Hogan Lovells

Key Dates

Carr v Thales Pension Trustees Ltd, Thales UK Ltd  [2020] EWHC 949 (Ch).

Judgment given on 22 April 2020.
 


Summary

The High Court has rejected an appeal by the employer against a determination by the Pensions Ombudsman, who held that RPI was the correct measure of inflation to be used when increasing pensions in payment under the scheme rules.

Pension increases under scheme rules

The pension increase rule (Rule 11.1) provided for pensions in payment to be increased on 1 April each year by a rate [that] shall be”… :

“[1]  the percentage increase in the retail prices index over the year ending 30 September in the calendar year prior to that in which the increase is due to take place subject to a maximum of 5 per cent [2] as specified by order under Section 2 of Schedule 3 of the Pension Schemes Act”  

The judge referred to parts [1] and [2] as Limb 1 and Limb 2.  Under section 2 schedule 3 Pension Schemes Act 1993, the Secretary of State makes orders used for the revaluation of deferred pensions (“Revaluation Orders”).  When the rules containing Rule 11.1 were adopted in 2000, Revaluation Orders were made each year based on RPI to the previous 30 September, subject to a maximum of 5%.

Background: statutory revaluation and indexation requirements

In relation to the statutory provisions governing revaluation:

In relation to the statutory provisions governing indexation:

History of the Scheme

Limb 1 or Limb 2: which had primacy?

Following the government's replacement of RPI with CPI for the purposes of Revaluation Orders, the trustees were advised to take a cautious approach and continued to use RPI for the calculation of pension increases.

However, in 2016 the trustees decided, on advice, that Limb 2 had primacy and switched to using CPI.  The trustees also decided that effect of Limb 2 was to incorporate the 2.5% cap in respect of pensionable service from 6 April 2005, and that this should be applied to increases made from 6 April 2009.

As a result of this change, the trustees concluded that pensioner members had been overpaid.  They decided not to seek return of the “overpayments” but froze pensions in payment until they equalled the “correct” level.

Mr Carr's complaint

Mr Carr complained to Pensions Ombudsman that the trustees should have continued to use RPI when calculating pension increases.  The Ombudsman agreed and upheld the complaint: the reference in Rule 11.1 to Revaluation Orders was simply to enable the reader to ascertain the percentage increase in RPI that applied in any given year.

Thales UK appealed, arguing that on the true construction of Rule 11.1 the trustees had been right to adopt CPI.

Was it correct that the 2.5% cap applied to post-2005 accrual?

The judge (Nugee J) held that the trustees had been wrong to conclude that the 2.5% cap applied, although he recognised that the application of the 2.5% cap was only an issue if Limb 2 had primacy.

In reaching this conclusion, the judge found it relevant that:

It followed that none of the increases under Rule 11.1 were subject to the 2.5% cap, regardless of whether primacy should be given to Limb 1 or Limb 2.

Conclusion

The judge rejected the appeal and agreed with the Ombudsman that Limb 1 had primacy:  the correct interpretation of Rule 11.1 required RPI capped at 5% to be used when calculating pension increases.  Relevant points in reaching this conclusion included the following:



Date Accessed: 03/12/2021