 2 is a ‘catch-up’ provision. The payment of a full RPI increase in the immediately following year would avoid pressure on pensioner finances. However, once that year has passed and pensioners are receiving their newly assessed pension, they will make financial adjustments accordingly. Having done so, the need for possible ‘catch-ups’ in subsequent years will be less pressing, the pensioner having effectively already ‘eaten’ the increased cost of living. Hence the distinction between Limb 2 compared to Limbs 1A and 1B.

[125]Moreover, if Interpretation 1.3.2 is the correct analysis of Limb 1A, there has to be a degree of possibility rather than certainty because you are assessing a future, inherently uncertain, set of circumstances as to whether there is going to be an increase in the future. To introduce the element of certainty would leave Limb 1A without any effective meaning, a course against which the Court would strive. Issue 1.5 - discussion/ conclusion

[126]D2 is correct to say that each of the limbs of Rule 4.9 under consideration contains different language which, on its face, could suggest different degrees of certainty between the criteria applied by each. D2 is also correct when he says that the Court will seek to give effective meaning to the language. NWL is also correct when it says that the Court will construe those provisions having regard to their purpose and context and their coherent operation as a whole.

[127]In this case, Rule 4.9 envisages different but related scenarios. The point of engagement of Limb 1A is the affordability of a possible full RPI increase expressed by reference to whether this can be paid without an increase in employer’s ordinary annual contributions. If it is not satisfied, the Trustee will then go on to consider payment of such part of the excess as it considers ‘prudent’ (Limb 1B). Although the potential need for employer contributions is not mentioned in Limb 1B, prudence obviously falls to be considered here in that (affordability) light as well. The potential for ‘catch-up’ payments (Limb 2) is expressly linked to the Scheme actuary’s confirmation that there will be no resulting increase in employer contributions.

[128]Given that concern common to all three limbs, it would be surprising in my view if a full RPI increase, with the greatest potential impact on the finances of the Scheme, could be triggered on the basis only of a ‘real possibility’ that its payment could be made without an increase in employer contributions. Although this is one connotation of the language of “can be done”, it is not the only one and, in my view, it does not hold here given the operation of the other limbs. Indeed, on D2’s construction of Limb 1A, it would be considerably easier to secure a full and immediate increase than it would a partial and/ or deferred one even though the former would give rise to greater concerns as to affordability and security of member benefits.

[129]First, if ‘realistic possibility’ was the level of certainty required for the engagement of the Limb 1A proviso, I agree that the scope for Limb 1B to operate would be much diminished. If there were no realistic possibility that a full RPI increase could be paid such that Limb 1B then fell to be considered, it is difficult to envisage the Trustee ever being able to get comfortable that it would be prudent to pay part of the excess over the Guaranteed Amount.

[130]Likewise, notwithstanding what D2 says about such an increase becoming less pressing for potential recipients in the Limb 2 scenario, it seems unlikely that actuarial confirmation of affordability would be required for a possible ‘catch-up’ payment where there has been a prior shortfall in payment of a full RPI increase and, yet, the threshold for immediate payment of the full RPI increase can much more readily be crossed (as Limb 2 itself assumes has occurred in the relevant year of assessment).

[131]Having considered the parties’ arguments carefully, I am satisfied that the “can be done” language in Limb 1A connotes greater certainty than suggested by D2 and that NWL’s formulation of “material uncertainty” reflects an appropriate moderation of the language, purpose and effect of the different limbs, enabling them to be read together in a meaningful way, consistent with the purpose of Rule 4.9(2) and the sensible operation of the provision as a whole. (f) Issue 1.6 – sectional or non-sectional based analysis under Rule 4.9

[132]This issue concerns whether the Trustee must take into account that the Scheme is a multi-employer sectionalised (and formerly segregated) scheme when considering the resources available to meet the cost of the RPI increase for WPS Section members only. In this regard, the NW, MIS and 80th Sections of the Scheme have their own increase rules which operate not dissimilarly to Rule 4.9, including provision for the Trustee to examine the sufficiency of the Scheme’s resources to fund the potential pension increase. Issue 1.6 asks whether, in assessing whether a full RPI increase could be afforded, the Trustee and Scheme actuary should treat members of the WPS Section as solely entitled to the benefit of the Scheme assets as a whole or whether they should only have regard to the assets and resources which they consider properly attributable to the WPS Section.

[133]Although the parties’ positions on this issue seemed somewhat polarised at the outset, I sensed that this was because they did not fully appreciate the position of the other. Issue 1.6 - NWL’s position

[134]NWL understood D2’s position to be that desegregation entitled WPS members effectively to treat the excess resources of the Scheme as exclusively applicable to meet the costs of increasing their benefits even though such resources may not then be available to meet the costs of increasing the benefits of members of other sections. NWL also understood D2 to be relying to that end on the fact that Rule 4.9(2) (for the WPS Section) takes effect from 1 April in each year but any relevant increase for the other sections takes effect from the date defined in the Pensions Increase Review Order which slightly postdates 1 April. NWL says that this runs counter to the intended effect of desegregation which, at core, involves making all the resources of a scheme available to provide the benefits of all its members. However, NWL also says that there is nothing in the language of Rule 4.9 that requires the Court to come to such an extreme conclusion. Nor would it make sense to require the Trustee, when operating Rule 4.9, to disregard the claims of members of other sections (to whom it also owes duties) to increases in respect of the same period of time and using the same assets.

[135]Prior to 1998, the WPS and the Scheme separately consisted of sections or sub-funds associated with the different water companies participating in them. As already noted, the WPS contained an ‘own cost principle’ limiting an employer’s pension and benefits obligation under the WPS to the provision of such benefits for members in and formerly in its service. As for the Scheme, this contained a sub-fund for each water company acquired by Lyonnaise. Clause 5(3) of the interim deed provided that the Scheme liabilities in respect of employees and former employees of each of the companies participating in the Scheme would be met from the sub-fund for that company. After the transfer in 1998 of the beneficiaries and assets of the NWG section of the WPS into the WPS Section of the Scheme, the Scheme kept the separate sub-fund structure.

[136]In 2010 the provisions requiring the Scheme to maintain separate sub-funds were deleted, apparently to simplify administration and save costs. NWL says that there was no suggestion then that the removal of the sub-fund structure would result in members of one section becoming exclusively entitled to benefits from resources of the Scheme as a whole. NWL notes that, despite this deletion, the Scheme’s governing documentation kept the approach of treating each employer as responsible for funding and providing the benefits of members which it employed or formerly employed. Accordingly, clause 18 of the 2017 Deed requires NWL to determine the contribution level of each participating employer having regard to the members it employed. An employer who had paid contributions fixed by reference to the needs of its employees would rightly object if its contributions or their corresponding assets were used to fund excess benefits for the staff or employees of other employers. NWL may now be the main employer but it is (and was) not the only employer and there was (and remains) the possibility that further employers and members might participate in the Scheme in the future.

[137]As such, D2’s construction could not be entertained unless there was clear wording positively requiring the Trustee to give priority to the claims of WPS members over other sections. There is no such language. Instead, the position adopted by D2 appears to be based on the chance that the increase date for the WPS Section is a few days earlier than for other members. It is unlikely that D2 would take the same approach if he were a member of another section. The Trustee should therefore undertake the Rule 4.9 assessment taking account of the fact that the resources of the Scheme are subject to different claims by different members which they know the Scheme would also be facing. Any other position would be counterfactual and perverse.

[138]Although this may not be necessary in all cases, the easiest way of doing that is to ask what proportion of Scheme resources can sensibly be regarded as being attributable to each section. Although D2 argues that this cannot be undertaken fairly because, post-segregation, there will have been cross-subsidy between sections, it is clear from the contemporaneous documents that the reason for not de-segregating before 2010 was to ensure the equalisation of the funding levels of all sections so that none would be disadvantaged. Moreover, to the extent there has been cross-subsidy, this could be taken into account when the Scheme actuary prepares its advice to the Trustee.

[139]As to the suggested impracticalities generally, considerations of apportionment are unlikely to arise in many years given the level of RPI from time to time or it may well be obvious whether there is scope for everyone to get an RPI increase or not. However, to the extent it does arise, Mr Tayyebi suggests it would be possible, albeit time intensive, to apportion excess resources to different sections. He also considers it reasonable and proper for the Scheme actuary, when performing its consultative and advisory role, to refer to the existence of the other pension increase rules and provide simplified calculations of the impact on non-WPS Section members of paying an increase of the excess under Rule 4.9. Mr. Benstead accepts that, in principle, the ‘sectionalisation approach’ would have been one option on the elimination of the sub-funds to protect members from the risks of the assets of their section being used to provide benefits for another section, albeit the difficulties should not be underestimated. NWL does not underestimate the difficulties but apportionment may be required to give effect to the rights of all members of the Scheme to the excess resources of the Scheme as a whole. Treating WPS Section members as if solely entitled to any excess would not be a principled or appropriate response to such difficulties. Issue 1.6 - D2’s arguments

[140]D2 notes that Issue 1.6 is expressed in somewhat binary fashion of whether the Trustee should effectively ignore members outside the WPS Section or whether there should be nominal segregation. D2 says that there should be a third option, namely that the Trustee does not ignore everybody else, but applies all the fund with no nominal segregation.

[141]As to the suggested nominal segregation, clause 4A(2) of the 2017 Trust Deed still provides that, unless otherwise stated expressly, the assets of the Scheme may be used for any purpose, consistent with the Trust Deed, including meeting contributions due from an employer to the DC Section of the Scheme. That wording is clear and requires express provision to countermand it. As such, NWL’s suggested nominal segregation is not viable on the plain language of the Trust Deed. Although the 2017 Trust Deed does contain a contribution rule that mandates the fixing of employer contributions by reference to the members, once that contribution has been fixed, it goes into the Scheme pot for the benefit of all sections. Nor did an ‘own cost principle’ (proper) in the sense provided for in the WPS ever feature in the 2017 Trust Deed.

[142]As such, it would be wrong to introduce some form of nominal desegregation for Rule 4.9 purposes. The issue of the timing difference of the increase date is a practical point. D2 does not rely on this to seek to ‘win the pot’ (as NWL described it). That could backfire against the members of the WPS Section, not least by Scheme amendment. Rather, D2 says that, when assessing pension increase affordability, the Trustee has to look to what it knows will be paid (whatever the date of the increase date). Although there is no segregation, to the extent that there are extant and equal claims against the Scheme, the Trustee has to look to everybody with such a claim. However, not all claims are equal. For example, the post-2008 indexation provision for the WPS Scheme and the pre-2008 indexation provisions for the other sections contain requirements as to employer consent before certain increases can be paid. Those are not equal with claims under Limb 1A which do not require consent. Other benefits are discretionary and they too will not be equal with those which fall to be paid to members as of right.

[143]Accordingly, although D2 does not assert that the timing of the increase date is of significance, he does reject nominal desegregation. Moreover, in approaching Rule 4.9, whether there will be an increase in employer’s ordinary annual contributions falls to be answered by reference to the totality of the claims across the sections of the Scheme. However, in considering them, the Trustee must have regard to the validity and different quality of the claims that might (or might not) fall to be paid.

[144]I should add that NWL did indicate in submission that it accepted that there may be a ‘halfway house’ under which the Trustee must give proper consideration to other extant claims to allow proper consideration under Limb 1A. However, when approaching those claims, NWL says that it should not be supposed that a claim requiring employer consent is not on a par with a ‘mandatory’ benefit. The employer may give consent, not least to ensure that its own members benefit. If so, that could have a major effect on the division of Scheme assets. Issue 1.6 – discussion/ conclusion

[145]I agree that WPS Section members should not be treated as solely entitled to the excess resources of the Scheme for Limb 1A purposes where there are proper claims for increases under the indexation provisions of the other sections of the Scheme. As became apparent at the hearing, it is common ground that the timing of the engagement of those indexation provisions is not material for these purposes. I agree. The Trustee should assess all such known claims even if the timing of their accrual might differ. In assessing those claims, it is appropriate for the Trustee to have regard to whether they are subject to conditions (such as employer consent) and whether any such conditions have been satisfied. Given the de-segregation of the Scheme in 2010, I also agree that the attribution of part of the Scheme assets to the WPS Section is not appropriate or required. (g) Issue 1.7 – date of assessment of whether an increase can be paid under Limb 1A

[146]NWL and D2 agree that the assessment of whether a pension increase can be paid without an increase in employer contributions should take place as at the date on which the increase is due to be paid by reference to the cost of the increase as at that date. They further agree that the assessment can take account of all reasonably foreseeable future events as at that date. (h) Issues 2/ 3 – interrelationship of the different Limbs 1A, 1B and 2

[147]The shape and scope of Issues 2 and 3, and any related dispute, was rather difficult to discern. However, it was clear that the parties differed when it came to the nature of the powers or duties entrusted to the Trustee under the different limbs of Rule 4.9. It was common ground that a decision under Limb 1A is a matter of judgment affording the Trustee a margin of appreciation such that its decision could not be impugned simply because a different trustee might have reached a different view. NWL went on to say that, although D2 contended that Limb 1B required a determination or judgment to be made, the Trustee’s powers under Limb 1B were more properly regarded as a matter of ‘limited discretion’, albeit the parties appeared to accept that, in practice, little was likely to turn on it.

[148]NWL says that the distinction arises more pointedly under Limb 2 by which the Trustee determines the payment of such part of any prior shortfall against a full RPI increase as it considers “appropriate”. There being no objective measure of ‘appropriateness’ against which to assess the decision being made, NWL says that this is properly a question of the Trustee’s ‘full discretion’. D2 did not agree, contending as a matter of the language of Limb 2 that it engages a question of the Trustee’s judgment, albeit again that little was likely to turn on the point. I am invited to resolve this question since it is said by NWL that the distinction may make a difference in practice. However, the issue was canvassed at the hearing at a somewhat general level rather than practical one. Moreover, the judgment/ discretion ‘bright line’ may not be so illuminating here. As such, I consider the appropriate course is merely to note that, Limb 2 being concerned with the appropriateness of any ‘catch-up’ payment, the Trustee’s related determination may properly involve different, and possibly farther reaching, considerations than those arising under Limbs 1A and 1B and, therefore, a potentially broader range of outcomes.

[149]NWL had also discerned D2 to be saying that the financial security of other benefits payable under the Scheme was not a relevant consideration under Limbs 1A or 1B but only under Limb 2 and sought the Court’s determination of that question. However, I understood it to be common ground by the conclusion of the hearing that this consideration is relevant to all three limbs of Rule 4.9. Issue 4

[150]Issue 4 concerns the interaction of any ‘catch-up’ increases to pensions in payment under Limb 2 with revaluation to pensions in deferment under Rule 4.10(2)(a) and, in particular, whether(i) if a catch-up increase is applied to pensions in payment in relation to a previous increase date, should the same increase only be applied for members whose pensions were in deferment as at that previous increase date and

(ii) if the answer to (i) is yes, should a catch-up increase under Rule 4.10(2)(a) only be made for members whose pensions remain in deferment as at the date of application of the catch-up increase. NWL and D2 agree that (i) and (ii) should both be answered in the affirmative. L. Conclusion/ disposal

[151]The parties are requested to seek to agree an order giving effect to the terms of this judgment. If they cannot agree and/ or there are any matters requiring a hearing, this can be arranged in the usual way.