In the course of deciding whether to allow the appeal in Barnardo’s & Ors v Buckinghamshire & Ors, the Court of Appeal has approved the decisions in Danks v Qinetiq Holding Ltd and Arcadia Group Ltd v Arcadia Group Pension Trust Ltd. Both of these cases decided that where an increase in pension was to be calculated by reference to an inflation index whose definition allowed for trustees to select alternative indices, there was no accrued right of payment until the index had been selected. Importantly, electing to move to a less generous index would not be a “detrimental modification” under section 67 of the Pensions Act 1995 (“section 67”).
In July 2010, the Government confirmed that the Consumer Prices Index (“CPI”) rather than the Retail Price Index (“RPI”) should be used to calculate the minimum levels by which public sector salary-related occupational pension schemes revalue deferred pensions and increase pensions in payment. Using CPI rather than RPI tends to result in lower increases so can lead to savings for the pension scheme at the expense of members.
The impact on private sector schemes varies from scheme to scheme according to each scheme’s rules. Those schemes with rules that apply Pensions Increase Review Orders have – in the absence of a decision to do something different – mirrored the public sector move to CPI. However many private sector schemes have rules that specify RPI but give powers for trustees to adopt an alternative index. Some trustees have agreed to use such powers to move from RPI to CPI. It has been argued however that as this reduces benefits it might offend section 67, which may void a “modification…which on taking effect would or might adversely affect the subsisting right of any member of the scheme.”
This was the point at issue in Qinetiq, Arcadia and a point of cross-appeal in Barnardo’s: whether as drafted, the scheme documents allowed the respective trustees to make the change from RPI to CPI without engaging section 67. The point turned on the definition of the reference index. In Qinetiq, “index” was defined as:
“…the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees.”
The court in Qinetiq decided that members (deferred and those with pensions in payment), did not have an accrued right to have their benefits calculated using RPI: “the value of neither member’s pension is crystallised until the revaluation is undertaken. Therefore, the decision to move to CPI was not a detrimental modification envisaged by section 67."
In Arcadia, the relevant definition was that of “Retail Price Index”, which was defined as:
“...the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue.”
The court followed the decision in Qinetiq: section 67 did not prevent the selection of CPI because “members have a ‘subsisting right’ to increases and revaluation at rates consistent with the definitions of ‘Retail Price Index’, but not to increases and revaluation specifically by reference to RPI”.
In Barnardo’s, the point of appeal was whether the trustees had the power under the scheme rules to substitute CPI for RPI. In this case, “Retail Price Index” was defined as “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval.” The issue was whether the definition – and particularly the reference to “replacement” – meant that the Government replaced RPI with another index, which the trustees then adopted; or whether it meant that the trustees were generally free to choose another index.
In a cross-appeal, the members raised the point on section 67, on the basis that the interpretation of the definition of “Retail Price Index” under the rules gave the trustees the power to merely choose another index.
The Court of Appeal by a 2:1 majority, with the Chancellor dissenting, took a restrictive view of the definition of RPI in the Barnardo’s scheme documents, holding that the trustees could not change the index “unless and until the RPI is replaced”. However, in deciding the cross-appeal, the Court unanimously approved the decisions in Qinetiq and Arcadia:
“As Newey J put it [in Arcadia] a member has the right to an increase consistent with the definition; or as Vos J put it [in Qinetiq] the member has a right to a future increase at RPI or any suitable costs of living index selected by the Trustees. I agree with both of them…the trustees have a choice; and until that choice has been exercised, it is not possible to say that the member has a right to an increase measured in any particular way.”
The decision provides Court of Appeal authority that section 67 is not offended by trustees adopting CPI instead of RPI. That may come as a relief for those trustees and employers who have already opted to exercise powers to move from RPI to CPI. However the question of whether a particular scheme’s rules allow the trustees to do this remains scheme specific and small differences in wording can make all the difference. There may be further cases to come for schemes with different wording, and there may also be scope for this case to be appealed to the Supreme Court. The whole issue remains far from certain.