What was the background?

Northumbrian Water Limited, the sponsoring employer of the Northumbrian Water Pension Scheme, commenced a Part 8 claim seeking the High Court’s directions as to the proper construction of Rules 4.9 and 4.10 of the Scheme’s WPS Section contained in the trust deed and rules dated 22 June 2017. The proceedings concerned pension increases for members in respect of pre-1 January 2008 pensionable service. The dispute arose because the Retail Prices Index exceeded 5% in the calendar years 2021 to 2023 while the Scheme remained in substantial deficit, prompting disagreement between the employer and the trustee over whether increases above the guaranteed 5% cap could lawfully be paid.

The claim came before Mr Justice Richard Smith in the High Court as a Part 8 construction application. The trustee adopted a neutral position, while a representative beneficiary, Mr John McGovern, was appointed under CPR 19.9 to represent members whose interests favoured the widest entitlement to uncapped RPI increases. The court also made a representation order appointing Northumbrian Water Limited to represent those whose interests favoured the narrowest scope for such increases. No material factual disputes arose and expert actuarial evidence was adduced to explain the Scheme’s funding arrangements and the practical operation of the relevant rules.

The court was required to determine a series of questions concerning the interpretation and operation of Rules 4.9 and 4.10. In particular, it had to decide how the condition in Rule 4.9 requiring the trustee to consider whether full RPI increases could be paid without increasing the employer’s ‘ordinary annual contributions’ should be applied, what considerations the trustee and scheme actuary were entitled or required to take into account, whether the assessment should be made by reference to the Scheme as a whole or the WPS Section alone, and how the different limbs of the pension increase provisions operated together.

What did the court decide?

The court held that Rules 4.9 and 4.10 should be construed principally by applying the approach to pension scheme interpretation explained in Barnardo’s v Buckinghamshire [2018] UKSC 55, while recognising the observations in BBC v BBC Trustees Ltd [2024] EWCA Civ 767 concerning the limited significance of historical scheme documentation. The court emphasised that pension scheme documentation should be interpreted primarily through textual analysis, construed purposively and in a manner that gives the scheme reasonable and practical effect.

Applying those principles, the court rejected both parties’ proposed methodologies that required reconstruction or updating of previous actuarial valuations. Instead, Rule 4.9 required a forward-looking assessment of whether payment of the full RPI increase would require the employer’s ordinary annual contributions to increase in the future. The relevant comparison was with the contributions determined following the most recent actuarial valuation, and it was immaterial whether any increase in contributions would arise immediately or only after the next scheduled triennial valuation. The trustee was entitled to consider reasonably foreseeable future developments and the likely assumptions to be adopted at the forthcoming valuation when making that assessment.

The court further held that the condition in Rule 4.9 requiring the trustee to consider whether the increase ‘can be done’ without increased employer contributions required more than identifying a mere realistic possibility that no increase would be needed. Read together with the remaining limbs of Rule 4.9, the provision required a degree of confidence, higher than a mere realistic possibility, that increased employer contributions would not be required, with the Court endorsing the concept of “no material uncertainty” as an appropriate guide to the trustee’s assessment. The trustee and actuary were entitled to consider all reasonably foreseeable information available at the assessment date, including the impact of any increase upon the security of members’ accrued benefits.

The court also rejected the suggestion that, following the removal of the Scheme’s segregated sub-funds, the WPS Section should be treated as having exclusive access to surplus Scheme resources. In considering whether full RPI increases could be afforded, the trustee had to take account of competing claims arising under the pension increase provisions applicable to the other sections of the Scheme, while recognising any conditions attaching to those claims, such as employer consent. The court also recorded the parties’ agreed positions on a number of subsidiary issues, including the meaning of ‘ordinary annual contributions’, the matters properly considered by the trustee and actuary, the timing of the Rule 4.9 assessment, and the operation of catch-up increases under Rule 4.10.

What are the practical implications of this case?

This will be a welcome case for employers whose schemes have similarly drafted pension increase provisions and/or provisions where benefits depend on a funding-related affordability test. It also provides useful guidance for trustees as to the factors they may properly take into account when applying such provisions.

In this case, the scheme had a deficit of around £181.5 million and the financial implication for the scheme of the issue was around £26 million.

The pension increase rules gave rise to competing interpretations, and the Court followed previous authority on interpreting scheme documentation and undertook a textual analysis of the rules, whilst recognising the importance of ongoing scheme funding realities, including the statutory funding regime introduced since the rules were drafted. The relevant wording originated in predecessor schemes before the current statutory funding regime existed. The Court nevertheless construed the rules in light of modern valuation, recovery plan and contribution schedule requirements. This suggests that historic scheme drafting may be interpreted in a way that allows it to operate sensibly within the current funding framework rather than being confined to the context that existed when originally drafted.

Had the representative beneficiary succeeded in his arguments on construction, schemes in deficit might have been required to grant full inflationary increases even where it was foreseeable that the cost would ultimately necessitate increased employer contributions at a subsequent valuation.

Whilst the interpretation of similar provisions in other schemes will turn on their specific drafting, some key takeaways from this case are that:

• trustees must take a genuinely forward-looking funding view;
• they are not confined to asking whether an emergency contribution increase is needed immediately;
• future increases in contributions at subsequent valuations are relevant;
• affordability and benefit security are important considerations; and
• where competing interpretations are available, the Court is likely to prefer a construction that reflects the practical realities of scheme funding and avoids arbitrary outcomes.

The judgment provides a useful illustration of the role of actuarial expert evidence in cases involving construction that are legal questions without any dispute of fact. The experts helped the Court to understand the framework within which the provision could be operated and how actuaries might approach an assessment required under the rules.

The decision also forms part of a broader body of recent pensions disputes arising from the rise in inflation between 2021 and 2023. Provisions that had received little attention during periods of relatively low inflation have become economically significant, resulting in increased scrutiny of historic pension increase rules and trustee decision-making concerning discretionary or conditional increases.

Case details

• Court: Chancery Division
• Judge: Mr Justice Richard Smith
• Date of judgment: 03/8/2026

Ben and Richard’s article was originally published in LexisNexis, here.