In 2010 the Chancellor moved to replace the Retail Price Index (RPI) with the Consumer Price Index (CPI) for increases to public service pensions. Since then many private sector employers have sought to switch to CPI to reduce pension costs and risks. A forecast in 2011 estimated that savings by using CPI could exceed £3billion over 15 years. Whether the switch can be made in a particular scheme depends on the Trust Deed and Rules and recent case law has helped to shed some light on the issue.
Revaluation and indexation
Legislation entitles members of pension schemes to minimum increases at two stages. These increases are essentially fixed and cannot be changed by employers.
First, when an active member of a pension scheme becomes a "deferred pensioner" (e.g. by leaving their job), statute gives them a right to increases every year – to counter inflation – until they draw their "revalued" pension.
Second, statute requires those revalued pensions – once in payment – to be increased (or "indexed") by a minimum percentage.
Scheme rules often promise extra increases beyond those needed by statute. Some of these rules can be changed, if pre-change interests are protected. As CPI has been lower than RPI in several years, changes have meant savings. And, where rules could not be changed, savings have been made by exchanges of above-statute increases for higher up-front pensions. Two recent cases have tested the pre-change interests that need respecting.
Switch to CPI – case examples
Several court and Pensions Ombudsman decisions have upheld employers' rights to switch from RPI to CPI. However, in Buckinghamshire v. Barnardo the Court of Appeal prevented a switch to CPI – by a majority decision of two judges to one. However, all three agreed on a point Dentons raised: members had no pre-change right to be protected until the trustees had chosen an index.
However, even where a change to CPI can be made an employer's attempts to save costs may not be straightforward. Last month the High Court (of England and Wales) in British Airways PLC v. APS Trustee Ltd, reported on 15 November 2017, recognised that trustees may have other options. The scheme had been validly changed to CPI against the wishes of the trustees. Those trustees had then amended the rules to permit them to pay discretionary increases – and their change was upheld by the court.
Future of RPI/CPI
The main issue for employers will be whether they, with or without the trustees, have the power to substitute the index used under the trust deed and rules and what else the trustees might be able to do if a change is pushed through. Additionally, there are occasional suggestions the government may scrap RPI altogether, which would be an issue for both trustees and employers who have schemes retaining RPI for revaluation.
The first step for employers who have not yet made the switch will be to consider whether a move to CPI will provide a cost benefit to the scheme. Thereafter, an analysis must take place (giving consideration to recent case law) to determine whether the scheme rules, in particular employer and trustee discretions, allow such a switch.