A recent case has lent further support to schemes which have switched from RPI to CPI for pension increases and the revaluation of deferred pensions. Nevertheless, as always it is important to check exactly what your scheme's rules say, as different wording can produce different results and not all schemes are able to use CPI. If you would like any advice on whether your scheme can use CPI – and if it can, whether it should use CPI – please contact any member of the Taylor Wessing Pensions Team.
The case concerned whether two schemes operated by the Arcadia group could use CPI rather than RPI for pension increases and revaluation purposes. In short, the judgment agrees with, and builds on what was said in relation to changing from RPI to CPI in the 2012 case of Danks v QinetiQ 2
The key question in Arcadia was whether CPI could be used instead of RPI in the context of a definition under the schemes at issue of "Retail Prices Index" that was in the following terms:
"The Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue".
The judge held that CPI could be used instead of RPI on the basis that:
- properly construed, the above definition did provide a power for an index different from RPI to be used;
- as the definition does not say in whom the power is vested, one needs to consider the position by reference to the scheme as a whole. There are no other powers under the rules where the employer can alter any benefits of members on its own – for example, the augmentation power is vested in the trustee with the employer's consent, and the amendment power is vested in the employer with the trustee's consent. Therefore, the judge held that the power to choose a different index is one vested jointly in the employer and the trustees;
- it was conceded by counsel for the trustees – to use the words of the judge, "I am sure correctly" – that CPI is a similar index to RPI for this purpose;
- HMRC had been asked, and confirmed that, it "would consider CPI a satisfactory index for increases in pension payments". It was also asked to confirm the same in relation to revaluation of deferred benefits, although it had provided no answer on that point. Nevertheless, the judge helpfully confirmed that CPI must be considered to be satisfactory for the purposes of the Inland Revenue in relation to the revaluation of deferred pensions, as there were no grounds on which HMRC could properly or reasonably consider it to be other than satisfactory for its purposes; and
- despite attempts to persuade the judge to hold to the contrary by counsel for the trustees (who were appointed to argue the case for all those in whose interests it was for the definition just to mean RPI) the judge upheld the position in respect of section 67 of the Pensions Act 1995 that was established in Danks. In other words, the right to use of any particular index does not "crystallise" and become a "subsisting right" that is protected:
- in relation to pensions in payment, until any given index is used for determining the amount of increase payable in any given year, so a different index could be used for determining the amount of increase payable in future years; and
- in relation to revaluation of deferred benefits, not until revaluation is applied, which will be on any given member reaching "normal pension age". (Normal pension age is a technical term that has a particular meaning and is not necessarily the same as whatever your scheme might define as a member's normal retirement age. If you would like any advice as to what normal pension age is under your scheme, please contact any member of the Taylor Wessing Pensions Team).
Word of warning
It is worth noting that for one of the two schemes at issue, which had been established many years before the other, the definition described above resulted from an amendment made by a deed of variation dated 31 March 2006 (and there was some debate as to the date from which the relevant amendment properly took effect). Before the effective date of the relevant amendment, the relevant definition was:
"the Index of Retail Prices published by the Department of Employment (or any replacement of that Index)".
There was no analysis in the judgment in relation to that prior definition. It may well be that the employer did not assert that it would have been possible to use CPI in relation to pension to which the prior definition applies - on the basis that RPI continues to exist, so there has been no replacement of it. This illustrates the point that we made at the outset: it is important to read your rules carefully, as small differences in wording can have big consequences.