Spirit Legacy Pension Scheme · CAS-29191-V6G7

CAS-29191-V6G7

Ombudsman’s Determination Applicant Mrs S

Scheme Spirit (Legacy) Pension Scheme (the Scheme)

Respondent Spirit (Legacy) Pension Trustee Limited (the Trustee)

Outcome

Complaint summary Mrs S complained that she is entitled to receive a “State Scheme Supplement” (SSS) from the Scheme until she becomes eligible to receive her State Pension.

Background information, including submissions from the parties

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On 13 July 2018, Aon wrote to Mrs S about her retirement. Aon set out the options for Mrs S to receive her benefits from the Scheme. One option was to take an annual pension of £15,786.42 and a tax-free lump sum payment of £75,121.49. This did not include Mrs S’ additional voluntary contribution benefits in the Scheme. Aon said that a bridging pension, meaning the SSS, of £2,654.08 per year, would also be payable to Mrs S and this would “cease at State Pension Age”. No further detail was provided by Aon as to meaning of this definition.

2 CAS-29191-V6G7 In October 2018, Mrs S retired from the Scheme. At that point1, the 1995 Schedule set out that “A person born after 5th October 1954 but before 6th April 1960 attains pensionable age when the person attains the age of 66.”

On 14 April 2019, Mrs S emailed Aon to register her concern that she was only going to be paid the SSS up to the age of 65. She said that her State Pension “does not start till 18 months after my 65 birthday [Sic]”, i.e. she was not due to reach her SPA until the age of 66 years and 6 months. Mrs S said that she had not been informed of this until she received correspondence in relation to her retirement. She considered that she had previously been provided with misleading information about the age to which she would be paid the SSS.

On 19 February 2020, Mrs S registered a complaint under the Scheme’s two-stage Internal Dispute Resolution Procedure (IDRP).

On 5 May 2020, the Trustee issued its stage one complaint response to Mrs S. It explained that a SSS applied to Mrs S’ pension from the Scheme. This broadly meant that a more generous final salary could be used to calculate Mrs S’ pension up to the point she reached ’State pension age’.

The Trustee highlighted the definition of ‘State pension age’ in the Rules, specifically Rule 5.5 (shown in Appendix 1). It asserted that the Rules define ‘State pension age’ as having the meaning given by paragraph 1 of Part 1 of Schedule 4 to the 1995 Act. The Trustee noted that the 1995 Act had been amended since the Rules were signed in 2001 and, for those born after a certain date, the age at which they will receive the State Pension had increased.

The Trustee said it had to consider whether the definition of ‘State pension age’, as given in the Rules, was fixed, or could vary as new legislation was introduced. It explained that it had taken legal advice on this matter and the conclusion was that, for Rule 5.5, ‘State pension age’ should be treated as a fixed age. The Trustee’s position was that the Rules could not be interpreted as allowing for new legislation to amend the provision, otherwise such a change could automatically alter benefits in the Scheme in a way that was beyond its control.

The Trustee added that there were two possibilities for the interpretation of the point at which the definition of ‘State pension age’ should apply. The first was the legislation in place at the date the Rules were signed. The second was the legislation in place when the member ceased to accrue benefits in the Scheme. It said that the Scheme had historically been administered based on the latter interpretation, which was more generous to members. In Mrs S’ case, the outcome would be the same under either interpretation.

1 The legislation as it stood on 1 October 2018 – specifically rule 6 of paragraph 1 of Part 1 of Schedule 4 to

the 1995 Act. 3 CAS-29191-V6G7 The Trustee concluded by setting out that it did not uphold Mrs S’ complaint, but accepted that the information provided to Mrs S, around the time of her retirement, was insufficiently clear. The Trustee offered Mrs S £500 in recognition of this issue.

On 23 June 2020, Mrs S confirmed that she wished for the complaint to be moved to stage two of the IDRP.

On 4 February 2021, the Trustee issued its stage two response to the complaint. It said it affirmed the decision set out in the stage one response. It had taken further legal advice and said it understood that unless the Rules contained “express provision providing for statutory references to be interpreted as including subsequent amendments, they should be treated as fixed at the date the rules themselves were signed”. This was the Trustee’s position for Mrs S’ case. However, its administrative approach was to treat the reference to ‘State pension age’ as being that applicable at the date the member ceased to accrue benefits in the Scheme, rather than the date the Rules were signed. Nonetheless, it was the Trustee’s view that “the Rules should be interpreted on the basis of a fixed interpretation which does not change where the underlying legislation changes over time”. The Trustee increased the offer of £500 to £1,000, in recognition of the delay in providing its response to Mrs S.

Adjudicator’s Opinion

2 The Adjudicator used references to ‘SPA’, but for continuity I refer to ‘State pension age’ where it refers to

the defined term in the Rules. 4 CAS-29191-V6G7

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I have considered the Trustee’s comments, but they do not change the outcome. I agree with the Adjudicator’s Opinion.

6 CAS-29191-V6G7 Ombudsman’s decision

3 Putting to one side the Trustee’s administrative practice of fixing it instead at the member’s date of leaving. 4 Similarly, I have examined the Interpretation Act 1978 to see if that provides assistance – but it does not. 5 The Trustee, and its legal advisers, also looked more widely at ‘replacement’ legislation (as opposed to

‘amended’ legislation). I have not sought to address that point here as it is not relevant to the complaint at hand – as I point out below, the key legislative reference used by the Rules for the purposes of defining ‘State pension age’ has remained constant, and it is only the underlying provisions in that paragraph that have changed. 7 CAS-29191-V6G7

6 Rather than in respect of the Thales Pension Scheme specifically, which did have a helpful, express

interpretation provision (see paragraph 41). However, Nugee J does not suggest that his obiter comment, set out above, would only apply to schemes that had such an interpretation provision. 7 At paragraph 64. 8 [2018] UKSC 55 9 Notably Britvic v Britvic Pensions [2021] EWCA Civ 867 and De La Rue v De La Rue Pension Trustee

[2022] EWHC 48 (Ch) 8 CAS-29191-V6G7

10 [2018] Pens LR 2 11 Barnardo’s, at para 15, and reproduced in full in the Appendix.

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12 I.e. the cross reference to “…the rules in paragraph 1 of Part 1 of Schedule 4 to the Pensions Act 1995…”. 13 “Final Salary cannot, however, exceed the amount of the Earnings Cap at the date on which the Member

leaves Employment, reaches Normal Pension Date or dies, whichever occurs first, except as described in Rule 17.3.” 14 At paragraph 23: “Fourthly, it is trite both that a provision in a pension scheme or other formal document

should be considered in the context of the document as a whole and that one would in principle expect words and phrases to be used consistently in a carefully drafted document, absent a reason for giving them different meanings.” 15 By way of just one example, in the investment power within the Rules (Rule 21.2) there is a reference to

“The Trustees will exercise these powers in accordance with Sections 36 and 40 of the Pensions Act 1995 (choosing investments and restriction on employer related investments)” – provisions that have changed since the date of execution. 10 CAS-29191-V6G7

I uphold Mrs S’ complaint.

Directions

Dominic Harris

Pensions Ombudsman

12 June 2024

16 Barnardo’s, at para 14, and reproduced in full in the Appendix.

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Appendix 1 – Extract from the Rules “5.1 Retirement at Normal Pension Date

A Member who leaves Employment at Normal Pension Date will receive a pension for life at a yearly rate of 1/60th of Final Salary for each complete year of Pensionable Employment, plus an additional 1/720th for each additional complete month, with a maximum of two thirds of Final Salary…

…5.5 State Scheme Supplement

A Member who leaves Employment before State pension age and is entitled to pension under Rule 5 will, until State pension age, have his or her pension calculated using Final Salary without reducing Salary by an amount equal to the Pensionable Deduction.

Any increase made to the Member’s pension during that time which are referable to the supplement will not continue to be paid after State pension age.

No account will be taken of the supplement for the purpose of calculating benefit payable under Rule 8 (pensions for spouses Dependants and children).

For the purpose of this Rule, State pension age has the meaning given by the rules in paragraph 1 of Part 1 of Schedule 4 to the Pensions Act 1995 (rules for equalisation of pensionable ages for men and women)…

…9.1 Preserved Pension

A member who leaves Employment before Normal Pension Date with at least 2 years’ Qualifying Service (see Rule 9.3) will receive a pension for life from Normal Pension Date of an amount calculated as described in Rule 5.1.

The pension will be increased before payment as follows:

9.1.1 the pension in excess of GMP will be increased by the percentage required by the Revaluation Laws (which is approximately equal to the percentage rise in the cost of living between the date the Member leaves Employment and Normal Pension Date, with a maximum of 5% per year compound); and

9.1.2 the GMP will be increased as required by the Contracting-out Laws.”

12 CAS-29191-V6G7 Appendix 2 – Extract of Lord Hodge’s discussion of the judgement for Barnardo’s v Buckinghamshire (2019)

“Discussion

The construction of pension schemes

13. In the trilogy of cases, Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, Arnold v Britton [2015] AC 1619 and Wood v Capita Insurance Services Ltd [2017] AC 1173, this court has given guidance on the general approach to the construction of contracts and other instruments, drawing on modern case law of the House of Lords since Prenn v Simmonds [1971] 1 WLR 1381. That guidance, which the parties did not contest in this appeal, does not need to be repeated. In deciding which interpretative tools will best assist in ascertaining the meaning of an instrument, and the weight to be given to each of the relevant interpretative tools, the court must have regard to the nature and circumstances of the particular instrument.

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.” 13 CAS-29191-V6G7 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.

17. It is nevertheless relevant to the construction of pension schemes that they are drafted to comply with tax rules so as to preserve the considerable benefits which the United Kingdom’s tax regime confers on such schemes. They must be construed “against their fiscal backgrounds”: National Grid Co plc v Mayes [2001] 1 WLR 864, para 18 per Lord Hoffmann; British Airways Pension Trustees Ltd v British Airways Plc [2002] Pens LR 247, Arden LJ at para 30. In this case, the CIR guidance on approval of schemes, which is contained in the practice note on occupational pension schemes (IR 12 (1979)), forms part of the relevant background. In the footnote to para 6.14 of that guidance, the CIR stated:

“Increases in the cost of living may be measured by the index of retail prices published by the Department of Employment or by any other suitable index agreed for the particular scheme by the Superannuation Funds Office.”

It appears therefore that the CIR, in giving discretionary approval to a scheme, would not have objected to a scheme which empowered its trustees to substitute an appropriate index for the RPI. This is relevant background as it means that there was no CIR constraint which might influence the construction of the words in dispute. This contrasts with the National Grid case in which the fiscal background was directly relevant to the interpretation of a phrase in the scheme. The tax regime did not allow an employer to be paid part of a surplus of scheme funds, which had already received tax exemptions when payments were made into the scheme. But the tax regime did not prohibit the release of a debt due by the employer to the scheme which had not had those tax advantages. This assisted the House of Lords to construe narrowly a provision in the scheme which prohibited the making of scheme moneys payable to the employers. In the present case, as Lewison LJ stated at para 32 of his judgment, the draftsman of the scheme did not track the wording of the Revenue guidance in the Definition but chose different language. The scheme could have empowered the trustees to select an index as an alternative to the RPI. The question is whether it did so.

14 CAS-29191-V6G7 18. Finally, a focus on textual analysis in the context of the deed containing the scheme must not prevent the court from being alive to the possibility that the draftsman has made a mistake in the use of language or grammar which can be corrected by construction, as occurred in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101 , where the court can clearly identify both the mistake and the nature of the correction.”

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