Court Of Appeal gives "natural meaning" to Britvic's Pension Increase Rule

Introduction

In Britvic Plc v Britvic Pensions Limited [2021] EWCA Civ 867, the Court of Appeal unanimously allowed the appeal brought by the appellant employer (Britvic) against the decision of the High Court, holding that the words "or any other rate decided by the Principal Employer" in the pension increases provision in the Rules of the Britvic Pension Plan (the BPP) meant "any other rate whether higher or lower" decided by Britvic and did not mean only "any higher rate" as the High Court had previously found.

The Pension Increase Rule

Rule C.10(2) of The Rules of the BPP provides:

(2) The part of a pension which exceeds any guaranteed minimum pension in payment is increased on 1 October in each year. The rate of increase is the percentage increase in the retail prices index during the year ending the previous 31 May but subject to a maximum of 5 per cent. in relation to Pensionable Employment up to and including 30 June 2008 and a maximum of 2.5 per cent. in relation to Pensionable Employment on and from 1 July 2008 (or any other rate decided by the Principal Employer).

The High Court decision

In the High Court, His Honour Judge Hodge recognised that the phrase "any other rate" did not mean "any higher rate" when construed strictly and literally. However, he held that the Rule had to be construed “with an eye to giving reasonable and practical effect to the scheme”. He concluded that the provision would have been understood by an objective observer with knowledge of the factual matrix to mean "any higher rate". He decided that both the drafter of Rule C.10(2) and the parties to the 2003 and later deeds “clearly had in mind only increases in the capped percentage increases in the retail prices index”.

In his view, that interpretation gave “better reasonable and practical effect” to Rule C.10(2) and created a two-stage mechanism. In the first stage, the trustee calculates and applies guaranteed increases based on the capped percentage increase in the RPI over the year to the end of May each year. It is only after this, in the second stage, that the employer has any discretion to direct that a different rate of increase should be applied.

As the first stage involves the calculation and application of "guaranteed" increases, Hodge HHJ decided that the discretion of the employer is only to decide a rate of increase above the guaranteed level (i.e. a higher rate of increase).

Britvic appealed this decision.

The Court of Appeal's Interpretation

The Court of Appeal unanimously allowed Britvic's appeal.

Sir Geoffrey Vos, the Master of the Rolls  (who gave leading judgment), noted that he understood why "it would have been better in a number of different ways if the drafter of Rule C.10(2) had given the employer only the power to select a rate of increase higher than capped RPI". It was recognised that to do so would indeed be more consistent with the factual matrix and the legislative background.

However, the Court of Appeal drew attention to existing case law which meant that, if there was unambiguous language used in a pension deed, the court must apply it. It was further noted that it had previously been recognised in Safeway v Newton (and approved by the Supreme Court Barnardo’s v Buckinghamshire [2018] UKSC 55) that the context of a pension scheme deed 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”. This is because a pension deed is:

1. a formal legal document drafted by skilled and specialist legal draftsmen
2. not the product of commercial negotiation
3. designed to operate over a long period of time, and
4. an instrument which confers rights on people who were not originally parties to it.

All three judges in the Court of Appeal considered that the words "any other rate" in the scheme rules of the BPP were sufficiently clear and unambiguous and that to construe them as meaning "any higher rate" would be to give them an unnatural meaning. As the meaning was clear, there was no basis for concluding that the draftsperson had made a mistake in drafting Rule C.10(2).

Other issues

The Court of Appeal also considered a number of other points concerning the interpretation and operation of the pension increase rule and it held that:

• the words "any other rate" can mean "any other rate or rates" - this meant that the power for Britvic to set "any other rate" in Rule C.10(2) allowed it to set a different rate in relation to pension attributable to different periods of service
• there is no requirement under Rule C.10(2) which means that the discretion can only be exercised once the increase in RPI (for the relevant year ending the previous 31 May) is known
• the rate of increase chosen by Britvic could be 0%, given that under the default rate an increase of 0% could be generated if RPI were 0% in any given year, and
• Hodge HHJ had been wrong to decide that any figure for pension increases set by Britvic for the purposes of Rule C.10(2) would automatically be read across into Rule C.2(2) which deals with increases in deferred pensions (which cross-referred to Rule C.10(2)) - therefore, it was open to Britvic to set a different rate of increase for deferred revaluation in the BPP.

Implications

This decision is another in a long line of cases relating to the construction of legal documents. Following the principles laid down in Barnardo’s by the Supreme Court, the judgment demonstrates that in a pensions context the Courts will focus primarily on textual analysis attaching less weight to the background factual matrix than they would when construing commercial agreements.

The Court of Appeal's decision also demonstrates the limits on the willingness of the Courts to use "corrective construction" to address problematic drafting in pension scheme documents. It suggests that corrective construction is likely to only be available where there is an obvious error with the drafting or where applying the natural meaning of the words used by the draftsperson would lead to a wholly irrational outcome that could never have been intended. In the absence of this, the Courts will seek to give provisions in pension scheme documents their natural meaning and parties will need to consider other options for correcting the drafting, such as rectification, if they consider that an error has been made.

If you wish to discuss how this judgement may impact your scheme or organisation please contact one of our specialists below or speak to your usual Herbert Smith Freehills’ contact.

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