Danks & Ors v Qinetiq Holdings Ltd & Anor

The Claimants are the trustees (the “Trustees”) of the QinetiQ Pension Scheme (the “Scheme”). The first Defendant, QinetiQ Holdings Limited (“QinetiQ”), is the principal employer under the Scheme. It is part of a group of companies (the “QinetiQ Group”) that operate in the defence, aerospace, and technology markets.

The second Defendant, Martin Pocock (“Mr Pocock”), became a member of the Scheme when it began on 1^st July 2001. He accrued benefits until he left QinetiQ’s employment on 31^st May 2011. Mr Pocock is now 57 years old, and will reach his normal retirement date of 65 under the Scheme on 12^th January 2020. Mr Pocock has, therefore, an accrued right to a deferred pension, and will, when he reaches 65, become entitled to a pension in payment.

This is the trial of a Part 8 claim issued on 22^nd November 2011. In essence, the Trustees have asked whether, on the true construction of the deed and rules of the Scheme dated 18^th June 2010 (the “2010 D&R”), the exercise of their power under Rule 49 and/or the definition of “Index” in Part A of Appendix 1 to the 2010 D&R to adopt the Index of Consumer Prices (“CPI”) rather than the Index of Retail Prices (“RPI”) as a suitable cost of living index under the Scheme, would be potentially voidable under sections 67 to 67I of the Pensions Act 1995 (“PA 1995”), if the power were exercised in certain different specified ways, to which I shall turn in a moment.

As is now well known, the CPI is, at the present time and for the foreseeable future, a generally lower and less favourable index, since it excludes housing costs and is calculated as a geometric rather than an arithmetic mean. Elias LJ provided a detailed explanation of the comparison between RPI and CPI at paragraphs 7-15 in his recent judgment in R (on the application of Staff Side of the Police Negotiating Board) v. Secretary of State for Work and Pensions[2012] Pens LR 31. The purpose of the Trustees’ wish to adopt CPI is to reduce the Scheme’s substantial deficit, which was calculated as at 31^st December 2010 at £191 million on a technical provisions basis. I am told that the question is far from academic in that negotiations between the Trustees and QinetiQ to agree a deficit reduction strategy are well advanced. If, however, the court were to determine that the adoption by the Trustees of CPI rather than RPI would engage section 67 on the grounds that it would or might adversely affect any subsisting rights, I am told that the Trustees would not be prepared to go ahead with a decision to adopt CPI, because of the uncertain consequences of the decision being voidable under section 67(2).

On 6^th September 1971, Mr Pocock started work as an apprentice at the Royal Radar Establishment (which became from 1996 the Defence Evaluation and Research Agency (“DERA”)).

On 2^nd June 1972, Mr Pocock became a member of the Principal Civil Service Pension Scheme (“PCSPS”).

The Scheme was established by a Definitive Trust Deed and Rules dated 29^th June 2001 (the “2001 D&R”).

With effect from 1^st July 2001, the activities of DERA were divided between the QinetiQ Group and the Government’s Defence and Science Technology Laboratory. At that time, Mr Pocock transferred his employment to QinetiQ, and the benefits he had accrued in the PCSPS were transferred to the Scheme.

In February 2003 the Government sold 37.5% of the QinetiQ Group to private investors. In 2006, the Government sold the remainder of its interest in the QinetiQ Group to private investors.

With effect from 1^st June 2008, the Scheme was amended so as to require those in pensionable service to choose between three optional categories of contributions and benefits.

On 27^th June 2008, Mr Pocock’s choice of option 1 (continuing to pay 5% contributions and receipt of a pension based on 1/90ths of his career average salary) was confirmed. The brochure (the “Brochure”) put out to Scheme members by the Trustees in preparation for the 2008 changes stated, in relation to option 1 that “[p]ension increases [would be] in line with [RPI] to a maximum of 4% a year”, and generally that “[p]ension built up prior to 1^st June 2008 will be increased in payment each year by the full increase in RPI from one year to the next. Under options 1 and 2 pensions built up after 1 June 2008 would have each year’s increase capped at either 4% or 5%”. Option 3 had increases at RPI without a cap, and the Brochure said in particular: “With this option and unlike option 2, if the RPI increases above 5% in retirement your pension would be guaranteed to increase at the full rate of the RPI”. The Brochure also told the reader not to forget that: “Benefits earned by you before 1^st June 2008 are untouched – they are protected. When you take your pension they will be calculated on the current basis”. There was a discussion during the hearing as to the Trustees’ precise intentions in relation to the adoption of CPI in the light of their acknowledgement that they might need first to establish the effect of the documentation surrounding the June 2008 changes. After the hearing, the Trustees’ intentions were clarified as follows in a letter from their counsel to the court:

“As regards pension benefits accrued after 1 June 2008, the Trustees’ present intention is to adopt CPI in place of RPI to revalue such benefits over the period of any deferment. For completeness we should mention that (again as regards benefits accrued after 1 June 2008) the current intention is that RPI will be maintained as the Index not only for increases to pensions in payment …, but also for the purposes of the revaluation of CARE benefits, and the indexation of the earnings cap applied to final pensionable salary under the rules of the Scheme …”.

Since that letter was written, I have been told that still further discussions have taken place. As a result, I am informed by the Trustees’ solicitors that the Trustees’ latest intentions in relation to CARE benefits for members in active service are to provide revaluation by reference to RPI in respect of each annual block of pension accrued prior to any change to CPI, for the period between the year in which that block of pension was accrued up to the date of the change, and by reference to CPI thereafter. Members in active service who accrue further CARE benefits after the date of any change to CPI will have those benefits revalued annually by reference to CPI until they retire or leave service. And a member with accrued CARE benefits who has or acquires a right to a deferred pension on leaving service will have the deferred pension revalued by reference to CPI in the same way as a member with an ordinary final salary pension.

On the 18^th June 2010, the 2001 D&R were replaced by the 2010 D&R. It has not been suggested by any party that the differences between the 2001 D&R and the 2010 D&R are material to the questions I have to decide.

On 22^nd June 2010, the Chancellor of the Exchequer announced in his budget statement that CPI would be used rather than RPI as the basis for uprating most state benefits and public sector pensions.

On 8^th July 2010, the Minister of State at the Department of Work and Pensions announced that the Government believed that CPI provided a more appropriate measure of pension recipients’ inflation experiences and was consistent with the measure used by the Bank of England, and that it was right to use the same index in determining increases for all occupational pensions and payments made by the Pension Protection Fund and Financial Assistance Scheme.

On 1^st January 2011, the Occupational Pensions (Revaluation) Order 2010 came into force, under which CPI, rather than RPI, was the index selected by the Secretary of State.

On 31^st May 2011, Mr Pocock was made redundant by QinetiQ.

On 21^st November 2011, the Trustees sent out an announcement in respect of the intended commencement of these proceedings to all 8,277 Scheme members, referring to Mr Pocock as the proposed representative beneficiary.

On 22^nd November 2011, the Trustees issued their Claim Form asking the following 3 questions pursuant to Part 64 and Rule 19.7 of the Civil Procedure Rules and/or the inherent jurisdiction of the Court:-

In December 2011, the Trustees provided a set of frequently asked questions to members on its website.

On 27^th January 2012, Mr Pocock prepared a communication for members, which he sent to the Trustees, and which was posted on the Scheme’s website between 27^th and 31^st January 2012. The communication explained his role as the proposed representative beneficiary in these proceedings, and said that he was chosen so to act simply because his pension history in the Scheme was representative of those who were likely to be disadvantaged if the move from RPI to CPI were to take place.

Simplifying the questions in the Claim Form slightly, the essential issues that I have to decide may be conveniently formulated as follows:-

The Trustees’ skeleton argument contained a summary of the detailed provisions concerning the minimum increases and revaluations permitted by statute, with which both Defendants’ counsel agreed. Accordingly, I gratefully adopt the summary prepared by the Trustees, which can be regarded as being common ground and is reproduced with only minor amendments and abbreviations in the appendix to this judgment.

The following provisions of the 2010 D&R are relevant to the matters that I have to decide.

Rules 36.1 to 36.4 provide for the defined benefits that will be received as follows:-

“36.1

An Active Member of the Defined Benefit Section who retires from Service at Normal Pension Date shall receive the aggregate of the following:-

(a)

in respect of his Pre-1 June 2008 Pensionable Service and his Post-1 June 2008 Pensionable Service accrued as an Option 2 or Option 3 Member;

(i)

a pension equal to one-eightieth of his Final Pensionable Earnings multiplied by the period of his Pensionable Service; and

(ii)

a lump sum equal to three-eightieths of this Final Pensionable Earnings multiplied by the period of his Pensionable Service.

(b)

in respect of his Post-1 June 2008 Pensionable Service a pension and lump sum equal to his CARE Benefits accrued as an Option 1 Member.

36.2

An Option 1 Member shall accrue pension and lump sum for each CARE Year of his Pensionable Service as an Option 1 Member at the rate of one ninetieth and three ninetieths respectively of his Pensionable Earnings.

36.3

If an Option 1 Member’s Pensionable Service covers a proportion (but not the whole) of any CARE Year, that CARE Year’s Accrued Benefits shall be calculated in the proportion that the number of complete days of Pensionable Service in that CARE Year bears to the number of days in that CARE Year, or otherwise shall be reduced by an amount which the Trustees consider appropriate.

36.4

Accrued Benefits of a Member under Rule 36.2 shall be increased by the percentage increase in the Index over the period from:

(a)

the 30 September falling within the CARE Year in which they were accrued; to

(b)

the 30 September immediately preceding the date on which the Member ceases to be in Pensionable Service or the date of earlier payment of the Accrued Benefits,

(or such other period as the Trustees may decide). However, there shall not be any increase under this Rule in any Accrued Benefits accrued in a CARE Year if the date in (a) in respect of that CARE Year is the same date as or later than the date in (b)”.

Rule 50.1 provides for the defined benefits in respect of early leavers as follows:-

“50.1

A Member who leaves Service before Normal Pension Date after at least 2 years’ Qualifying Service shall be entitled to his retirement benefits on reaching his Normal Pension Date, unless his retirement benefits come into payment immediately under Rule 38 (Early Payment of Benefits (Not Because of Ill Health)), Rule 39 (Early Retirement for Ill Health) or Rule 53 (Choice of Early Pension). The benefits shall be calculated as described in Rule 36 (Payment of Benefits at Normal Pension Date), but his CARE Benefits (if any) will be those accrued up to the date he leaves Service and his Final Salary Benefits will be calculated by reference to his Final Pensionable Earnings at, and Pensionable Service completed to, the date of leaving Service. These preserved benefits shall be increased in accordance with Rule 49.4 (Pension Increases)”.

Rules 49.1 – 49.3 provide for increases in pensions in payment as follows:

“49.1

Each pension or part of a pension payable to a Member or his Spouse or Dependant that is attributable to Pre-1 June 2008 Pensionable Service or to Post-1 June 2008 Pensionable Service accrued as an Option 3 Member shall be increased while in the course of payment on 1 April each year by an amount equal to the percentage increase in the Index over the period of 12 months ending on the preceding 30 September (or such other period as the Trustees may decide). In the case of the first increase due following the pension coming into payment the increase shall be proportionate, in the proportion that the period between the date it started and the following 1 April bears to a year.

49.2

Each pension or part of a pension payable to a Member or his Spouse or Dependant that is attributable to post-1 June 2008 Pensionable Service accrued as an Option 1 Member shall be increased while in course of payment on 1 April each year, at the rate of 4% per annum or, if less, the annual rate of increase in the Index for a reference period of twelve months ending on the preceding 30 September (or such other period as the Trustees may decide). In the case of the first increase due following the pension coming into payment the increase shall be proportionate, in the proportion that the period between the date it started and the following 1 April bears to a year.

49.3

Each pension or part of a pension payable to a Member or his Spouse or Dependant that is attributable to post-1 June 2008 Pensionable Service accrued as an Option 2 Member shall be increased while in course of payment on 1 April each year, at the rate of 5% per annum or, if less, the annual rate of increase in the Index for a reference period of twelve months ending on the preceding 30 September (or such other period as the Trustees may decide). In the case of the first increase due following the pension coming into payment the increase shall be proportionate, in the proportion that the period between the date it started and the following 1 April bears to a year”.

Rule 49.4 provides for revaluation of deferred pensions, which are referred to as “preserved benefits”, as follows:-

“Index” is defined in Part A of the Appendix as follows:

““Index”means the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees”.

Section 67(1) of the PA 1995 applies “the subsisting rights provisions” to “any power conferred on any person by an occupational pension scheme to modify the scheme”. The “subsisting rights provisions” are defined by section 67(4) as meaning section 67 and sections 67A to 67I.

Section 67(2) provides that “[a]ny exercise of such a power to make a regulated modification is voidable in accordance with section 67G” unless certain conditions are satisfied. It is common ground that none of these conditions is satisfied in this case, but Mr Andrew Spink QC, counsel for Mr Pocock, relies for other reasons on one of these conditions – namely that referred to as the “actuarial equivalence requirements” contained in section 67C. The other conditions are spelt out in detail in sections 67B, and 67D to 67F. I shall return to the detailed provisions of section 67C, when I consider Mr Spink’s argument.

Section 67A(2) defines a “regulated modification” as a modification which is either (a) “a protected modification” or (b) “a detrimental modification”. The question here is whether the change to CPI would be regarded under the legislation as a “detrimental modification”.

Section 67A(4) defines a “detrimental modification” as follows:-

“(4)

“Detrimental modification” means a modification of an occupational pension scheme which on taking effect would or might adversely affect any subsisting right of–

(a)

any member of the scheme, or

(b)

any survivor of a member of the scheme”.

The question, therefore, becomes, whether the change to CPI would or might adversely affect any subsisting rights of members of the Scheme.

The term “subsisting right” is then defined by section 67A(6) as follows:-

“(6)

“Subsisting right” means–

(a)

in relation to a member of an occupational pension scheme, at any time–

(i)

any right which at that time has accrued to or in respect of him to future benefits under the scheme rules, or

(ii)

any entitlement to the present payment of a pension or other benefit which he has at that time, under the scheme rules, and

(b)

in relation to the survivor of a member of an occupational pension scheme, at any time, any entitlement to benefits, or right to future benefits, which he has at that time under the scheme rules in respect of the member”.

The distinction between “accrued rights” and “entitlements” was held in Aon Trust Corporation v. KPMG (a firm) and others [2006] 1 WLR 97 at paragraph 181 to be that an “entitlement” “refers to a pension already in payment”, whereas an “accrued right” “refers to a member's current right to a future pension”.

Whilst “entitlements” are not defined, section 124 of the PA 1995 has the following definition of accrued rights:-

“(2)

For the purposes of this Part-

(a)

the accrued rights of a member of an occupational pension scheme at any time are the rights which have accrued to or in respect of him at that time to future benefits under the scheme, and

(b)

at any time when the pensionable service of a member of an occupational pension scheme is continuing, his accrued rights are to be determined as if he had opted, immediately before that time, to terminate that service;

and references to accrued pension or accrued benefits are to be interpreted accordingly”.

The key questions, then, for the purposes of sections 67 to 67I are:-

If the Trustees’ decision to adopt CPI in place of RPI were to be a detrimental modification within section 67A(4), then it would be potentially voidable by the Pensions Regulator under section 67(2) in accordance with section 67G (referring to the “Authority”, which is defined in section 124(1) to mean the Pensions Regulator), and the Trustees would be potentially liable to civil penalties under section 67I.

I asked counsel on the first day of the hearing to explain the rationale of the amendments to section 67 contained in the Pensions Act 2004 (“PA 2004”). Their diligence overwhelmed me. I was provided, amongst other things, with extracts from Hansard, Mr Alan Pickering’s report dated July 2002 entitled “A Simpler Way to Better Pensions”, and a decision of the Pensions Regulator determining that a regulated modification was void under sections 67G(2) and (6). As counsel pointed out, there was little to gain from all that material. It does not, however, appear to have been any part of the intention behind the amendments that regulated modifications made by trustees could, in normal circumstances, be expected to be, in effect, validated by the Pension Regulator declining to declare modifications to be void. In other words, the changes to the legislation, making modifications caught by it voidable instead of void (as was the effect of the original version of section 67) does not seem to have been a change aimed at encouraging trustees to do anything that might be caught by sections 67 to 67I in the expectation that what they had done might be later validated. The provisions of sections 67 to 67I seem, instead, to provide a rather more comprehensive and more detailed regime, but one that has a broadly similar intention behind it. The provisions are still aimed at preventing modifications that adversely affect subsisting rights. The Pensions Regulator has published Code of Practice No. 10 entitled “Modification of Subsisting Rights”, following the revisions to section 67, but the Code of Practice is more akin to an explanation of what the statute provides than a code setting out how the provisions are expected to operate in practice. This is not a criticism, but it does not seem that the Code assists in explaining the detailed rationale for the provisions, nor indeed how the Pensions Regulator can be expected to undertake his duties under section 67G.

The parties are agreed that the most relevant authority to the decisions I have to take is the one I have already mentioned, namely Aon Trust Corporation v. KPMG (a firm) and otherssupra,in which the Court of Appeal (Mummery, Chadwick and Jonathan Parker LJJ) considered the effect of the statutory predecessor of sections 67 to 67I. There, however, the unanimity ceases, because QinetiQ submits that Aon supports its case, and Mr Pocock says that it supports his. I have, therefore, had to look carefully at what it does in fact decide.

Aon concerned a somewhat unusual type of pension scheme, and the main question in the appeal was whether that scheme was or was not a “money purchase scheme” as defined in section 181 of the Pension Schemes Act 1993 (“PSA 1993”) for the purposes of section 56(2)(a) of the PA 1995. Sir Andrew Morritt V-C at first instance and the Court of Appeal held that it was not a money purchase scheme (although the Supreme Court ultimately disapproved Jonathan Parker LJ’s interpretation of the statutory definition in Bridge Trustees Limited v. Houldsworth [2011] 1 WLR 1912). The decisions on the money purchase benefits issue are not, however, relevant to what I have to decide.

More importantly for these purposes, the Court of Appeal in Aon had also to consider:-

To understand the dicta of Jonathan Parker LJ upon which particular reliance is placed, it is important to set out parts of rule 7 and clause 8 that were in issue in that case. For our purposes, it is sufficient to set out the following parts from paragraphs 60 and 69 of Jonathan Parker LJ’s judgment (with which the other members of the court agreed) as follows:-

“SURPLUS REVEALED BY ACTUARIAL VALUATION

8.4

If an actuarial valuation or interim review of the [Pre-2000] Fund shows a surplus the Trustees may, with the consent of the Principal Employer and after taking the Actuary's advice and after making any such amendments to the Trust Deed and/or the Rules as may be necessary, decrease the contributions of any Member and/or increase (by declaration of bonuses or interim bonuses or otherwise) the benefits or future benefits of any Member or other person entitled to receive any benefit from the [Pre-2000] Fund.

DEFICIENCY REVEALED BY ACTUARIAL VALUATION

8.5

If an actuarial valuation of the [Pre-2000] Fund reveals a deficiency in the [Pre-2000] Fund's resources, the Trustees may with the consent of the Principal Employer make such adjustments and amendments to the benefits secured or thereafter accruing for or in respect of the Members as are necessary in the opinion of the Trustees after taking the Actuary's advice to secure the continued solvency of the [Pre-2000] Fund.

MEMBER'S ENTITLEMENT TO PENSION FROM NORMAL RETIREMENT DATE

7.1

A Member whose pensionable service terminates as a result of his retirement from Service on his Normal Pension Date shall be entitled to a pension from the Scheme which shall commence to be payable with effect from the day following his Normal Pension Date for the remainder of his lifetime and calculated in accordance with this Rule.

ANNUAL AMOUNT OF MEMBER'S PENSION

7.2

The annual amount of a Member's pension under sub-Rule 7.1 shall be calculated as follows:

(1)

by taking the total amount of the contributions paid by him and his Employer into the General Fund during or in respect of each Contribution Period up to and including the Contribution Period ending 31 March 2000 and multiplying it by the appropriate factor determined from the Tables in Appendix A in accordance with sub-Rule 7.3 in order to give the amount of pension derived from each Contribution Period;

(2)

by increasing the amounts determined in accordance with paragraph (1) of this sub-Rule by bonuses declared pursuant to sub-Clause 8.4 . . . and/or by reducing them by any adjustments made pursuant to sub-Clause 8.5; and

(3)

by aggregating the amounts of pension determined in accordance with paragraphs (1) and (2) of this sub-Rule …”.

Mr Jonathan Sumption QC for the employer submitted, as recorded at paragraphs 100-103 of the judgment, that clause 8.5 was not a power to modify within section 67(1), and that the exercise of the power in clause 8.5 was not capable of affecting a member’s entitlement or accrued right. This second argument was explained at paragraph 103 as follows:-

“As to his second reason, he submits once again that there is no entitlement under the Scheme to a pension calculated without reference to the powers of adjustment in clauses 8.4 and 8.5. He points out that the process prescribed by rule 7 expressly includes the clause 8.5 adjustment. He submits that it follows an exercise of the clause 8.5 power does not effect any change in a member's right to his pension, since his only right is a right to a pension in the amount which results from the complete calculation process, including any adjustment under clause 8.4 or clause 8.5”.

At paragraph 111, Jonathan Parker LJ records Mr Sumption’s attack on Sir Andrew Morritt’s reasoning in treating the pension benefit as comprising essentially two distinct benefits, viz. the standard pension and any bonuses awarded under clause 8.4. Rather, he said there was one composite benefit under rule 7.2 (set out above).

With that introduction, I can set out Jonathan Parker LJ’s relevant reasoning as follows:-

“[163] So I conclude that, on the true construction of clauses 8.4 and 8.5, the existence of a surplus or a deficit (as the case may be) does no more than set the scene for the possible exercise of the powers of adjustment of benefits conferred by those clauses. The relevant power may not be exercised at all; or it may be exercised in a way which leaves some part of the surplus or deficit still in existence. There is, therefore, no question of any automatic adjustment of benefits following an actuarial valuation which reveals the existence of a surplus or a deficit; still less of an adjustment which will have the effect of extinguishing the entirety of that surplus or deficit.

[164] There is also the time factor to be considered. Even if the Trustee, with the employer's consent and acting on actuarial advice, decides to exercise the appropriate power of adjustment (according to whether the actuarial valuation has revealed a surplus or a deficit) there will inevitably be an interval of time (which may be substantial) between the date when the surplus or deficit first arose and the date when the power is exercised. Yet during that time rights will inevitably have accrued under the Scheme and benefits will inevitably have been paid out, notwithstanding the existence (by definition) of a continuing mismatch between assets and liabilities. Moreover, the effect of any adjustment of benefits (whether upwards or downwards) will usually take effect over time, by gradually eroding the surplus or deficit. Thus even in a situation where the adjustment is designed entirely to extinguish the surplus or deficit, the mismatch between assets and liabilities may continue for a substantial period of time after the adjustment has been made.

[165] In the light of the above analysis, I conclude that Mr Sumption's basic submission must be rejected. So far as the clause 8.4 power to increase benefits is concerned, the declaration of a bonus will give the member the right to an increased pension. But it does not follow that the member has no right to a pension under rule 7 until the Trustee has considered whether or not to exercise that power (and, it may be, decided not to exercise it, or to exercise it not by declaring a bonus but by reducing contributions). The same consideration applies, in my judgment, to the clause 8.5 power. In my judgment it does not follow from the existence of that power that a member has no right to a pension under rule 7 until the Trustee has taken a decision as to whether the power should be exercised, and if so how.

[166] The correct analysis in law, in my judgment, is that on the true construction of the Scheme a member has an accrued right to a pension under rule 7 in the (unadjusted) amount calculated by aggregating the total amounts referred to in rule 7.2(1), but subject to any adjustments made under clauses 8.4 or cl 8.5. I therefore reject the notion that that calculation produces only a "provisional" sum (to quote Mr Sumption). In my judgment, to read the Scheme in that way is to attempt to force a square peg into a round hole. …

[177] I now turn to question 2, and to PA 1995 s 67.

[178] I can deal with question 2 quite shortly. In my judgment the power in clause 8.5 to reduce benefits where the Scheme is in deficit is plainly a power to 'modify' the Scheme within s 67(1) (see para 47 above). I do not accept Mr Sumption's submission that the reference to 'the scheme' in s 67(1) is a reference only to the terms of the scheme as recorded in the scheme documents. In my judgment, the modification of a benefit under the scheme in the exercise of an express power in the scheme to make such a modification is self-evidently a modification of the scheme. …

[184] I turn next to question 1(i). On this question, I respectfully differ from the Vice-Chancellor. In the first place, I accept Mr Ham's submissions to the effect that on the true construction of the Scheme the calculation of a pension is a once-for-all calculation, carried out as at the date when the pension first comes into payment. That seems to me to be the natural construction of rule 7.2, and it is supported, in my judgment, by the other provisions of the Scheme on which Mr Ham relies.

[185] Against that background and in that context, a power to reduce pensions already in payment would in my judgment require the clearest words. I accordingly return once again to clause 8.5. Far from clearly conferring such a power, the terms of clause 8.5 lead, in my judgment, to the opposite conclusion. The power is expressed as a power to adjust or amend 'the benefits secured or thereafter accruing' in respect of members. The antithesis of 'benefits secured' as against 'benefits . . . thereafter accruing' makes it plain, in my judgment, that what is envisaged is a situation in which a member is still accruing pension rights, year on year. The pension already accrued constitutes the benefit 'secured': the benefit 'thereafter accruing' refers to pension rights accruing in the future”.

The effect of this decision is, in my judgment, relatively straightforward. First, it is common ground that at any level below the Supreme Court, it could not be argued that the exercise of a power which would have the effect of reducing benefits was not a modification for the purposes of the old section 67 and the new sections 67 to 67I. Secondly, as it seems to me, the Court of Appeal held that, as a matter of law, where a member has an accrued right to a pension (in that case under rule 7) in an unadjusted amount, the exercise of a power (in that case in clause 8.5) to reduce that amount would be caught by section 67. These holdings do not directly decide this case, but they do have an important bearing on the outcome, to which I shall return in due course.

Mr Spink starts his argument from a consideration of section 67C which contains, as I have said, the “actuarial equivalence requirements”. Section 67C(3)(b) provides that “actuarial equivalence requirements” include (as one of three) an “actuarial value requirement”. Section 67C(5) provides that the “actuarial value requirement” is “satisfied in the case of an affected member if before the modification is made the trustees have made such arrangements, or taken such steps, as are adequate to secure that the actuarial value will be maintained”. Finally, section 67C(8) provides that “actuarial value is maintained if the actuarial value, immediately after the time at which the modification takes effect, of the affected member’s subsisting rights is equal to or greater than the actuarial value of his subsisting rights immediately before that time”.

Thus, says Mr Spink, section 67C makes it clear that sections 67 to 67I are aimed at maintenance of actuarial value, which should inform the decision that has to be taken as to whether the modification adversely affects a subsisting right. Since a change from RPI to CPI would, inevitably, reduce the actuarial value of the members’ rights, whether they have a pension in payment or a deferred pension, it seems most likely that such a change was intended to be a regulated modification under section 67(2). The right to RPI increases is an entitlement or an accrued right, like the entitlement to a rule 7 scale pension in Aon, which will be adversely affected if the power to change the Index to CPI is employed, just as it was in Aon if the power to reduce the pension in payment in clause 8(5) was employed. Mr Sumption’s argument to the contrary was, Mr Spink submits, rejected.

Mr Spink then pointed out that the members have an entitlement or an accrued right to the Rule 49 RPI increases as much as those with pensions in payment have an entitlement to a Rule 36 scale pension, or deferred members have an entitlement to a deferred pension under Rule 50. Had there been an actuarial valuation of their rights, as there was in fact (in 2002 and 2008), the right to RPI increases would have been built in to those valuations. Indeed, Mr Spink referred me to parts of the 2002 and 2008 valuations indicating that RPI was, as one would have expected, in the mind of the Scheme actuaries. He referred also to the Interim Deed dated 30^th May 2008, which gave effect to the 2008 changes, and which referred expressly to the proposals contained in the Brochure, and said expressly in clauses 7.2(d) and (i) that option 3 provided for benefits broadly comparable with those provided under 2001 D&R, and that benefits earned by pensionable service before 1^st June 2008 would be calculated on the same basis as under the 2001 D&R as they stood before that Interim Deed.

Finally, Mr Spink referred to a number of other provisions of the 2010 D&R which provided for the possibility of actuarial valuations at other stages in the course of membership of the Scheme. These stages include the calculation of employer’s contributions (Rule 19), where a deferred member chooses to take a pension before the normal pension date (Rule 53), where a member leaving service does not transfer his preserved benefits to a new employer (Rule 50.2), and where a deferred member chooses to transfer out of the Scheme (Rule 74). His underlying submission was that all these provisions assumed that a member’s overall pension was earned by discrete periods of pensionable service, so as to give rise (once each such period was completed) to an accrued right to the future receipt of the pension referable to that period, increased by the relevant RPI increase under Rule 49.

In answer to Mr Spink on these points, Mr Keith Rowley QC, counsel for QinetiQ, referred me to Newey J’s judgment in Prudential Staff Pensions v. Prudential Assurance [2011] EWHC 960 (Ch) where he considered the effect of actuarial assumptions saying at paragraph 178(ii) that: “an assumption used in determining conversion factors cannot be regarded as constituting a promise”. He also took me through the statutory provisions relating to transfers in an attempt to demonstrate that the actuaries would be required to make provision for accrued benefits, options and discretionary benefits, including the possibility that the Trustees might at some future stage choose to change the Index from RPI to some different measure (whether more or less favourable).

In my judgment, however, these points are somewhat peripheral. The issues that I have to decide turn on the meaning of sections 67 to 67I, and whether, as I have said above, on the proper construction of the 2010 D&R:-

Put another way, the questions are whether the member with a pension in payment has a present entitlement to a pension that will be increased at RPI every year, and whether the member with a deferred pension now has an accrued right to revaluation on the basis of RPI, when he takes his pension in the future.

Dealing first with the pension in payment, it seems to me that it is necessary to understand what Rule 36 provides. Like Rule 7 in the Aon case, Rule 36 provides for a calculation (albeit of a very different kind) to be made so as to work out what pension is to be paid to members who retire from service at their normal pension date. Once that calculation is made (even if a member takes an early pension under Rule 53), it cannot be doubted that the pensioner in question has an entitlement to such a pension. But as Jonathan Parker LJ put the matter in paragraph 166 of his judgment in Aon, that entitlement (he used the term ‘accrued right’, but it does not matter for these purposes) is “subject to any adjustments made under clause 8.4 or clause 8.5”. Thus, in my judgment, the entitlement is to the pension calculated under Rule 36 (or under Rule 53.1 in the case of an early pension), just as it was to the pension calculated under rule 7 in Aon, but the entitlement is subject to the possibility of adjustment. In our case, the possibility of adjustment is in fact a right to adjustment under Rules 49.1 to 49.3 for pensions in payment, but that right (“each pension … shall be increased”) is not a right to have an increase at a particular rate, since it is only a right to have an increase each April “by an amount equal to the percentage increase in the Index …”, and the Index is defined as being RPI or “or any other suitable cost of living index selected by the Trustees”. Thus, the point is really one of timing. A member with a pension in payment, who has had an increase under Rule 49.1 at RPI on 1^st April 2011 (for example) could not have that increase reduced without there being a detrimental modification. But, in advance of the next Rule 49.1 increase date (1^st April 2012), the member has no entitlement to an increase at any specific rate, since the Trustees always retain a power to change the Index by which the increases are to be calculated. To repeat the point, the member has only a right to a future increase at RPI “or any other suitable cost of living index selected by the Trustees”. The difference in Aon was that the members with pensions in payment were entitled to pensions calculated in accordance with rule 7, and the exercise of the Clause 8(5) reduction would obviously have been a detrimental modification. Here the entitlement is only to a future increase at a rate that the Trustees have power to change.

The same logic applies to deferred pensions, where the accrued right is found in Rule 50.1, which provides for a member to be entitled to his retirement benefits on reaching his normal pension date. Rule 49.4 provides a right for those benefits to be revalued or increased once only by the percentage increase in the Index from the 30^th September preceding departure from service until the 30^th September preceding the member’s normal pension date. That revaluation is once again to be undertaken on the basis of the Index as the Trustees have determined it should apply at the time the calculation is made.

The deferred member has no right to have his deferred pension revalued at any particular rate until the normal pension date when that calculation is undertaken, unless an early pension is taken under Rule 53.1. Again, once that early pension is taken, the right to it becomes an entitlement, and the Rule 49.4 increase in the preserved benefits, which has taken place at RPI, cannot be affected by a change to CPI or any other change in the Index.

This logic is the same as I have indicated above in relation to future increases in respect of pensions in payment. The Trustees can decide at any stage to change the Index upwards or downwards, provided they adhere to the requirements for the exercise of such a fiduciary power, and the only entitlements that pensioners will receive will be to the increased pension once the increases under Rules 49.1 to 49.3 have been calculated each year on the 1^st April.

That this is the correct construction is made clear if you read the definition of “Index” into the provisions of Rules 49.1 to 49.4 as Mr Rowley argued one should. That shows that the member’s entitlements or accrued rights are to an increase by an amount equal to the percentage increase in the “[RPI] or any other suitable cost of living index selected by the Trustees”.

Mr Spink draws attention to the anomalous consequences of this approach, by pointing to the unfairness of the comparison between the position of two deferred pensioners, one of whom takes an early pension just before the Trustees exercise their power to change the Index to CPI, and the other of whom takes an early pension just after the Trustees have made the change to CPI. Even if both members have earned their pension at a time when the Index was RPI, the second member will receive a significantly lesser pension than the first member. That is true. It is also true that the result seems unfair, but the unfairness is the result of the fact that the value of neither member’s pension is crystallised until the date on which the Rule 49.4 revaluation actually takes place. Rule 49.4 refers to one single increase. Though it does not specifically state the date on which that increase is to take place, it is obvious that it can only take place once – when the deferred pension falls into payment, for example under Rules 50.1 or 53.1, or when a transfer is taken.

Aon did not decide anything to the contrary. The right to an increase in the pension in payment or the deferred pension under Rule 49 at a particular or specific rate is not an entitlement or an accrued right until the calculation has been done, as it was in Aon under rule 7 when the pension was taken, and as it is here when the Rules 49.1 to 49.3 increases are calculated for pensions in payment on 1^st April every year, and when the revaluation under Rule 49.4 is undertaken at the moment the deferred pension becomes a pension in payment.

In answer then to the key questions that I posed when I dealt with sections 67 to 67I above:-

I turn now to deal with the differences between questions (1)(a), 1(b)(i) and 1(b)(ii) on the Claim Form. Question 1(a) refers to future increases to pensions in payment, when the pensionable service was before the Trustees exercise their power to change the Index. I have already explained why that fact does not mean that the member has an entitlement, perhaps years later, to increases under Rules 49.1 to 49.3 at the rate provided for when the pensionable service took place. All the member bargained for was a pension to be increased annually at RPI or at “any other suitable cost of living index selected by the Trustees”. He cannot have had an entitlement to increases at RPI whatever the Trustees later decided. And if the member did not have such an entitlement, the decision to change to CPI cannot be a detrimental modification to the Scheme within section 67A(4).

The difference between questions 1(b)(i) and 1(b)(ii) is that:-

Neither side suggested that these questions should be answered differently from one another. As it seems to me, the questions suggest no relevant distinction, because the revaluation under Rule 49.4 occurs at a specific time, as I have said. Prior to the revaluation, the deferred member has no accrued right to a revaluation at any particular rate. The fact that RPI was the ‘default rate’ (as Mr Spink described it) when the pensionable service was undertaken cannot affect the appropriate rate of revaluation when it is eventually undertaken. Likewise, the revaluation under Rule 49.4 is a single event: preserved benefits are to be increased by the percentage increase in the relevant Index over the specified period (from 30^th September immediately prior to ceasing pensionable service to 30^th September immediately prior to taking the pension). I will decide whether the “Index” in question in this exercise could, in theory, be more than one Index, under question 2. But the important point here is that the revaluation does not take place until the deferred member takes his pension, and the Trustees can and should use the rate (or rates – as to which, see question 2 below) prevailing at that time, not the rates prevailing when the pensionable service was undertaken. At the point of revaluation, the Trustees can and should undertake the revaluation at the rate (or rates – see question 2) in accordance with the prevailing determination of the Index. The accrued right to the revaluation at any particular rate only comes into being when the revaluation itself occurs. And it is to be observed that the statutory revaluation rate described in the Appendix operates in a similar manner at the time that the deferred members take their pensions.

The answer to this question is of particular importance, notwithstanding my answers to questions 1(a) and (b) because the Trustees intend, for the time being at least, to continue to use RPI to increase pensions in payment after 1^st June 2008 because of the terms of the Brochure suggesting that RPI increases would be allowed, and to revalue CARE benefits for members in active service which will have accrued after 1^st June 2008 under the revisions to the Scheme at that time, for the period between the year in which that block of pension was accrued up to the date of any change to CPI. It will be noted, however, from the information provided by counsel and solicitors for the Trustees that I have set out above that the Trustees now intend to use CPI to revalue benefits accrued after 1^st June 2008 over the period of deferment, if they are permitted to do so, on the true construction of the definition of Index in the 2010 D&R.

I was referred, in the context of this question, to a series of well-known authorities on the construction of contracts in general and of pension schemes in particular, including those that follow. They were relevant, of course, not only to this question, but also to the previous ones.

The first question under this heading is whether the words used in the definition of Index do have more than one potential meaning.

Mr Pocock contends that the term “Index” must mean only one index – for our present purposes, either RPI or CPI. So, it is said that it would not be open to the Trustees to choose CPI, and then to use CPI for only some purposes as they have suggested they intend to do.

QinetiQ argues that the word “Index” can refer to RPI in respect of some periods or purposes and CPI in respect of other periods or purposes. The practical importance of this construction is undoubted, but can the word “Index” bear the meaning suggested? In my judgment, it can. This is not just because section 61(c) of the Law of Property Act 1925 provides that in all instruments the singular includes the plural, so that Index can mean RPI or “any other suitable cost of living [indices] selected by the Trustees”. In addition, one could justifiably read in the words “for particular periods or purposes” into the definition so that “Index” means “the [RPI] published by the Office of National Statistics [for particular periods or purposes] or any other suitable cost of living index selected by the Trustees [for particular periods or purposes]”. If the Trustees choose CPI in place of RPI, that choice can be reversed or altered at any time. Likewise, the Trustees can, as it seems to me, on one reading of the definition of Index, choose CPI for some purposes or periods.

There are, therefore, in my judgment, two available meanings of “Index”. The question then arises as to which of the two available meanings is the true construction? Here, it seems to me there is no contest. If the term “Index” were to be construed in the way that Mr Spink contends, the operation of the Scheme would be cumbersome and unworkable in practice. In Lord Clarke’s words, the court“is entitled to prefer the construction which is consistent with business common sense and to reject the other”. Mr Rowley’s construction is consistent with commercial reason, and should, in my judgment, therefore, be preferred. The statutory revaluation regime explained in the Appendix also provides for hybrid rates to be employed. And it is to be noted that Mr Spink’s construction could, in many situations redound to the detriment of Scheme members, which is another good reason why it should be rejected as not being what the draftsman must be taken to have intended from the words that he used.

There was no dispute between the parties as to Mr Pocock’s appointment as a representative beneficiary. I was, however, shown some correspondence, in which certain members of the Scheme had expressed concerns about Mr Pocock’s appointment. For that reason, I asked counsel to satisfy me that isolated objections to such an appointment did not constitute a good reason in the circumstances of this case for the appointment to be refused. The issue is whether Mr Pocock’s interest is the same as that of those that he is to represent. As to that, I am entirely satisfied that it is. The fact that isolated members of the Scheme might have chosen a different representative to argue the points that Mr Pocock has argued is nothing to the point. None of those members has attended court to make any additional points, and the purpose of the representation order is so as to ensure that the entire class that is in the same interest as Mr Pocock is bound by the order that is made at the conclusion of this case.

Accordingly, I am satisfied that it is appropriate to make the representation order sought.

For the reasons I have sought to give the answers to the 3 questions that are included in the Claim Form are as follows:-

I will hear counsel on the appropriate form of order and any questions that arise as to costs.