In Barnardo's v Buckinghamshire, the sponsoring employer had proposed to the trustees that they should change the way pensions were indexed or revalued for inflation, substituting the historically lower CPI (Consumer Prices Index) for RPI (Retail Prices Index). Although no longer a national statistic, RPI is still published as a separate index.

Under the rules of the scheme, RPI 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."

In the High Court last year, the employer maintained that the trustees had the power to make the substitution of CPI for RPI; the members argued that the trustees could not do so whilst RPI is still being published. The Court agreed with the members.

The Court of Appeal has now dismissed the employer's appeal, confirming the High Court's conclusion. The reason the claim was dismissed was that both courts concluded that the reference to "replacement" meant a replacement of RPI with another index by the Department of Employment (or other appropriate authority), not a decision by the trustees just to replace RPI with another index. As RPI was still being published, the authority hadn't replaced RPI, and therefore the trustees had no power to use an index other than RPI. In reaching that conclusion, the courts also relied on the fact that the second part of the rule, dealing with how to increase in line with RPI, referred to how a calculation would be made if the RPI was "replaced or re-based". The Court of Appeal extrapolated from this that both replacement and re-basing had to be by the same person and that had to be the authority, not the trustees, as the trustees didn't have the power to re-base.

There was a cross-appeal: the members arguing that even if the trustees did have power to switch the index, exercise of that power for future increases would have been inhibited by section 67 of the Pensions Act 1995 – trustees or employers cannot make changes that could detrimentally affect members' accrued pension rights, unless certain conditions are met or the members agree. This was also dismissed. Until the choice of index is made, it is not possible to say that a member has the right to an increase measured in any particular way.

Comments & Actions

  • The issue was finely balanced – and one of the three judges gave a strong dissenting judgment, arguing that the evidence indicated that the increase rule had been changed specifically to allow the trustees a choice of index and that the second part of the rule should have been ignored because it had only been included because of the (then) tax rules. It is possible that it will be appealed to the Supreme Court (although we think that unlikely as the Supreme Court does not usually hear appeals which simply focus on the meaning of the rules of a particular scheme).
  • This latest ruling doesn’t change the essential point that, if trustees or employers are contemplating replacing RPI with another index, the precise wording of the rules will be critical in determining whether or not this is likely to be possible. In two previous High Court cases (Danks v QuinetiQ Holdings Limited and Arcadia Group Limited v Arcadia Group Pension Trust Limited), the Court had allowed trustees to replace RPI with CPI – in neither of these cases was there any mention in the rules of "replacement".
  • The conclusion about section 67 was not part of the main decision, but will nevertheless be of some help to trustees who do have power to make a switch, as it makes the point that, on the wording of the rules in question, members do not have an accrued right to an increase using any particular form of index.