In a decision which will be of interest to all schemes, the High Court has held that the rules governing an employer's two defined benefit pension schemes did not prevent the schemes switching from using the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) in revaluing deferred pensions and indexing pensions in payment.
Broadly, the rules set the indexation and revaluation requirements by reference to the RPI. RPI was defined as “the Government's Index of Retail Prices or any similar index satisfactory for the purposes of [the Inland Revenue in one scheme and HMRC in the other]”. In neither scheme did the rules express which party had the power to select a "similar" index if the power were used.
The Court held that the scheme rules therefore conferred a power to select an index other than RPI as the “Retail Prices Index”. This power was not confined to circumstances where the RPI was discontinued or replaced. In the absence of an express provision, the power was vested in the employer and the trustee of each scheme jointly.
In our update for March 2012, we reported on the Qinetiq case in which the High Court showed what was seen as a commercial and purposive approach in the interpretation of scheme rules, when it held that a switch to CPI would not be a “detrimental modification” under section 67 of the Pensions Act 1995. Members had a subsisting right to increases and revaluation at rates consistent with the definitions of “Retail Prices Index”, but not to increases and revaluation specifically by reference to RPI. In Arcadia, the judge confirmed that Qinetiq had been correctly decided, and there was nothing in the Arcadia schemes’ rules preventing a switch to CPI.
Arcadia provides further judicial authority that schemes may switch to the CPI measure for future indexation and revaluation of benefits derived from past service. However, employers should consider carefully any proposed switch from RPI to CPI where the principal reason is that continued RPI increases are unaffordable, as this could affect the valuation of the employer covenant. In its new DB funding Code of Practice, TPR urges schemes to take an integrated approach to risk management, and a potential decrease in the employer covenant could result in a request for increased contributions. In addition, care would be needed in communicating such a change to members, as it may not be easy to explain how increases which had formerly been calculated referencing RPI can actually be interpreted as “RPI or any other suitable index” under the scheme rules.