A recent decision of the High Court shows that the effect of the statutory switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) for the purposes of increasing pensions in payment and revaluing deferred benefits is still being felt.
In order to try and counteract the effects of inflation, many pension scheme rules contain a requirement for pensions in payment to be increased (or indexed) annually and for deferred pensions to be increased (or revalued) between the point at which the member left the scheme and the point at which the pension comes into payment. In both cases legislation provides for the increases to be at least a minimum percentage although scheme rules can be more generous.
The Government publishes annual orders which specify the minimum percentages and, historically, these have been calculated by reference to RPI. However, in 2011, the Government switched to using CPI instead on the grounds that this is a more appropriate measure of inflation.
At the same time, the Government chose not to make the legislation implementing the change override those scheme rules which may have ‘hardcoded’ the use of RPI for indexation and revaluation. Nor did it provide for an optional ‘statutory override’ power to enable schemes to switch to using CPI where they had hardcoded RPI into their rules. The result was something of a lottery, with some schemes continuing to use RPI where this is provided for in their rules (subject to the use of the scheme’s own amendment power) while others have rules which are drafted in such a way that the switch to CPI has occurred automatically (for example, because scheme rules simply refer to the scheme providing whatever increase the legislation requires as a minimum).
Involving the court
While in many cases it will be clear whether or not RPI has been hardcoded into a scheme’s indexation and revaluation rules, sometimes the rules may be more ambiguous. In those circumstances, some trustees and employers have sought the guidance of the courts.
For example, Arcadia Group v Arcadia Group Pension Trust concerned a scheme rule that defined RPI as “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue”. The court confirmed that the scheme could switch to using CPI on the basis that this is a similar index satisfactory for the purposes of HMRC.
In the earlier decision of Danks v Qinetiq Holdings the court had decided that switching from RPI to CPI would not contravene Section 67 of the Pensions Act 1995 in relation to the protection of accrued rights. The definition of RPI in that case was “the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees”.
Buckinghamshire v Barnardo’s
The 1988 rules of the Barnardo Staff Pension Scheme defined RPI as “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval”. The question for the court was whether the definition meant:
- RPI or any price index which replaces RPI and which the trustees then adopt; or
- RPI or any other index which the trustees decide to use in place of RPI.
While the employer argued for the latter interpretation, a representative appointed on behalf of the members argued for the former. The judge agreed with the members and held that, for as long as RPI continues to exist, the trustees cannot adopt CPI in its place. For the trustees to be able to adopt CPI as a “replacement” for RPI, RPI must have ceased to be published. Nor was it sufficient that RPI has been downgraded as a national statistic provided that it continues to be published. The judge rejected the employer’s argument that it was the trustees’ act of selecting an alternative index, such as CPI, which would render it a “replacement” for the purposes of the definition.
Where does this leave us?
The outcome of the Buckinghamshire v Barnardo’s case turns very much on the language of the rules in question. The key difference compared to Arcadia and Qinetiq is the use of the word “replacement” in the definition of RPI and the court’s interpretation that there can only be a replacement of RPI once it is no longer published.
The court was also influenced by the fact that the definition went on to explain how to calculate the increase in RPI over any period in which RPI has been “replaced or re-based” between the start of the period and the end. The judge’s view was that, because a re-basement of RPI can only happen by Government intervention, the same must be true of a replacement. In other words, the trustees themselves cannot create a replacement for RPI simply by selecting an alternative index. Nor was the judge persuaded by the employer’s argument that, because an earlier set of scheme rules from 1978 had effectively hardcoded the use of RPI, the draftsman of the 1988 rules must have intended to permit the trustees more flexibility when crafting the new definition.
What this shows is that the effects of the Government’s switch from RPI to CPI continue to be felt and that the impact on individual schemes is still something of a lottery. Employers and trustees should examine the rules of their scheme as the key lesson from the case law to date is that the specific rules of the individual pension scheme are crucial to the outcome.
Buckinghamshire v Barnardo’s may lead to further case law as we understand that the judgment is being appealed.