On 31 July 2014, a High Court judgment was handed down* which considered the indexation provisions and the definition of ‘retail prices index’ (RPI) in pension scheme documentation, and whether the definition gives the employer and trustees the power to select an index other than RPI, namely the consumer price index (CPI), as the inflation measure for increasing deferred pensions and pensions in payment. The judgment is useful for schemes that are considering the extent to which they can make the change from RPI to CPI.
The proceedings concerned two pension schemes within the fashion group Arcadia; the Arcadia Group Pension Scheme and the Arcadia Group Senior Executives Pension Scheme. The claimant, Arcadia Group Limited (Arcadia), was the principal employer and the trustees of the schemes were the defendants. The issues raised by the proceedings related to the extent to which CPI could be adopted instead of RPI for the purposes of calculating increases in pensions in payment and the revaluation of deferred pensions.
The indexation provision in both schemes referred to a defined term “Retail Prices Index”. The definition of “Retail Prices Index” in the rules of both schemes as: “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue”.
Mr Justice Newey found that the definition of “Retail Prices Index” in both schemes’ rules provided leeway to choose an alternative index, and that CPI was in fact a suitable alternative. CPI was a “similar index satisfactory for the purposes of the Inland Revenue” within the meaning of the definition of ‘Retail Prices Index’ in the rules of the schemes. Read in conjunction with the relevant background, the definition would reasonably be understood to mean that there was a power of selection which did not have as a prerequisite the discontinuance or replacement of RPI. In this instance, the power of selection was exercisable by Arcadia and the trustee of the relevant scheme jointly, mirroring the schemes’ amendment powers.
In addition, Mr Justice Newey commented that Section 67 of the Pensions Act 1995 “does not preclude the selection of CPI for use in connection with benefits derived from past service”. Thus the adoption of CPI is not deemed to adversely affect members’ subsisting rights.
What does this mean going forward?
The decision is helpful for those employers, trustees and advisers, who are still coming to terms with uncertainties about how their pension schemes should deal with RPI/CPI issues, especially as the outcome can be significant, with a switch to CPI potentially reducing pension scheme liabilities by enabling employers to apply lower inflation increases (the RPI measure of inflation is generally higher due to differences in the methodologies used to create the indices). However, it is important to note the judge did state that his conclusions need to be considered against the relevant background, and so the position as regards RPI/CPI changes turn on the facts of each case.
*Arcadia Group Limited v Arcadia Group Pension Trust Limited