High Court applies strict interpretation of pension scheme documents to ESPS case

The High Court has dismissed an appeal originating from a determination of the Pensions Ombudsman in McKavney v Serco Group Plc. The case involved an employee with long service subject to several transfers to different employers within the electricity sector and provides guidance on how the Pensions Ombudsman and the court might in future deal with cases involving employees protected by the Electricity (Protected Persons) (England and Wales) Pensions Regulations 1990 (the EPP Regulations), introduced to protect pension benefits after the electricity industry was privatised.

The EPP Regulations require that privatised employers must either participate in the Electricity Pension Supply Scheme (ESPS) or provide their employees with an alternative scheme with rights ‘no less favourable’ than those previously enjoyed. The EPP Regulations also (at Regulations 6(4) and 6(5)) provide that transfers of accrued rights be ‘at least equivalent’ in value. 

The Issue

Mr McKavney was a protected person under the EPP Regulations. In 2005, his employment transferred automatically to Serco by way of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). Following the transfer, he also elected to transfer his benefits into the Serco Pension and Life Assurance Scheme (Serco Scheme). 

In 2012, Mr McKavney’s employment transferred under a second TUPE transfer to AMEC, but he did not elect to transfer his benefits into the AMEC Scheme and instead became a deferred pensioner under the Serco Scheme, and an active member for future service in the AMEC Scheme. 

Mr McKavney was then made redundant in 2015 and received an immediate unreduced pension for his AMEC service from 2012 but was denied early payment of his deferred protected pension under the Serco Scheme. 

The key Section F rules in the Serco Scheme allowed early (unreduced) payment of any deferred benefit in limited cases for those aged 50 or over, including on: 

• compulsory retirement from Service due to redundancy or a reorganisation (Sub-Rule 4.2.1.3); or

• termination of Pensionable Service in circumstances of redundancy or reorganisation (Sub-Rule 6.2.3.1).

These rules were based on wording in the original ESPS rules and EPP Regulations and intended to protect industry employees transferring between employers from suffering detriment to their retirement benefits.

Mr McKavney complained to the Pensions Ombudsman on the basis that the transfer or the redundancy constituted “compulsory retirement from Service” as described under the Section F rules of the Serco Scheme.

The Pensions Ombudsman Decision

The complaint was dismissed on the basis that the TUPE event had provided for continuity of employment and so could not constitute “compulsory retirement from Service”, which under the Serco Scheme rules contemplated a genuine cessation of employment (typically with dismissal), not merely the end of active membership while employment continued elsewhere. Equally, had the right to a pension been triggered at the point of TUPE, Mr McKavney would have lost his EPP Regulation 6(5) transfer right which is contrary to the purpose of the EPP Regulations protections.

The High Court Decision

The decision was brought before the High Court. The appeal turned on the correct construction of the Serco Scheme rules, particularly the Section F rules described above.

The court approached the decision by focusing on construction, applying Lord Hodge’s judgment in Buckinghamshire v Barnardo’s [2018] UKSC 55, which reasoned that rules should be interpreted in a commercial and contextual manner, taking account of industry framework and the purpose of Section F to ensure protected members were no worse off. 

The judge noted that “it is a formal legal document which has been prepared by skilled and specialist legal draftsmen”. The court noted that there was nothing about the ESPS or the other relevant pension scheme that meant this did not apply in this case.

The court rejected the argument that the TUPE transfer could amount to “compulsory retirement”, instead holding that:

• a TUPE transfer does not terminate the employment contract, but preserves it;

• the language of “compulsory retirement” and “reorganisation” in the Serco Scheme was directed at situations involving involuntary termination of employment, not routine transfers of employment under TUPE where only the employer changes and employment continues; and

• interpreting the rules as conferring an immediate pension on TUPE transfer would not only be inconsistent with TUPE itself, but with the statutory two-year transfer window, and would be inconsistent with the Serco Scheme rules.

The High Court therefore upheld the Ombudsman’s determination.

What this means for ESPS arrangements and alternative relevant schemes 

Schemes that are subject to the specific regulatory framework of the EPP Regulations should be mindful that the Ombudsman and ultimately the courts are likely to resist interpretations that cut across the purpose or structure of that framework. The judgment reinforces that schemes that are subject to the EPP Regulations should ensure that the drafting of their documentation remains in line with the objectives of the scheme and the regulatory framework.

If you have questions arising from the judgment, or queries relating to the ESPS or EPP Regulations, please contact Andy Prater or your usual Burges Salmon contact.

Written by Matthew Pegler and Jaimie Buchanan