knowledge 16 July 2024 |

Commercial Court Rules on Increase Provision in Pension Scheme

In a decision that will be of interest to both employers and pension scheme trustees, the High Court considered the principles of interpretation applicable to pension schemes, and ultimately found that the VIPP provided for guaranteed pension increases for certain members.

Background

The VIPP is a defined benefit occupational pension scheme for employees of Vodafone Ireland Limited (the “Company”). The Scheme has different rules for different cohorts of employee members. The relevant cohort of employees affected by the rule at issue in this case are referred to as “Scheme C” members. Scheme C employees were originally civil servants employed by the Department of Posts & Telegraphs (“P&T”). When Telecom Éireann was formed as a State company in 1983, P&T employees were transferred to Telecom Éireann and became members of the Telecom Eireann Main Superannuation Scheme. When Telecom Éireann was privatised and became Eircom plc (“Eircom”) in 1999, Eircom became the principal employer of the pension scheme. Certain Eircom employees were then seconded to Eircell (the State’s first mobile telephone phone network operator). Vodafone bought Eircell in 2001, and the Eircom employees who had been seconded to Eircell at that time transferred their employment to Vodafone and became members of the VIPP.

The Dispute

The dispute concerned the meaning of Rule 10 of Schedule C (“Rule 10” or the “Rule”) of the Trust Deed and Rules dated 15 December 2005 (the “2005 Deed”), which provides that:

The main issue in dispute was whether Rule 10 provided for “guaranteed” increases for members, or whether the grant of increases was within the discretion of the Company (the “Interpretation Issue”). A related issue before the Court was the determination of the appropriate comparator for the purposes of calculating any increases to be granted to Scheme C members (the “Comparator Issue”).

Principles of interpretation applicable to pension schemes

In reviewing the authorities relating to the proper interpretation of the rules of a pension scheme, the Court cited the previous High Court endorsement of the principle that “[t]here are no special rules of construction which apply to Pension Scheme Documents”². Rather, Roberts J held that the ordinary principles of contractual interpretation, in particular the “text in context” approach set out in cases such as Law Society v MIBI³, also applied in the context of the interpretation of pension schemes. 

The Interpretation Issue

On the Interpretation Issue, the Company argued that any pension increases that were to be granted to Scheme C members were within the discretion of the Company, and required its consent. In particular, the Company argued that the reference in the Rule to the Eircom Scheme reflected an intention that increases would be discretionary as the equivalent rule in the Eircom scheme had referred to the company discretion (with increase under that subject also being subject to the discretion of the Minister). Prior to its amendment in 2005, the wording of Rule 10 of the VIPP had also provided in its terms that the Company “may” grant increases to Scheme C members.

The position of the Trustees was that, properly understood, the wording of the Rule provided for guaranteed increases for Scheme C members aligned throughout their retirement with salaries for the grade and point at which that member retired (i.e. on a “pay parity” basis). First, the Trustees argued that the plain meaning of the words used – which state that pensions “will increase” – did not provide for any Company discretion. The Trustees also relied on the provisions of the Postal and Telecommunications Services Act 1983 (the “1983 Act”), enacted at the time of the establishment of the Telecom Eireann (and amended at the time of the establishment of Eircom), which provided that the pension conditions of affected employees would be “no less favourable” than had they remained members of the civil service. The Trustees also pointed to the rules governing increases for separate cohorts of the VIPP – namely, Scheme A and Scheme B members – which expressly provide for Company discretion where that is intended to be the case. An individual member of the scheme was also joined as a defendant to act in a representative capacity on behalf of all members (the “Representative Beneficiary”). The Representative Beneficiary’s position in the proceedings was largely consistent with the position of the Trustees.

In ruling that Rule 10 meant that Scheme C members were entitled to guaranteed increases, the Court held that Rule 10 should be given its ordinary meaning and that the use of the phrase “will increase” should be interpreted as giving rise to a guaranteed pension increase. The Court also accepted that the wording of the rule had to be viewed against the backdrop of the employment history of Scheme C members, and that the “no less favourable” language should be seen as necessary to reflect the statutory right deriving from Scheme C members’ original entitlements in the Eircom Scheme as provided for under the 1983 Act. The Court also found that the Company’s interpretation “would appear to fly in the face of the legislative protections which were introduced for the very purpose of recognising the need to protect the Scheme C members’ valuable pension status as former civil servants”.

The Comparator Issue

The Company argued that the appropriate comparator for any increases to be granted to Scheme C members is the annual increase in the Consumer Price Inflation Index (“CPI”) up to a maximum of 4% per annum (the “Capped CPI” basis). The Company argued that this was consistent with its industrial relations commitments on Scheme C increases, would be fair to Scheme C pensioners, employees, deferred members and the wider Vodafone workforce, and would bring pension increases for Scheme C members in line with the basis of increase for other cohorts under the Scheme. The Company also argued that actuarial analysis demonstrates that the Capped CPI basis was more favourable than the current position regarding increases in Eir/Eircom.

The Trustees and Representative Beneficiary argued that the Company’s proposal of Capped CPI would, if accepted, break the mandated pay parity link for Scheme C members. The Trustees proposed three alternative bases which they submitted would satisfy the requirements of the Rule. The Representative Beneficiary supported one of the three bases proposed; namely, granting increases by reference to the average salary increases across the general working population within the Company (the “General working population in Vodafone” basis).

The Court ultimately held that the General working population in Vodafone basis proposed by the Trustees and the Representative Beneficiary was appropriate. The Court found that, contrary to the position advocated for by the Company, the wording of Rule 10 does not provide for any cap. Rather, it envisages increases which are aligned with the percentage increase in the relevant grade for the particular member; in other words, there must be some pay parity connection with serving staff in Vodafone. The General working population in Vodafone basis was found to satisfy this requirement.

Conclusion

This decision emphasises the importance of clear and unambiguous drafting in pension scheme documentation. Employers and pension scheme trustees should ensure that any amendments to scheme documentation are reviewed by appropriate advisors. Equally, and particularly in light of the obligations placed upon trustees by the European Union (Occupational Pension Schemes) Regulations 2021 (“IORP II”), parties should ensure that proper records are kept, including contemporaneous notes, when drafting and amending pension scheme documentation.