Summary

The recent High Court decision in Buckinghamshire v Barnardo’s suggests that there may be limits to the courts’ flexible approach (seen in the earlier cases of QinetiQ and Arcadia) of allowing trustees to adopt an index other than RPI for the purposes of their scheme’s indexation and revaluation provisions. This unreported decision turns on its facts, but highlights the need to consider the specific wording of scheme rules, taking into account the wider factual background and the scheme’s balance of powers. It appears that there is not necessarily a consistent viewpoint among the judiciary on these issues.

Background

The UK Statistics Authority (“UKSA”) is required by law to publish RPI – the UK’s longest-running measure of consumer price inflation. UKSA has held for several years that RPI is flawed as a measure of inflation: its methodology is not consistent with best international practice and contains an upward bias.  The continuation and the make up of RPI have been the subject of a number of consultations in recent years, most recently a UKSA exercise launched in June 2015.   However, the index-linked gilts market and a large number of commercial contracts remain linked to RPI, so discontinuing the index would be virtually impossible in practice.

From 1 January 2011, CPI replaced RPI as the measure of inflation used by the Government to calculate the statutory minimum requirements for revaluing deferred pensions and increasing pensions in payment. The impact of this change on a pension scheme – and whether its trustees must or can adopt CPI in place of RPI for these purposes – depends on the precise drafting of its rules. Where the effect is unclear, parties can seek court guidance. In Qinetiq and Arcadia the High Court took a  flexible approach:

  • In the 2012 Qinetiq case, the High Court found that the words  “the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees” allowed the adoption of CPI as a measure of inflation (for both revaluation and indexation), and that this would not breach s67 Pensions Act 1995 (the provision which protects members’ accrued rights from adverse changes).
  • In the 2014 Arcadia case, the High Court considered scheme rules that provided for revaluation and indexation by reference to “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of [HMRC]”. The Court found that, as a matter of construction, this wording vested a joint power in the scheme’s employer and trustees to select an alternative index, and that this was not confined to circumstances where RPI had been discontinued.

Facts and decision

The rules of the Barnardo’s scheme provide for revaluation and indexation by reference to the following definition of Retail Prices Index:

“the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval.”

The definition then goes on to provide that:

Where an amount is to be increased “in line with the Retail Prices Index” over a period, the increase as a percentage of the original amount will be equal to the percentage increase between the figures in the Retail Prices Index published immediately prior to the dates when the period began and ended, with an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period”

The Court was  asked to rule on the meaning of the word “replacement” in this definition – did it mean:

  1. Any other index adopted by the Trustees (i.e. could the Trustees simply select CPI as a “replacement” for RPI, adopting the index that is best suited to the purposes of the Scheme)? This was the approach favoured by the Scheme’s sponsoring employer; or
  2. Only a replacement for RPI introduced on an official level for purposes broader than the Scheme? This was the approach favoured by the Scheme’s members.

The Court (Mr Justice Warren) decided that the second approach was correct: even though CPI is now used as the statutory measure of pensions indexation, the scheme’s definition of “Retail Prices Index” only allowed the trustees to adopt a “replacement” index if RPI was no longer published as an official index. The Court’s decision was partly based on the following facts:

  • The Scheme’s factual background. At the time of the adoption of the first set of rules under consideration (1988), RPI was the only official inflation index being published. This suggested that the intention behind the rules was to make provision for if RPI became obsolete;
  • The Scheme’s balance of powers. All of the scheme’s other powers affecting the quantum of members’ benefits were exercisable by its sponsoring employer, or trustees but only with the consent of the sponsoring employer. As such, it would have been odd if the power to adopt a replacement index rested in the scheme’s trustees alone; and
  • The second part of the definition – which referred to RPI being “replaced or re-based” – was relevant to the construction of the first part.  As RPI can only be re-based by an official body, this suggested that the term “replacement” in the first part of the definition should be seen in the same light: i.e. as a reference to official action rather than a scheme-specific decision by the trustees.

Comment

It would be going too far to suggest that the word “replacement” should now be read restrictively in all scheme rules: this judgment is – as with Qinetiq and Arcadia before it – simply a decision as to the interpretation of the rules of the scheme concerned.  In a different scheme (with a different background and balance of powers, or lacking the second part of the definition that refers to the index being “re-based”), the appropriate interpretation of the term “replacement” could be very different. It is also possible that further criticisms of RPI as a statistically credible measure of inflation might influence future courts looking at these questions in years to come. This case (which we understand may be appealed) does, however, serve to demonstrate that rules which at first glance seem very similar can as a result of minor variances be read very differently by different judges, and that scheme rules should accordingly be reviewed with caution and – where necessary – the benefit of legal advice.