UK: To Switch Or Not To Switch: That Is The Question

The High Court's consideration of whether the rules of the Barnardo's Staff Pension Scheme allowed its trustees to adopt CPI in place of RPI, as the measure of inflation-proofing to be applied to members' benefits, provides further clarity on how difficult issues of this nature should be approached by trustees.

In the latest in a line of cases involving the switch from RPI to CPI, the High Court has considered whether the trustees of the Barnardo's Staff Pension Scheme (the "Scheme") had power under the Scheme Rules to replace RPI with CPI for the purpose of calculating revaluation of deferred pensions and increases to pensions in payment. The decision¹ turns on its facts but highlights the need to be very aware of the nuances hidden within scheme rules and how these should be interpreted.

RPI to CPI – a refresher

In the 2012 Qinetiq case² the High Court held that a decision by the trustees of the Qinetiq scheme to switch the basis for calculating pension revaluation and indexation would not be a "detrimental modification" under section 67 of the Pensions Act 1995, as the scheme rules allowed the use of the RPI "or any other suitable cost-of-living index selected by the Trustees".

In the 2014 Arcadia case³ the High Court held that the rules governing an employer's two defined benefit pension schemes did not prevent the schemes switching from RPI to CPI in revaluing deferred pensions and increasing pensions in payment. Broadly, the rules provided that inflation-proofing should be based on the "Retail Prices Index". This term was defined as "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of [HMRC]".

The Barnardo's case – background

The Scheme, a final salary scheme, is closed to both new members and future accrual. Depending upon the date on which members left service, they are subject to different editions of the Scheme's rules.

Barnardo's, the principal employer, proposed that the trustees of the Scheme substitute CPI for both revaluation and indexation. In current economic conditions, increases by reference to CPI are considered to be less costly than RPI increases. A fair enough proposal you might say, but the trustees and the principal employer needed to overcome the hurdle of making sure that such a switch was possible under the Scheme's rules.

Whichever edition of Rules came in to play, the Scheme revaluation and indexation increases were, strictly speaking, calculated by reference to RPI.

In the 1978 Rules, "Index" was defined as meaning "the Government's Index of Retail Prices or any other official cost of living index published by authority in place of or in substitution for that Index".

In the 1988 Rules, "Retail Prices Index" meant "the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval".

Later versions of the Scheme rules were not materially different from the 1988 Rules.

In light of the principal employer's request, the trustees of the Scheme saw fit to bring a claim under Part 8 of the Civil Procedure Rules concerning the interpretation of the Scheme's rules. The critical words to be construed were, in the 1978 Rules the words "in place of or in substitution for" and, in the 1988 Rules, "any replacement".

The trustees' claim concerned whether they had power to select an index in place of RPI, as the index by reference to which pensions in payment are indexed and deferred pensions revalued; and, if so, what other indices might properly be adopted.

The court's decision

The judge (Mr Justice Warren) rejected the principal employer's argument that the adoption of a new index would result in a replacement for the purposes of the 1988 Rules. Replacement would only occur once RPI had ceased to be published. This would happen outside the Scheme–the fact that the Office of National Statistics had announced in March 2014 that RPI no longer met the standard to be designated as a "national statistic" does not amount to "replacement".

Mr Justice Warren therefore concluded that under both the 1978 Rules and the 1988 Rules, the trustees did not have a power to select a different index for the purpose of revaluation and indexation so long as RPI remains an officially published index.

WB comment

The Barnardo's decision turns on the specific rules of the Scheme. Whether trustees or employers (or both) have a power to switch from RPI to CPI as a suitable measure of inflation is typically a question of construction. Case law in this particular area will undoubtedly develop further and the next case could have a very different outcome. It is also possible that further criticism of RPI as a credible measure of inflation may influence future courts looking at these issues in years to come.

We understand that the case is to be appealed and so the eventual outcome remains unclear. What is certain is that trustees and employers considering a switch from RPI to CPI should approach any proposal with caution and take detailed legal advice – the precise wording and meaning of scheme rules will be critical to this.

Footnotes

1 Buckinghamshire & others v Barnardo's & others [2015] EWHC 2200 (Ch)

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

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

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.