The Court of Appeal has handed down its judgment in the most recent indexation case of Barnardo’s v Buckinghamshire (Barnardo’s). In summary, the court held that the trustees only had a power to select an alternative index when the Retail Prices Index (RPI) is replaced as an official index.
The Court of Appeal has handed down its judgment in the most recent indexation case of Barnardo’s v Buckinghamshire (Barnardo’s). In summary, the court held that the trustees only had a power to select an alternative index when the Retail Prices Index (RPI) is replaced as an official index. Earlier this month, the ONS published a decision to continue to publish RPI, whilst the sister index RPIJ will cease to be published. Whilst the case largely turns on its facts, schemes with more flexible indexation powers can (temporarily at least) breathe a sigh of relief that adopting a lower index of inflation is not prohibited under pensions legislation.
The choice of selecting an inflation index to revalue deferred pensions before they come into payment and increase pensions in payment is an increasingly significant issue for those defined benefit pension schemes that are currently linked to the RPI. Historically, the RPI has always been higher than the Consumer Prices Index (CPI) (albeit there was a short period in 2009 where it was lower). In recent years, the gap between the RPI and the CPI has been growing and is currently 1%. Linking pension increases to a lower rate of inflation can significantly reduce the costs pension schemes, and as such there have been a series of cases asking the courts to interpret the scheme’s powers to select an alternative index.
Decision in Barnardo’s
In Barnardo’s, the Court of Appeal considered:
- whether or not the trustees had a power under the rules of that particular scheme to select an alternative index to the RPI for the purposes of calculating pension increases; and
- if there was such a power under the rules of the scheme, whether or not the exercise of that power to select a different index would be an amendment to benefits that would be prohibited by section 67 of the Pensions Act 1995 (Section 67).
The Court of Appeal dismissed the employer’s appeal on the first issue and upheld the decision of the High Court, in deciding that the terms of the Barnardo’s pension scheme did not give the trustees a generalised discretion to switch the applicable index used to increase pensions in payment.
In relation to the second issue, the Court of Appeal was unanimous in dismissing the cross-appeal made by members, and followed (obiter) the previous High Court decisions on indexation in Danks and others v Qinetiq Holdings Ltd and another (Qinetiq) and in Arcadia Group Ltd v Arcadia Group Pension Trust Ltd and another (Arcadia). The court decided that if there had been a discretionary power to switch index, an exercise of that power to switch the index applicable to future increases would not have been inhibited by section 67 of the Pensions Act 1995.
The interpretation of the power to select an alternative index
The Barnardo’s case considered the trustees’ ability to select an alternative index for the purposes of revaluing benefits and calculating increases to pensions in payment. The rules of the Barnardo’s pension scheme defined “Retail Prices Index” as the “General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval.” The case focussed on the meaning of ‘replacement’ namely whether the RPI had to be officially replaced by another index, or whether the act of the trustees selecting another index amounted to a ‘replacement that had been adopted by the trustees’.
Historically, the RPI was the only method of measuring the cost of inflation. However, in 2013, the National Statistician announced that while the RPI would continue to be published by the Office for National Statistics, it no longer met the required standards to be recognised as a national statistic. In January 2015, the UK Statistics Authority published an independent review of UK consumer price statistics which supported ending the use of the RPI as soon as practicable and recommended adopting CPIH (a measure of consumer price inflation including owner occupiers housing costs), as the main measure of inflation. The RPI is used to calculate index-linked gilts and bonds and therefore continues to be published today.
As the RPI is still published and there is no official index that is a ‘replacement’ for the RPI, the court held that the definition of “Retail Prices Index” under the rules of the Barnardo’s pension scheme was not wide enough to give the trustees a power to change the index. All three judges applied the same principles of interpretation but one of the judges (Vos C) dissented on this point and would have held that the rule did allow the trustees to choose a new index.
Does exercising a power to select an index affect accrued rights?
Whilst the case largely turns on the specific wording of the power to select another index, it also upholds the previous High Court decisions in Qinetiq and Arcadia to confirm that there are circumstances when the trustees can select an alternative index for revaluation and indexation.
Under Section 67, any exercise of a power to make a specific type of amendment (known as a “regulated modification”) to an occupational pension scheme which would or might adversely affect a member’s “subsisting rights” (subsisting rights are essentially a members accrued rights at the date of the change) is voidable unless certain conditions are met.
In Qinetiq, and Arcadia, the question was whether members have: (a) an accrued right to deferred benefits or pensions in payment being increased at a specified rate; or (b) a right to an increase but only at a level determined by the trustee (or the trustee and employer) at a particular point in time. In Arcadia, the High Court followed Qinetiq and held that pensioners and deferred members have an accrued right to have their pensions increased, but that member has no entitlement to an increase at any specific rate, until the date of calculation. This meant that the trustees were permitted to change the index from RPI to CPI without adversely affect a member’s “subsisting rights” for the purposes of Section 67. Whilst only obiter, the Court of Appeal followed both of these cases in Barnardo’s.
Issues for employers and trustees to consider
This judgment is helpful to schemes that have already exercised the power to select an alternative index, in that it confirms that the modification would not have to be unwound as a result of section 67.
Schemes that have been waiting the outcome of this decision should now review their rules. Whether there is a power to select an alternative index will depend on the particular rules of the scheme but wording such as “any other suitable cost-of-living index selected by the Trustees” (Qinetiq) and “any similar index satisfactory for the purposes of the Inland Revenue” (Arcadia) could allow schemes to select an alternative index. Schemes that have rules referring to the replacement of RPI, as in Barnardo’s “General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval” may not be able to select an alternative index until RPI is officially replaced as an index.
If trustees determine that they do have a joint or sole power to select a different index to the RPI, this will be relevant to employers and trustees negotiating scheme funding arrangements, as trustees will need to consider whether to exercise that power, and the extent to which they have a duty to take into account the economic interests of the employer.