Royal Mail Group Ltd v Evans & Ors

This is the hearing of a Part 8 Claim which raises a single issue, namely the correct construction of one of the Rules of the Royal Mail Senior Executive Pension Plan (“the Executive Pension Plan”), an occupational pension scheme.

The Claimant, (“Royal Mail”) is the Principal Employer of the Executive Pension Plan; the Defendants are the present Trustees of that Plan.

The current governing documentation of the Executive Pension Plan is a Definitive Trust Deed and Rules dated 31 March 2010 (“the 2010 Deed and Rules”).

The provision with which these proceedings are concerned is Rule 19.2 of the 2010 Deed and Rules. It reads as follows:

“A member who becomes or is treated by the Principal Employer as becoming a Section A Member with effect from 1 April 2001 and who had previously been a member of Sections A or B of POPP and who had been entitled to have their pension in payment or in deferment increase without limitation in line with the retail prices index shall continue to be so entitled under this Scheme. This will apply both to the Pensionable Service accrued to the date of their leaving the POPP and also to their Pensionable Service accrued under this Scheme.”

It is not in dispute that the Rule applies to a limited class. In fact, the class of members affected are defined in the Part 8 Claim as the “Relevant Members” and are described as those Members of the Plan (in other words the Executive Pension Plan) who had previously been a member of Sections A or B of the Post Office Pension Plan (in other words POPP) and who:

The difficulty addressed in this case arises over the words:

“who had been entitled to have their pension … increase without limitation in line with the retail prices index shall continue to be so entitled under this Scheme.”

in Rule 19.2.

It is said by Mr Nugee on behalf of Royal Mail that in fact none of the Relevant Members had an entitlement under POPP to have their pension increase in line with the retail prices index (“RPI”). Their entitlement under POPP was to have their pensions increased in line with increases to public sector pensions. In fact, in practice these had been increased in line with RPI; but the statutory provisions did not, and do not, require it.

In summary Royal Mail’s case is that Rule 19.2 is what is known as a “grandfathering” clause which preserves for a particular class of people a special right. The operative provision is contained in the words “continue to be so entitled” and the emphasis is therefore on continuation of the members’ former entitlement. This requires one to look back at what the members’ entitlement under POPP actually was; and on this construction the Relevant Members are entitled to the same as before, namely full indexation, rather than increases capped in any way, but indexation which tracks public sector increases. This would mean that they are now entitled to increases in accordance with the Consumer Prices Index (“CPI”) because this is the index which is adopted at present in relation to public sector pensions.

The point is of some importance: the Scheme Actuary has estimated that the extra cost to the Executive Pension Plan (and hence to Royal Mail which has to fund it) of using RPI rather than CPI is (i) about £20m for past service liabilities (as at 31 March 2010) and (ii) an extra 1.5%–2% of pensionable pay of the Relevant Members for future service. In fact, the Executive Pension Plan was closed to future accrual as from 31 December 2012.

It would be usual in a case such as this to have joined a Relevant Member to argue the opposite construction to that advanced by Royal Mail, namely that the Rule should be construed to mean that such members are entitled to increases to their pensions in payment or in deferment based on RPI without any cap. However, in this case, as the Trustees are in possession of all the relevant documentation and in order to avoid the increased cost which would be incurred were a further party joined, the Trustees have agreed to argue for such a construction. I should add that they are firmly of the belief that it is the correct construction.

Accordingly, I am happy to make the representation orders pursuant to CPR Rule 19.7(2) in the form sought in the Claim Form at (ii) and (iii). They are firstly that Royal Mail be appointed to represent all beneficiaries of the Executive Pension Plan in whose interests it is to argue that the true construction of Rule 19.2 is that Relevant Members are entitled to have their pensions increased (in payment and deferment) by the increase applicable under Section A or B of the Post Office Pension Plan as the case may be; and secondly, that the Defendants be appointed to represent all the beneficiaries of the Executive Pension Plan in whose interests it is to argue that the true construction of Rule 19.2 is that Relevant Members are entitled to have their pensions increased (in payment and deferment) in line with increases in the retail prices index.

The parties agreed a chronology summarising the relevant history of the Executive Pension Plan and in addition, Mr Nugee on behalf of Royal Mail has very helpfully set out the relevant background in his skeleton for which I am grateful and which for the most part, I adopt.

The Post Office was until 1969 a government department under the Postmaster-General and its employees were therefore civil servants. As such they were entitled to pensions under the arrangements then made for civil service pensions (principally found in the Superannuation Act 1965).

Under the Post Office Act 1969 the Post Office became a (publicly-owned) statutory corporation on 1 October 1969. A new pension scheme, the Post Office Staff Superannuation Scheme, was established by deed dated 24 September 1969 to take effect from 1 October 1969. This scheme is still the main pension scheme for Royal Mail employees. It has been variously called as follows:

POSSS as originally established entitled Post Office employees to the same pension benefits as were available to civil servants from time to time. The civil service pension scheme was non-contributory, and POSSS therefore started as a non-contributory scheme. Under the original Rules, the members were entitled to

“the like superannuation benefits”

as were payable under the enactments and instruments relating to superannuation in the civil service (which were listed in a schedule). In 1971 the Post Office introduced two new contributory Sections to POSSS, Sections A and B: As to these:

The Pensions (Increase) Act 1971 in effect provided for civil service (and other official) pensions to be fully protected against inflation or fully “index-linked” (“1971 Act Indexation”) and applied to benefits under Section A and Section B of POSSS.

In 1987 the Post Office set up a separate scheme called the Post Office Pension Scheme (“POPS”) for new entrants with effect from 1 April 1987. This contained no link to civil service benefits or 1971 Act Indexation; nor did it provide for full protection against inflation. Instead it provided for pensions in payment to be increased by the lesser of 5% and RPI.

With effect from 1 April 2000, POPS was merged into POSSS by virtue of a Merger Agreement of 22 December 1999. POSSS was renamed the Post Office Pension Plan (“POPP”) and contained the following Sections:

As well as the main scheme, the Post Office had a scheme for senior executives. This was established by deed dated 29 June 1994 under the name Post Office Senior Executives Pension Scheme, with effect from 1 July 1994 and is the Executive Pension Plan with which this matter is concerned.

The Executive Pension Plan has also gone through a number of name changes as follows:

As established in 1994, the Executive Pension Plan was a “top-up” scheme. In other words the members remained members of the main Post Office Plan (ie POPS or for pre-1 April 1987 entrants POSSS) which provided them with the same benefits as other members; but obtained extra benefits by becoming members of the Executive Pension Plan. By virtue of Rule 17B, pensions payable under the Executive Pension Plan were, like POPS, subject to pension increases of the lesser of 5% and RPI.

In 2001 the Executive Pension Plan was remodelled to operate as a stand alone scheme. Thereafter, active members would accrue all future benefits under the Executive Pension Plan. This was effected by a Deed of 20 March 2001 which put in place new Rules with effect from 1 December 2000.

By a subsequent transfer agreement dated 24 December 2001, the past service benefits of the members of the Executive Pension Plan were transferred into it from the main plan (then called CPP) with effect from 1 April 2001. The effect was to bring together all the pension benefits, both pre-2001 and post-2001, of the active members so that they were all payable out of one scheme. However those who chose to join Section A of the Executive Pension Plan with effect from 1 April 2001 became entitled to new remodelled benefits both for the future and in respect of their past service benefits. Those who did not were Section B members. The benefit structure for them remained the same. In fact, there are no members left within Section B and as I have already mentioned Section A closed to future accrual in December 2012.

Under Section A of the 2000 Rules:

The 2000 Rules have been replaced by the 2010 Deed and Rules. As under the 2000 Rules:

Pensions increases for “official pensions” (which includes civil service pensions) are effected under statute. In summary, official pensions enjoy full index-linking, by reference to “the general level of prices” but it is for the Secretary of State to estimate this in such manner as he thinks fit. In practice the indexation was always done by reference to RPI until 2010 when Government announced that it was going to use CPI instead. This was enacted by means of the Pensions (Increases) Act 1971. Section 1 dealt with specified increases to official pensions in September 1971 that had already commenced and section 2 provided for the Minister for the Civil Service to review, in 1973 and every 2^nd year thereafter, the rates of official pensions against “any rise in the cost of living” and if there had been, to provide by order that official pensions might be increased by an appropriate amount.

“Official pension” was defined in s. 5(1) as meaning any of the pensions specified in schedule 2; and schedule 2 para 4 referred to civil service pensions (then payable under the Superannuation Acts 1965 and 1967). s. 2(5) of the Pension (Increases) Act 1971 provided that

“On any review under this section the cost of living shall be assessed by such means as the Minister thinks appropriate.”

Various orders were duly made under s. 2. These were incorporated into s. 1 in 1978.

Section 2 of the Pension (Increases) Act 1971 was repealed on 6 April 1979 and replaced by s. 59 Social Security Pensions Act 1975 (“SSPA”). s. 59 remains in force and has effect as if it were contained in the 1971 Act: s. 59(7). s. 59 cross-refers to ss. 150 and 151 of the Social Security Administration Act 1992 (“SSAA”).

Section 150 SSAA requires the Secretary of State (“SoS”) to review in each tax year various social security benefits, including (by s. 150(1)(c)) “additional pensions in long-term benefits”. This is a reference to the State Second Pension, which is an earnings-related addition to the basic state pension. s. 150(1) provides that the SoS shall review the specified sums

“in order to determine whether they have retained their value in relation to the general level of prices obtaining in Great Britain estimated in such manner as the Secretary of State thinks fit”

Where it appears to the SoS that the general level of prices has increased in the review period, s. 150(2) obliges him to lay an up-rating order before Parliament which increases certain benefits (including those mentioned in s. 150(1)(c)) by at least the % increase in the general level of prices. By s. 151(1) any increase in the sums mentioned in s. 150(1)(c) takes the form of a direction that the amount shall be increased by a specified % of their amount apart from the order.

Section 59 SSPA 1975 provides that where a direction is given under s. 151 SSAA 1992 that the sums mentioned in s. 150(1)(c) be increased by a specified %, then the Minister for the Civil Service shall by order (made by statutory instrument) provide that official pensions may be increased by the same %. In fact, that function has now been transferred to the Treasury.

By virtue of schedule 3 para 2 (3)(a) Pension Schemes Act 1993, the minimum revaluation of deferred pensions required by statute in relation to occupational pension schemes in general, is also determined by the SoS by reference to what appears to him to be the % increase in the general level of prices in Great Britain.

Until 2010 RPI has always been used as the measure of indexation for these statutory purposes. On 22 June 2010 however the Chancellor of the Exchequer announced in his budget statement that CPI would be used instead of RPI for indexation of social security benefits and public sector pensions; and this decision was in due course implemented in 2011. An account of the differences between RPI and CPI, of the Government decision to use CPI and the formal steps to implement the decision and the reasons for it, are set out in the judgment of Lord Neuberger MR in FDA v SoS for Work and Pensions [2012] EWCA Civ 332 in which a number of public sector unions unsuccessfully challenged the decision.

The practical effect is that civil service pensions are now increased each year by CPI rather than RPI; and hence the members of the Non-Contributory Part (if any), and of Sections A and B of the Royal Mail Pension Plan, (“RMPP”) formerly POSSS, all of whom are entitled to statutory indexation, have their pensions in payment increased by reference to CPI rather than RPI. On the other hand members of Section C of RMPP, and the ordinary members of the Executive Plan, have their pensions in payment increased by the lesser of 5% and RPI.

The principles of admissibility of extrinsic evidence on a question of construction are well established and are not in dispute. Background facts known, or reasonably available, to the parties to a document are admissible as part of the matrix of fact against which the document falls to be construed: ICS v West Bromwich [1998] 1 WLR 896 at 913A. In this case the evidence before the court was much more wide ranging but by the time of the hearing the extent of the relevant background facts had been narrowed down and agreed taking into account the examination of the exclusionary rule by Lord Hoffmann in Chartbrook v Persimmon Homes [2009] UKHL 38, [2009] 1 AC 1101 at [27] – [42]. In the present case it is now accepted that the factual matrix to Rule 19.2 includes all the history of the Executive Pension Plan and the RMPP, and the relevant statutory provisions.

So far as the general principles applicable to the construction of contracts and other instruments is concerned, the process is first, one of interpreting the words the parties have used. The process was defined by Lord Hoffmann in ICS v West Bromwich at 912, as:

“the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.

The starting point is therefore the words used in the document which should be given their ordinary and natural meaning. They must be read in the context of the background matrix of fact. However, as Lord Hoffmann put it at 913D in ICS v West Bromwich:

“if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.”

In such circumstances, as Lord Hoffmann explained at [22] – [24] of Chartbrook v Persimmon as part of the single task of interpreting the agreement in its context if there is a clear mistake on the face of the instrument with regard to its context and it is clear what the correction ought to be in order to cure it, the correction is made as a matter of construction. He added at [25]:

“What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. . .”

This remains good law after Rainy Sky v Kookmin Bank [2011] 1 WLR 2900, which was a slightly different type of case. It concerned the proper construction of advance payment bonds where there were two possible interpretations. At [21] Lord Clarke stated:

“The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”

At [23] he went on to make clear:

“Where the parties have used unambiguous language, the court must apply it.”

He went on in that paragraph to quote from the judgment of Hoffmann LJ (as he then was) in Co-operative Wholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR 97 at 99:

“This robust declaration [ie what Lord Diplock said in The Antaios] does not however mean that one can rewrite the language which the parties have used in order to make the contract conform to business common sense. But language is a very flexible instrument and, if it is capable of more than one construction, one chooses that which seems most likely to give effect to the commercial purpose of the agreement.”

Where there are two possible interpretations, the weight to be given to the commercial consequences must depend on the degree of ambiguity of the language concerned. This was very clearly stated by Briggs J in a passage in LB Re Financing No 3 Ltd v Excalibur Funding No 1 Plc [2011] EWHC 2111 (Ch) at [46]:

“Commercial absurdity may require the court to depart even from the apparently unambiguous natural meaning of a provision in an instrument, because “the law does not require judges to attribute to the parties an intention they plainly could not have had”: see per Lord Hoffmann in the ICS case at page 913. Questions of commercial common sense falling short of absurdity may however enable the court to choose between genuinely alternative meanings of an ambiguous provision. The greater the ambiguity, the more persuasive may be an argument based upon the apparently greater degree of common sense of one version over the other.”

I should also mention that there are several statements in decided cases of the correct approach to the construction of pension scheme documents. There is no difference of approach from the general principles applicable to the construction of contracts and other instruments. The applicable principles were summarised in the pensions context by Arden LJ in Stevens v Bell [2002] PLR 247 at [26] – [32], the most important of which for the purposes of this case are:

Before turning to the competing submissions, I should mention that although the exercise is academic as the wording is identical and it is not suggested that the factual matrix differs, in addition to Rule 19.2 of the 2010 Deed and Rules, I am also required to construe Rule 17.2 of the 2000 Rules because there are a number of Relevant Members who had left the Executive Pension Plan or retired before the 2010 Deed and Rules took effect.

Mr Nugee submits that there is no difficulty in applying these principles to Rule 19.2 of the 2010 Deed and Rules or to Rule 17.2 of the 2000 Rules which is in the same form and was drafted at the stage at which the Executive Pension Plan became a stand alone scheme.

He broke up the Rule into five parts in the following way:

“A member [1] who becomes or is treated by the Principal Employer as becoming a Section A Member with effect from 1 April 2001 and [2] who had previously been a member of Sections A or B of POPP and [3] who had been entitled to have their pension in payment or in deferment increase without limitation in line with the retail prices index [4] shall continue to be so entitled under this Scheme. [5] This will apply both to the Pensionable Service accrued to the date of their leaving the POPP and also to their Pensionable Service accrued under this Scheme.”

He said that no difficulty arises over limb [5]. It brings in not only benefits accrued as a result of pensionable service under the Executive Pension Plan in its top up form but also previous service in relation to base benefits under POPP. He says that this is not surprising in the light of the fact that in 2000 (or with effect from April 2001) the Executive Pension Plan became a stand alone scheme to which members were invited to transfer their past service benefits from POPP, in relation to which they were awarded a year for year credit and going forwards they accrued a new single benefit which accrued on the basis of n/45ths. He says that those benefits were an improvement on the benefits which the Relevant Members had had before and that the rate of increase for pensions in payment and in deferment was intended to apply to both past and future. He submits that limbs [1] to [3] specify which members qualify for this “special provision”; and [4] tells the reader what the special provision for these members is.

In fact, there is no dispute as to the meaning of limbs [1] and [2]. They are straightforward: a member only qualifies for the special provision if he [1] becomes a Section A Member of the Executive Pension Plan at the outset of the scheme as a stand alone arrangement on 1 April 2001 (or is treated as doing so); and [2] was formerly a member of Sections A or B of POPP. In this regard, Mr Nugee emphasises that in both Section A and Section B of POPP public sector style benefits were provided to which uncapped increases were applied pursuant to the Pensions (Increases) Act 1971.

To summarise, he says therefore, that the effect of Rule 19.2 and Rule 17.2 before it, was to continue the entitlement of this group of members to uncapped increases pursuant to the Pensions (Increases) Act 1971 and to extend the application of those increases from past service in respect of their base benefit to the top up element which they had already accrued and to future service in relation to the new composite benefit provided under the Executive Pension Plan in its new stand alone form.

Both Mr Nugee and Mr Green on behalf of the Trustees agree that the difficulty starts with limb [3]. Mr Nugee characterises this as another requirement for a member to qualify for this special provision. The problem with this is that those who were formerly members of Section A or Section B of POPP were not entitled to increases in the way described. An accurate way of referring to those members’ entitlement would be:

“who had been entitled to have their pensions increased by reference to the rate of increase payable to civil service pensions under the Pensions (Increase) Act 1971.”

Mr Nugee suggests that a fuller (and equally accurate) way of referring to their entitlement would have been:

“who had been entitled to have their pensions increased by reference to the rate of increase payable to civil service pensions under the Pensions (Increase) Act 1971 (which has historically been, is currently, and is expected to remain, RPI).”

And an even fuller statement would have been:

“who had been entitled to have their pensions increased by reference to the rate of increase payable to civil service pensions under the Pensions (Increase) Act 1971 (which has historically been, is currently, and is expected to remain, RPI, but which is ultimately referable to the rise in the general level of prices obtaining in Great Britain, estimated in such manner as the Secretary of State thinks fit).”

He says that in circumstances where public sector pensions (and hence the pensions payable to Section A and B Members of POPP) had always in practice been increased by RPI without the imposition of any cap, it is not perhaps surprising that the draftsman used the shorthand of referring to the Relevant Members as those who:

“had been entitled to have their pension in payment or in deferment increase without limitation in line with [RPI]”

However, he says that it is shorthand and cannot be understood literally.

He says that if it were read literally, there would be no-one who would qualify under Rule 19.2 or Rule 17.2 at all. As I have already mentioned, none of the members of the Executive Pension Plan who had been members of Sections A or B of POPP had an entitlement to full RPI increases. In fact, no member of any of the Post Office schemes had such an entitlement. They were either entitled to full 1971 Act Indexation or to RPI capped at 5%. Mr Nugee submits therefore, that if limb [3] is given its literal meaning, the class of members who benefit from Rule 19.2 is empty.

He goes on to say that such a literal meaning would produce a wholly uncommercial result which would not be a sensible reading of the Rule; and it is therefore an example of the principle of construction that if the literal meaning flouts business commonsense, the Court will make it yield to such business commonsense.

He also says that this is an example of the situation described in Chartbrook: the literal meaning of the provision gives a result which is absurd and cannot have been intended, and one concludes that something has gone wrong with the language. He says that what has gone wrong in this case is that the draftsman has referred to an entitlement to full RPI, instead of, as he should have done, an entitlement to 1971 Act Indexation (which has in practice meant RPI).

In his submission, therefore, the Court should have no hesitation in reading the words as if they said just that with the result that the class of members benefiting from Rule 19.2 is not empty but includes all those who were members of Sections A or B of POPP and who became (or were treated as becoming) members of the Executive Pension Plan with effect from 1 April 2001.

Alternatively, he suggests that rather than treat limb [3] as a further requirement for membership of the class, it could be viewed as narrative. Even so, he says, it is inaccurate for the same reasons. For the purposes of this alternative, he adopts Mr Green’s submission that limb [3] is not a condition of membership of the class but sets up the benefit entitlement itself. He says that it refers to an existing entitlement which is perpetuated and extended to the entirety of the member’s Executive Pension Plan benefit by limb [4].

On either argument therefore, he says that limb [4] is the operative part of the Rule because it provides that the Relevant Members (whether identified by [1] to [3] or [1] and [2])

“shall continue to be so entitled under this Scheme.”

Mr Nugee emphasises that “continue” means what it says: the members get the same provision in relation to increases under the Executive Pension Plan as they had before and not something new. He also says that “so entitled” is a reference back to what they were entitled to under Section A or B of POPP. He says that the draftsman has referred to this inaccurately as full RPI, rather than an accurate reference to their actual entitlement under POPP, and that should be read as meaning “full indexation (which has in practice been RPI)”.

He reiterated that the overall construction therefore is that Rule 19.2 is a grandfathering provision which preserves for the Relevant Members the special benefits that they had under the former scheme and extends that entitlement which he says makes perfect commercial sense. On the contrary, he says, it makes no commercial sense to read the Rule as it were intended to confer on the Relevant Members, for the first time, a right not to full 1971 Act Indexation but to full RPI, a right which they never enjoyed under POPP and which no other class of Post Office or Royal Mail employee has ever enjoyed.

He also rejects Mr Green’s criticism that such a construction leads to the unfortunate and uncommercial position that increases in respect of this class of members of the Executive Pension Plan would be subject to amendment by the trustees of the RMPP, the present name of the main Royal Mail scheme. He says that the true effect of Rule 19.2 is that the reference back is to the increases applicable under the Rules which applied to Section A or B of POPP as they stood as at 31 March 2001, as the case may be. That was the date at which Relevant Members transferred their benefits to Section A of the Executive Pension Plan. As a result, he invites the Court to declare that on the true construction of Rule 19.2 of the 2010 Deed and Rules:

“the Relevant Members continue to be entitled to have their pensions increased (in payment or deferment) by the increases which would be applicable as a result of the Rules applicable under Section A or B of POPP as the case may be as they stood as at 31 March 2001.”

This is a refinement of the relief sought in the Part 8 claim form.

In relation to the second paragraph of Rule 19.2 which applies to Relevant Members who therefore have all the attributes of those referred to in the first paragraph but who either became or were treated as having become members of Section A of the Executive Pension Plan after 1 April 2001, and with regard to whom, the Principal Employer may determine whether they continue to be so entitled, he says that if such a determination is made, the Rule requires the continuation of whatever the increases were as a result of the Rules of Section A or B of POPP at the stage at which they transferred or were deemed to have transferred.

Mr Green on behalf of the Trustees in their representative capacity takes a different view. First, as I have already mentioned he says that limb [3] in Mr Nugee’s analysis is not an additional criterion for membership of the class. He says that limbs [1] and [2] are sufficient for that purpose and that reliance on limb [3] as well in the manner adopted by Royal Mail has the effect artificially of de-populating the class to which Rule 19.2 applies. He goes on to say that having done so, Royal Mail then seeks to resolve the mistake or problem of its own making by seeking to interpret the reference to RPI as a reference to the increases payable in respect of Civil Service Pensions under the Pensions (Increase) Act 1971. He says therefore, that there is no mistake either in respect of the class or, in fact, in respect of the nature of the increases to be applied.

Instead of defining the class, Mr Green submits that limb [3] sets up the essence of the benefit which is being conferred which as I have already mentioned, is something with which Mr Nugee ultimately agrees. Mr Green says that the natural way in which Rule 19.2 is drafted met the expectations of those who transferred their benefits to Section A of the Executive Pension Plan in 2001. Albeit that they were active members who by their very status were neither in receipt of pensions in payment nor in deferment, they had the expectation of unlimited increases in those benefits in line with RPI which had been enjoyed by their brethren in POPP. Even if there were a mistake, Mr Green says that it is not clear what a reasonable person would have understood the parties to have intended and accordingly, it is not possible to substitute 1971 Act Indexation for the reference to RPI as the Claimant contends.

Mr Green goes on to submit that the Claimant’s construction places too much weight upon the use of “continue”, a weight which he says it cannot bear. First he says that if it is a retrospective reference to increases in POPP, it does not describe and naturally encompass the collation of benefits or the new monetary benefit being provided under Section A of the Executive Pension Plan. Secondly, he says that the way in which Mr Nugee seeks to deploy the word creates a selective stopping of the clock in order to impose CPI, and thirdly, he says that ‘continue’ can only have been intended in a loose sense because the Relevant Members were active members in any event and therefore, in their cases, there was nothing yet to be continued.

He also says that to interpret the reference in limb [3] to RPI to mean what it says accords with good business sense and accordingly, in accordance with the principle in Rainy Sky SA v Kookmin Bank where there are two constructions, the court is entitled to prefer the one which makes business common sense. He says that a provision providing for increases by reference to a standard index, referred to expressly within the four corners of the Executive Pension Plan itself, which, in fact, had been applied for the preceding 32 years and was to be applied to benefits which had nothing to do with the RMPP or the Civil Service Pension Scheme satisfies that test.

He says that this is all the more so when in 2001 it was 32 years since Royal Mail had last introduced a Section in an occupational pension scheme adopting a civil service style measure of benefits and for the last 14 years, since 1987, all pension increases whether under Section C of RMPP which was for new joiners, under the Executive Pension Plan in its top up form or in its stand alone form from 2001 in respect of all but Relevant Members, increases had been based on RPI albeit capped at 5%. He says that to preserve a link to civil service style increases makes even less sense where the new unitary benefits no longer bore the hallmarks of public sector benefits. By contrast he says that Mr Nugee’s construction which requires one to look outside the Executive Pension Plan fails miserably on that front.

Of course, he says it also fails because the new benefits provided are no longer of a public sector nature but the construction requires increases to be set by reference to the civil service standard some 32 years after Royal Mail had ceased to be a government department and when it was in transition away from public corporation status. Furthermore, he says that if the draftsman had intended what Mr Nugee suggests, he could have used Rule 24 of Section B of the RMPP as a template. It is all set out there. Where relevant it provides as follows:

“(1)

Any pension payable under the Section B Rules shall be increased from time to time in accordance with the Pensions (Increase) Act 1971 and the Social Security Pension Act 1975 Sections 59 and 59A or any statutory modification or re-enactment thereof, as if the pension were payable under the Principal Civil Service Pension Scheme 1974 and any amendment or replacement thereof, . . .”

Mr Green went on to submit that the interpretation of limb [3] which does the least violence to the Rule as a whole is to add “in fact” at the end of it. He says that once that is done, limb [4] is the operative part of the Rule which piggybacks off limbs [1] – [3]. There is no need he says to place such weight on ‘continue’ and as a result seek to interpret Rule 19.2 in a way which is contrary to the express words used. The Rule should be interpreted in accordance with what actually appears on the page. Of course, Royal Mail agrees that limb [4] is the operative part and that it is dependant on limbs [1] to [3] but Mr Nugee reaches a different conclusion as a result.

Mr Green submits that if there is a mistake in the drafting of Rule 19.2 at all it is only to refer to the intended RPI as if it were an entitlement de jure whereas the measure of increase had been applied de facto. This accords with his submission that the Rule should be interpreted as if “in fact” had been added at the end of [3].

Of course Mr Green also submits that Royal Mail is wrong to characterise the Rules as a grandfathering provision, preserving the position in relation to increases which applied to the Relevant Members’ basic benefits under the RMPP when the Executive Pension Plan was a top up scheme. He emphasised that Rule 19.2 and a fortiori Rule 17.2 should be construed in the context of the new stand alone situation in which the Rule was not confined to increases to past benefits but covered the new unitary benefit going forwards. He says that limbs [1] – [3] merely reflected what he called the Human Resources reality.

In relation to revaluation, Mr Green submits that the fact that the same measure as in the public sector is applied albeit uncapped is just a neutral coincidence and takes the matter no further forwards.

Mr Green then turned to the second paragraph of Rule 19.2, the effect of which is that the second paragraph is that if a Relevant Member seeks to transfer to Section A after 1 April 2001 and the Principal Employer does not determine to permit such a transfer, the increases which will apply to such a member’s benefits in deferment and in payment will be RPI capped at 5%. Both Mr Green and Mr Nugee submit and I agree that the evident purpose was to encourage Relevant Members to join Section A at its inception on 1 April 2001 by offering a better rate of increase without any question of an exercise of discretion. Mr Green says that the choice is intelligible to the member faced with the whole of Rule 19.2 if the reference to RPI in the first paragraph means what it says. He says that the option would be much less clear if Royal Mail’s construction were correct and therefore, once again that the Trustees’ construction is the one which makes more commercial common sense.

He elaborated this point with another illustration namely that if the Claimant’s construction were right, increases both in payment and deferment would be linked to “the general level of prices obtaining in Great Britain estimated in such manner as the Secretary of State thinks fit.” In essence, he says that to leave the new unitary benefits under the Executive Pension Plan subject to variance decided upon by the Secretary of State in relation to social security benefits, cannot be correct and would not make business common sense.

Lastly, I should mention that Mr Green accepted that Mr Nugee was right that an argument based on section 67 Pensions Act 1995 in its 20 March 2001 form, takes the matter no further in the circumstances of this case. In summary, section 67 provided that any power to modify an occupational pension scheme could not be exercised in a way which would or might affect any entitlement or accrued right of any member acquired before the exercise of the power, unless the trustees had satisfied themselves that certain requirements were met. In this case it was said that the certification requirement had not been complied with. It had been suggested that if Royal Mail’s construction were right there had been a diminution in the accrued rights of the Relevant Members and accordingly, adopting a presumption of regularity, the Trustees’ construction should be preferred.

In fact, as I have mentioned, it was accepted that section 67 does not apply because as at 2001, Section A of the Executive Pension Plan was a new Section with new Rules and benefits to which the Relevant Members were encouraged to transfer their accrued rights. However, it was a matter for them. If they chose not to do so, they were subject to the provisions of Section B and their accrued rights remained unchanged.

In reply, Mr Nugee emphasised that the Trustees’ construction requires one to ignore both “continue” and “so entitled” in Rule 19.2 and in effect, to conclude that the use of both terms was a mistake. He fully accepted that the benefits available under section A of the Executive Pension Plan in its stand alone form were unitary. However, he pointed out that all of the Relevant Members had also been pre 1987 members of the RMPP (then POSSS) and, in that scheme had been entitled to public sector style benefits. The bulk of their benefits therefore, had enjoyed the uncapped 1971 Act Indexation, albeit that their top up benefits had not and that was what the architects of the stand alone version of the Executive Pension Plan had chosen generously to perpetuate and continue for this special group of members, in relation to the new unitary benefit going forwards. In such circumstances, he says that it is an irrelevance that Royal Mail had ceased to be a government department in 1969. Had the draftsman wanted to start again entirely with new increases, the Relevant Members would have been provided with RPI capped at 5% in the same way as the new joiners. On the contrary, the Relevant Members were carved out and given special treatment by preserving and extending what they had had before, in relation to their basic benefits which formed the bulk of their entitlement.

I should mention that I was handed up various schedules which sought to explain the nature of the accrued benefits which Relevant Members would have had and the way in which they were treated and then transformed for the purposes of Section A of the Executive Pension Plan in its stand alone form. Suffice it to say that past years of service were treated like for like and that the accrual rate applicable within Section A was favourable.

Mr Nugee also says therefore, that Mr Green’s construction not only requires one to ignore two terms and to “adapt” the meaning of both limb [3] and limb [4] but that it also hangs upon a distinction between de facto and de jure entitlement which does not exist. Either one is entitled or one is not and he says that the reasonable reader would assume no less. He also points out that Mr Green’s addition of the words “in fact” at the end of limb [3] is also inaccurate. As Mr Green himself accepted, the Relevant Members were active members and accordingly, were not entitled in fact, to any kind of increase at that stage.

Mr Nugee suggested that instead of “had been entitled” in limb [3] Mr Green’s interpretation would require the phrase to be read as “were in a Section of the scheme in which other members whose pension had already come into payment or were already in deferment had in fact, had their pension in payment or deferment increased at a rate of [x].” That he says cannot be how the reasonable reader would understand Rule 19.2.

He also submits that either Mr Green is forced to ignore “continues” and “so” in “so entitled” altogether or his approach is based on a premise which is incorrect, namely that it was an entitlement to full RPI which was being continued. Such an entitlement did not exist.

He also pointed out that Mr Green’s suggestion that upon the Trustees’ construction, the mechanics as to the application of RPI to pensions in payment were to be found in the general Rule 17 was unsustainable. However, on the Company’s construction, Rule 19.2 contains its own mechanism by reference to the Pensions (Increase) Act 1971. The relevant parts of Rule 17 of the Executive Pension Plan are in the following form:

“PENSION INCREASES

That part of each pension in payment that exceeds any GMP will increase in each year by the lower of:

(a)

the percentage increase in the retail prices index over the preceding year on a date decided by the Trustees; and

(b)

5%.

. . . . .

For Members to whom Rule 19.2 applies, pensions in payment will be increased in accordance with those provisions instead of this Rule 17.

Pensions paid for less than a year may be increased by a smaller amount.

Pensions will increase on a date decided by the Trustees. The interval between increases will not exceed 12 months. If an interval is less than 12 months, the increase will not exceed the percentage for the reference period which corresponds to 5% a year.”

It seems to me that applying the principles which I have set out and approaching the exercise of construction as a unitary one in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant Rule 17.2 and Rule 19.2 should be construed in the way in which Royal Mail puts forward.

In my judgment, as both Mr Nugee and Mr Green accepted, limb [4] is the operative provision and it piggybacks upon limbs [1] to [3]. It contains both “shall continue” and “so entitled”. It seems to me that the construction put forward by the Trustees in their representative capacity requires both those phrases to be ignored. Although I remind myself that Lord Hoffmann pointed out in Chartbrook that there is not necessarily a limit on the amount of red ink or rearrangement which may be necessary, nevertheless, it seems to me that the Trustees’ construction not only does more violence to the Rule but also gives no meaning whatever to “continue” and “so entitled”. As Mr Nugee points out, there was no entitlement to increases by reference to uncapped RPI which could be continued or to which the Relevant Members had been “so entitled”. The state of affairs which was to be continued and extended to all their benefits under the Executive Pension Plan in its stand alone form was the application of 1971 Act Indexation.

Furthermore, as these were special individuals all of whom had been members of POSSS prior to 1987 and therefore, who had had public sector style benefits with 1971 Act Indexation which they retained in 2001 when they were being encouraged to join Section A of the Executive Pension Plan in its stand alone form, I can see nothing uncommercial in extending what was seen as a generous level of indexation which was more generous than that which would be applied to the benefits of other members, and to which they had already been entitled as to part of their accrued benefits, to the whole of the new benefits.

The relevant background supports such a conclusion. The Relevant Members were not in any way distant from public sector style benefits. They had accrued benefits in that very style and retained those accrued rights immediately before they joined Section A of the Executive Pension Plan.

Furthermore, if the Trustees’ construction were correct, there would be no mechanism by which the uncapped RPI could be applied. In this regard, I agree with Mr Nugee. It seems clear to me that Rule 17 of the Executive Pension Plan expressly carves out Rule 19.2 from it and provides no room to apply the mechanism in Rule 17 by which the period over which the RPI is to be determined to the Relevant Members to whom Rule 19.2 applies. The Trustees’ construction, therefore, would create a level of increase with no means by which to apply it or, in fact, to identify it from year to year. Such a conclusion would be uncommercial and unbusinesslike and in my judgment cannot be how the reasonable reader with the background knowledge reasonably available to the parties would have understood it. Nor would it be a construction which would produce a reasonable and practical effect for the Executive Pension Plan itself.

It seems to me that Mr Nugee is right when he says that the reference to RPI in limb [3] was shorthand for the provisions which had applied in relation to increases in Sections A and B of POPP but in reality had been RPI and therefore was intended to refer to 1971 Act Indexation. Otherwise, “had been entitled”, “shall continue” and “so entitled” are rendered useless. It follows that I also accept Mr Nugee’s submission that the insertion of “in fact” at the end of limb [3] is not how the reasonable reader applying the appropriate test would have read Rule 19.2. As he pointed out, the Relevant Members were not entitled in fact, to unlimited RPI. First, there is no such thing as an entitlement in fact and secondly, all the Relevant Members were actives who had yet to become entitled to increases in any form.

Accordingly, whether one treats limb [3] as a condition for membership of the class or as narrative upon which the operative limb [4] is dependent, it seems to me that in Lord Hoffmann’s words something has gone wrong. In my judgment, given the reference to “continue” and “so entitled” and the relevant background it is also clear what the reference to RPI should be replaced with.

If I am wrong about that, I conclude that in accordance with the principles enunciated by Lord Clarke in Rainy Sky that where there are two possible constructions, the Court is entitled to prefer that which is consistent with business common sense, the reference back to 1971 Act Indexation is consistent with such common sense. I arrive at this conclusion in the light of the fact that no member of the Royal Mail schemes had ever been entitled to increases on the basis of unlimited RPI and the Relevant Members had been entitled to 1971 Act Indexation on the bulk of their benefits up to the date of their transfer into Section A of the Executive Pension Plan in 2001. In such circumstances, the reasonable reader would construe Rule 19.2, in my judgment the entire shape of which is drafted on the basis of continuation rather than creation of a new right, as extending what had been considered to be a generous increase provision. As Mr Nugee pointed out, that too made commercial sense when members were being encouraged to join Section A of the Executive Pension Plan as at 1 April 2001 instead of waiting until later. If one reads the second paragraph of Rule 19.2 with the remainder, it seems clear to me that members would have been able to compare the continued increases which were perceived to be valuable because they were uncapped, which were available if one transferred immediately as against the ordinary Rule which provided for RPI capped at 5% and the potential to benefit from better provisions only if the Principal Employer exercised its discretion to permit it.

Nor do I see that in the circumstances, it would have been uncommercial in any way, to provide for benefits to be increased by the 1971 Act Indexation rather than something written into the four corners of the Executive Pension Plan. If that had been intended, a mechanism for application of the unfettered RPI would also have been set out.

Accordingly, in my judgment, Rule 19.2 and Rule 17.2 should be construed in the manner to which I referred at paragraph 55 above.