British Telecommunications plc v BT Pension Scheme Trustees Limited and another  EWHC 69 (Ch)
A judge has ruled that the BT Pension Scheme may not switch to using the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) when assessing whether or not a pension increase is payable in order to protect pensioners against the impact of inflation, because the Scheme's rules state that it can only move away from using RPI if that index "becomes inappropriate".
We have reported previously on various cases regarding the question of whether pension plans may change the type of index used to assess whether an annual increase is due to pensions in payment. These cases have come about since the Government decided in 2011 that it would move away from the use of RPI in various contexts, including in relation to public service pensions.
CPI generally gives rise to a lower figure than RPI for annual inflation, and therefore this is a method by which some costs savings may be possible. It has been argued that CPI is a more appropriate index than RPI because: (i) the methodology underlying RPI has been criticised in recent years; and (ii) specifically when considering pensioners' living costs, CPI does not take into account certain household costs, such as the costs of mortgage borrowing, that tend to be less relevant to pensioners than to the population as a whole.
The case law in relation to private occupational pension plans is fairly fact-specific in that much will depend on the exact wording of a given pension plan's rules on increases to pensions in payment, revaluation of early leavers' benefits and making amendments. Some plans will track the statutory index used by the Government from time to time, without specifying any particular index, and in those cases no additional steps will be necessary in order to substitute the use of CPI for RPI (indeed, companies and trustees are unlikely to have any flexibility not to make this change). However, other plans will refer specifically to the use of RPI (sometimes referred to as RPI being "hardwired" into the plan's rules), and in these circumstances it is sometimes necessary for an application to be made to the court to interpret that wording in order to determine whether or not a switch from RPI to CPI is permitted.
The BT Pension Scheme's rules
The key rule in the BT Pension Scheme's 2016 Rules states that each year:
"…each pension in payment… will be increased by the increase in the costs of living during the 12 months up to and including the previous January… subject to a maximum increase in each year of 5%... The cost of living will be measured by the Government's published General (All Items) Index of Retail Prices, or if this ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustee, decides".
There were, therefore, two principal questions that the High Court was asked to consider. The first, described in this case as the gateway test, is does the issue of whether RPI has become inappropriate have to be assessed subjectively by BT (or BT and the Trustee) or must it be assessed objectively. The second is whether, in light of the answer to question (1), the "becomes inappropriate" test has been met in all of the circumstances.
The judge's decision
The judge in this case held that the natural meaning of the words used points towards an objective test for whether RPI has "become inappropriate". He noted that there are other provisions in the Scheme's rules (and indeed other wording within the same provision) that refer to matters being within the discretion of the Company and/or Trustee but the operative provision here is silent on that matter, which the judge takes to mean that the relevant test was an objective question of construction.
He went on to hold that, in the circumstances, the relatively high hurdle set by the objective test of whether RPI had "become inappropriate" had not been cleared because:
- the use of the transitive verb "becomes" in the test suggests that something must have changed in terms of RPI's appropriateness since 2002 (when the relevant test was first incorporated into the scheme's rules), whereas the evidence before the court was that the key problems with RPI had been known about since before that time
- the use of "inappropriate" means something other than whether RPI is less appropriate than CPI; although RPI is no longer in use as the Government's principal index for pensions purposes and is no longer designated as a national statistic, it is still calculated and published on a monthly basis and it remains an appropriate method of achieving the purpose of the rule, which is to provide protection against increases in the real cost of living likely to be encountered by pensioners.
BT intends to appeal against the High Court's decision.
What does the decision tell us?
As mentioned above, all of these cases are very much dependent on the wording of the affected pension plan's provisions regarding the index to be used when considering the applicability of pension increases. We are currently awaiting a Government White Paper which may propose the introduction of a statutory modification power to allow schemes to switch from RPI to CPI regardless of the terms of the plan rules.
If your plan does allow for a discretionary change of index, trustees will need to carefully consider all of the circumstances when assessing whether such a change is appropriate, rather than simply acceding to the company's desire to use a cheaper methodology. In addition, it may be necessary to carry out a consultation with affected members before any change can be validly made, regardless of the method by which such a change can be effected.