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Background

The Government announced in 2010 that the statutory minimum amounts by which pensions in payment should be increased, and deferred pensions should be revalued would be calculated by reference to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). Since then, the Courts have examined the ability of private sector pension schemes to make the switch from RPI to CPI on a number of occasions.

Many schemes have made the change where their rules permit, usually led by the sponsoring employer, because the cost of increasing pensions in payment and revaluing deferred pensions by reference to CPI is generally lower than using RPI in the calculation. Other schemes have not made the switch: RPI could be “hard-wired” into the scheme rules, the sponsoring employer might be comfortable with retaining RPI as the index of choice or the trustees and employer might not yet have addressed the issue.

Details

The latest case on the issue of RPI/CPI relates to the Barnardo Staff Pension Scheme [1] (the Barnardo’s Scheme).

Previous cases considered by the Courts include:

  • The Qinetiq case [2], in which the Court rejected arguments that the exercise of a power under the scheme’s rules to switch to CPI based indexation and revaluation would contravene the provision protecting accrued rights found in Section 67 of the Pensions Act 1995; and
  • The Arcadia case [3] where the RPI definition in the Scheme rules referred to “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of [HMRC]”. This wording was held to confer a power to select an index other than RPI, including CPI.

Although useful guidance can be drawn from these cases, much has depended upon the particular wording used in a scheme’s governing documents.

The Barnardo’s Case

The Barnardo’s case required the interpretation of five separate sets of rules and in particular the Court considered the meaning of the word “replacement” in the relevant provision of the Barnardo’s Scheme rules. Barnardo’s had proposed substituting RPI with CPI, as have many sponsoring employers since 2010.

The Barnardo’s Scheme rules required pensions in payment to be increased and deferred pensions to be revalued by the “prescribed rate”, this being the lesser of 5% and “the percentage rise in the Retail Prices Index (if any)…”. Retail Prices Index was defined as “the General Index of Retail Prices … or any replacement adopted by the Trustees without prejudicing Approval.” Barnardo’s argued that the trustees had the power to substitute CPI for RPI in making the calculation. The representative members argued that there was no such power whilst RPI was still a published index.

 The key question in the case was whether the word “replacement” should mean a situation where RPI was replaced as an index and no longer published, or whether the word referred to an alternative index chosen by the trustees. The Court took the former view, holding that the rules did not permit RPI to be substituted by CPI (or any other index) so long as RPI remained an officially published index. Although now arguably a flawed measure of inflation and non-compliant with international statistical standards, RPI is still retained and published as an official index and had therefore not been “replaced” within the ordinary sense of the word.

It is understood that the judge has given permission to appeal the decision although a hearing date has not yet been set.

A general rule?

Unfortunately little in the way of a general principle emerged from the Barnardo’s case. As with the earlier cases in which a switch from RPI to CPI was the central issue, the decision in the Barnardo’s case turns very much on the facts and the specific wording in the provisions of the relevant scheme rule. Nevertheless, the case is a reminder to employers and trustees who are considering whether their scheme can use CPI instead of RPI in increasing pensions and revaluing deferred pensions that they should carefully check their scheme’s rules and take advice. Whether a scheme can make the switch will very much depend on the wording contained in the relevant provision of the scheme’s rules.

This post was contributed by Rachel Stevens. For more information, email blogs@gateleyplc.com.

[1] Buckinghamshire & Ors v Barnardo’s [2015] EWHC 2200 (Ch)

[2] Danks and others v Qinetiq Holdings Ltd & another [2012] EWHC 570 (Ch)

[3] Arcadia Group Ltd v Arcadia Group Pension Trust Ltd & another [2014] EWHC 2683 (Ch)


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.