Over recent years, many employers with DB schemes have considered changing the index used for revaluing deferred benefits and increasing pensions in payment. In 2011 the statutory index for revaluation and indexation was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). It is generally considered that CPI is likely to show lower increases than RPI and so schemes switching from RPI to CPI will be able to record a decrease in liabilities.
The index which should be applied will depend on the detail of the scheme rules. Some rules feed into the statutory provisions and, in which case, will already be using CPI. Others contain rules, or definitions, which give the employer or trustees the power to select an alternative index (sometimes only in specific circumstances). Many schemes will have an entrenched index which can only be changed using the scheme's power of amendment.
A recent case involving two Arcadia pension schemes shows the court allowing a switch from RPI to CPI, for both past and future service. Although the case turns on the detailed wording of the scheme provisions, it may be helpful to other schemes wishing to make the change.
The schemes both require revaluation and indexation based on a definition of "Retail Prices Index" which provides "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue". It was accepted that CPI was "similar" to RPI but at issue was whether this rule allowed someone to select an index other than RPI while RPI still existed (and if so, whom) and the role of the Inland Revenue (now HMRC).
The court held that the wording did allow CPI to be adopted. The power to select a new index was to be exercised jointly by the employer and trustees (on the basis that other alterations to benefits under the schemes required trustee input, so the index selection should too). CPI was considered "satisfactory" for the purposes of HMRC, in the absence of any express confirmation, as there are no grounds on which HMRC could properly or reasonably consider CPI anything other than satisfactory (particularly in view of the fact that it is used for statutory revaluation and indexation).
Also at issue was whether section 67 (which restricts the modification of "subsisting rights") would preclude selecting CPI in relation to benefit accrued through service prior to the date the index was changed. It seems to have been accepted by the parties that the selection of a new index under an existing power would be a "modification". The trustees submitted that members had a subsisting right to increases and revaluation based on RPI. The employer argued that the right was only to have the correct index applied at the time the particular calculation falls to be made (following the earlier Qinetiq case). The court held that Qinetiq was correctly decided and that members in the Arcadia schemes have a "subsisting right" to increases and revaluation at rates consistent with the scheme definition of "Retail Prices Index" (i.e. with the employer and trustee having the power to change it), not to increases and revaluation specifically by reference to RPI. This meant that the switch to CPI would apply to all benefits, not just those accrued through service after the switch.
The Qinetiq and Arcadia cases open up the possibility of a switch from RPI to CPI (or indeed to RPIJ) in respect of both past and future service. Careful consideration must be given to the detail of the particular scheme rules. It is not clear if a court would come to the same conclusion if the switch required an exercise of the scheme's power of amendment rather than a modification under the express terms of an existing rule. Legal advice should be taken where the implications of this decision are being considered in relation to a particular scheme.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
