In the recent High Court case of Arcadia Group Ltd v Arcadia Group Pension Trust Ltd and another it was held that the governing rules of an employer's defined benefit pension schemes did not prevent the schemes switching from using the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) as the inflation measure for increasing deferred pensions and pensions in payment.
Switching to CPI reduces scheme liabilities because the RPI measure of inflation is generally higher due to differences in the baskets of goods and methodologies used to compile the indices.
The rules of the two Arcadia schemes required the increase and revaluation of pensions by reference to the RPI, defined as "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue". The court ruled that this gave the schemes the power to switch indices, regardless of whether the Office for National Statistics (ONS) continues to produce the RPI.
This case provides useful confirmation that even if scheme rules appear to expressly refer to the "Retail Prices Index", this is no guarantee that members have an accrued right to revaluation or indexation by reference to the RPI.
Instead, the court found that the CPI was similar and satisfactory for the purposes of HMRC. This was based on a test of whether there were any grounds on which HMRC could properly or reasonably consider it unsatisfactory for their purposes. With pension schemes no longer requiring HMRC's approval, and CPI being used for statutory minimum indexation and revaluation there did not appear to be any reasonable basis on which HMRC could object to the switch.
The court also upheld an earlier ruling in Danks v QinetiQ, and stated that switching indices did not contravene Section 67 of the Pensions Act 1995, which prevents schemes from making changes that adversely affect members' subsisting rights.
However, also of note in this case is that the court rejected Arcadia's argument that the sponsoring employer could exercise this right alone. The court held that, where no one party was identified as being able to exercise the power, the decision must be made jointly with the trustees of the scheme.
It is possible that a practical uncertainty may arise from the court's ruling that the power to select between indices should be exercised "jointly" by the employer and trustees. Pension scheme rules are generally drafted in such a way as to avoid joint exercise of particular powers for the simple reason that this can lead to deadlock. Instead, where it is considered that both trustees and employers need to be involved in a particular matter, powers are often expressed to be exercisable by one party, subject to the "consent" of the other. This is on the basis that such consent cannot be unreasonably withheld as opposed to a power vested jointly where there may be wider grounds on which one party may refuse to exercise the power.
The effect of this judgement is that where no one party is identified as holding the power, such power vests jointly.
Given this decision and the decision in Danks v QinetiQ, it seems unlikely there will be too many more challenges to schemes looking to move from RPI to CPI for revaluation and indexation. The confirmation that the switch does not offend section 67 should prompt employers to review their rules for the ability to switch to the CPI.