- The Thales case is an acute example of the power of scheme rules to dictate whether an inflation index that is hard wired into a scheme can be replaced by another.
- The Green Paper on DB discusses providing a statutory override to facilitate switching but the government is noncommittal.
Under the scheme rules, the inflation measure was Retail Prices Index (RPI) but a change of index was possible if "its compilation is materially changed". If this happened, the Principal Employer, acting with the agreement of the Trustees, was required "to determine the nearest alternative index".
The judge found that a change in the compilation of RPI is material "if it results in the RPI functioning and operating in a way which either does not fulfil its original purpose (to provide a measure of inflation for the typical household) or does so in a way which is materially different from the way in which it did so before the change". He agreed with the parties that the change had to be to the methodology underlying RPI.
On the expert evidence the judge found that the incorporation into RPI of the UK HPI, a new housing price index, resulted in a "material change" in its compilation. Compared to its predecessor (HPI), the new index was based on substantially more data sources and included the house purchase expenditure of the top 4% of households by income (excluded from the HPI). The change had happened in 2008.
The judge held that the Principal Employer must select as "the nearest alternative" the index which most closely reflected the key elements of RPI before the change (e.g. its aim to track the inflation experience of typical households and its use of the Carli formula). He held the Principal Employer had no option but to select RPI with UK HPI incorporated. He specifically rejected CPI, RPIJ, CPIH and any other index.
The judge made clear his decision was based on his construction of the schemes rules, not on the propriety of selecting a particular index. In other words, it was the superlative phrase "the nearest alternative" in the scheme rules that drove his decision.
The inflation measure under the TOPS scheme rules was RPI. But if RPI was "revised to a new base or if that Index is otherwise altered,... [inflation would be measured]… on a basis determined by the Trustees having regard to the alteration made to the Retail Prices Index."
The judge's decision was on the same lines as in the CARE scheme. He held that RPI had been "otherwise altered" by the incorporation of UK HPI. Again as a matter of construction, the requirement to "[have] regard to the alteration made to the Retail Prices Index" gave the trustees no option but to select the basis closest to what RPI had been before it changed. As for the CARE scheme, that was RPI incorporating UK HPI.
The judge heard extensive expert evidence from both sides about how official inflation indices are first compiled and then kept fit for purpose over time by frequent adjustments. The judgment sets out a history of RPI and a comparison with CPI that will be helpful to other scheme sponsors and trustees facing questions like those in this case.