Mr Justice Vos has given judgment in the case of Danks v QinetiQ Holdings Limited. The case related to the powers of pension trustees to uprate their members' benefits on the basis of the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) in order to provide a level of protection against inflation. The case arose following on from the Government's announcement in 2010 that it would allow increases by reference to RPI instead of CPI. CPI is generally lower than RPI by around 0.7 per cent, and so entails less cost for schemes and their employers.

The QinetiQ scheme rules defined the term "Index" as "the Index of Retail Prices... or any other suitable cost-of-living index selected by the Trustees...". The issue was whether the trustees' selection of CPI, instead of the default position of RPI, would be a "detrimental modification" under Sections 67 and 67A of the Pensions Act 1995, by virtue of being a change that "would or might adversely affect any subsisting right" of members. If so, it would have been voidable by the Pensions Regulator, and the trustees would in addition potentially have faced civil penalties from the Regulator.

Mr Justice Vos found that the definition of "Index" gave the trustees the flexibility to select an index other than RPI prior to applying an uprating calculation to a member's benefits (either the revaluation of deferred benefits or increases to pensions in payment).

However, he noted that the discretion given to the trustees amounted to a fiduciary power. A decision to switch would therefore have to be made for a proper purpose.

The judge drew a distinction with the earlier Court of Appeal decision in Aon v KPMG (2005), in which exercising a power to vary benefits would have involved the trustees unwinding rights that had already vested in members. In this case, no members had any right to increases or revaluation on the basis of RPI until the increases or the revaluation had actually been granted.

Finally, the judge held that the definition of "Index" gave the trustees flexibility to designate different indices for different purposes relating to increases to pensions in payment and the revaluation of deferred pensions.

Clyde & Co comment

The definition of "Index" in the QinetiQ Scheme is not an uncommon one, so this judgment opens the door for switching to CPI and reducing costs. However, the judgment did not sanction the switch from RPI to CPI – it merely said that the trustees had the power to make the switch. As the judge noted, a trustee power like that conferred by the definition of "Index" will be fiduciary in nature, and some care must therefore be taken when such a power is exercised. Trustees therefore have to make a decision to switch in the context of their own schemes. In the case of the QinetiQ scheme, the deficit was £191 million as at 31 December 2010 (on an ongoing basis), and this may have militated in favour of the trustees taking the action that they were seeking to take. Other schemes – without large deficits or with a strong employer covenant – may find it harder to justify a switch. The legal saga may not be over yet: there are press reports of further legal action in the pipeline from scheme members challenging the trustees of the QinetiQ scheme's actual use of the power.

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