The BT case focused on the 2016 Rules and 1993 Rules for members in Section C (established after BT's privatisation). Both sets of rules provided for inflation based increases of up to 5%. The 2016 Rules contain provisions envisaging a switch in index, which say:
"The cost of living will be measured by the Government's published General (All Items) Index of Retail Prices or if this ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustees, decides."
The first question was whether this conferred a power on BT, or on BT and the Trustee jointly, to determine whether RPI had become inappropriate. Mr Justice Zacaroli ruled that whether RPI had ceased to be published or become inappropriate was a question of objective fact, with no power conferred on BT or the Trustee to make that decision. It was only if one of these "gateways" could be established that BT would have the power to select (in consultation with the Trustees) an alternative method of determining the cost of living. In particular, the judge noted that in many other places the rules were clear as to whether BT or the Trustees would have to make a decision – so the absence of either party being given an express power to determine whether it had become inappropriate meant that it had to be decided objectively.
The judge concluded that "becomes inappropriate" was a high hurdle to meet and it would not be enough for RPI to have become merely undesirable or less appropriate than any alternative index for the purposes of calculating increases in pensions to reflect the inflation experienced by the members. The change also had to take place after 2002 when this rule was first introduced.
The judge heard expert evidence, but ultimately found that there was little assistance to be gained from it: the views on the "appropriateness" or otherwise of RPI generally was of limited relevance to the question of its appropriateness specifically for the purposes of calculating pension increases under the BT Pension Scheme. The judge considered the criticisms levelled at RPI – including that it had been de-recognised as a national statistic – but concluded that did not make it inappropriate for the purposes of uprating pensions. In doing so, Mr Justice Zacaroli considered it significant that the flaws in RPI were known when the current rule was introduced in 2002 (and the perception of those flaws have hardened in subsequent years) and that the purpose of the rule is to provide protection for pensioners against increases in the real cost of living. There were reasonable grounds to conclude that changing from RPI would lead to material risk for pensioners for three main reasons. First, an index can only provide an estimate of the increase in the cost of living. Second, there was evidence that CPI might underestimate inflation (albeit probably to a lesser extent) as well as respects in which RPI might be said to overestimate inflation. Third, RPI continues to be used in many contexts dictated by government or regulator policy.
The 1993 Rules were slightly different and said:
"If the General Index [of Retail Prices] ceases to be published, or is so amended as to invalidate it in the view of the Principal Company as a continuous basis for the purpose of calculating increases, the Principal Company shall substitute such other index or appropriate basis of comparison as it shall in consultation with the Trustees decide."
The judge ruled that this was narrower in scope than the 2016 Rules as it required a direct change to the way RPI is compiled or calculated before a different measure of inflation could be substituted. Moreover, the amendment had to invalidate RPI as a "continuous basis" for the purposes of calculating increases. The only change which might have satisfied this requirement was a change, in 2010, in the way clothing prices were taken into account when determining RPI; but the judge ruled that the change was not so significant to "invalidate [RPI] as a continuous basis for the purposes of calculating increases". However, the judge also ruled that no Section C members remained subject to the 1993 Rules on increases, so all pension increases for Section C members would be governed by the 2016 Rules.
Comment
The case is another illustration that whether a scheme can switch from using RPI to CPI is down to the approach of the draftsman of the rules, which might be many years before CPI was even created. The difficulty BT faced was that once the test was found to be objective it set a high bar: short of RPI being discontinued it will be a difficult test to meet.
This will not be the end of the RPI/CPI debate. The Green Paper issued last year discussed the possibility of introducing a statutory power to allow schemes to switch from RPI to CPI; and we must await the White Paper due in the spring to see whether the Government will introduce flexibility for pension schemes. The introduction of such a power – perhaps vested in the trustees alone – may simplify the decision making process and reduce the costs incurred when deciding whether a change in inflation measure is possible. The Barnardo's case is also due to be heard by the Supreme Court in June.
Further reading
Barnardo's case - Pensions increases: case update
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