UK: The Switch From RPI To CPI: High Court Rules This To Be Lawful

Last Updated: 23 April 2012
Article by Justin McGilloway

Last month's High Court judgement in Danks v QinetiQ1 has provided clarity on a decision by the trustees of the QinetiQ Pension Scheme to switch the inflationary basis for calculating pension indexation and revaluation. Mr Justice Vos concluded that the scheme's rules gave the Trustees power to dictate the index used – this meant that they could switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) without triggering the application of Section 67 of the Pensions Act 1995.

Policy decision

In July 2010, pensions minister Steve Webb confirmed the switch from RPI to CPI for the calculation of the statutory minimum levels by which private-sector salary-related occupational pension schemes must revalue deferred pensions and increases to pensions in payment. On 1 January 2011, this change was implemented through the Occupational Pensions (Revaluation) Order 2010.

CPI is regarded as a lower index than RPI and it is generally thought that the switch to CPI will lead to a long-term saving for private sector occupational pension schemes.

The QinetiQ Pension Scheme

The Trustees of the QinetiQ Pension Scheme wished to adopt CPI in order to reduce the Scheme's substantial funding deficit. The Trust Deed and Rules provided that revaluation and indexation would be calculated by reference to an "Index" which was defined as:

""Index" means the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of living index selected by the Trustees."

Before adopting CPI, the Trustees asked the High Court to confirm whether the selection of an index other than RPI would offend the statutory restrictions in Section 67 of the Pensions Act 1995.

Section 67

Broadly, Section 67 will render void a detrimental modification to a scheme which has an adverse effect on members' subsisting rights unless the member's consent is obtained or the scheme actuary certifies the modification's actuarial equivalence. A modification would or might affect a member's subsisting rights if it would alter an entitlement or right, so that benefits (or future benefits) to which the entitlement or right relate could or might be less generous.

Danks, (the representative beneficiary appointed on behalf of those members who were likely to be disadvantaged if the move from RPI to CPI were to take place) argued that any proposed change would have a detrimental effect on members' subsisting rights.

Decision

Mr Justice Vos confirmed that for the purpose of revaluation and indexation, the wording of the Trust Deed and Rules did not confer on members an entitlement or an accrued right until the calculation had actually been done. This meant that it would be possible for the Trustees to adopt CPI in place of RPI in respect of future increases without Section 67 applying to the change.

Mr Justice Vos also confirmed that the Trustees can choose CPI for some periods but not for others. The definition of "Index" therefore provided flexibility in allowing the Trustees to alter their choice at any time.

Clarity

The effect on the ability of a scheme to be able to switch from CPI to RPI will ultimately depend on the specific wording of a scheme's rules. This case provides clarity for trustees holding a similar discretion with regard revaluation and indexation – however, it should not override their duties to members in exercising that power. The case also provides invaluable guidance on how such revaluation and indexation provisions interact with the complexities of Section 67.

In a similar vein, on 11 April 2012, the Pensions Ombudsman2 rejected a complaint brought by an armed forces pension scheme member who claimed that that he had been misled in his assumption that his scheme benefits would always be linked to RPI. The Pensions Ombudsman rejected Mr Clarke's complaint on the basis that the scheme documentation on which he relied was unclear and ambiguous such that the link to RPI (as opposed to other inflationary measures) could not be made out.

Switching from RPI to CPI will continue to be a contentious issue and much will depend on the scheme rules. From an employer's perspective the effect of the QinetiQ decision is that it may be worthwhile revisiting the rules of your scheme as this could be an invaluable negotiation tool in current or future funding discussions.

Footnotes

1. [2012] EWHC 570 (Ch)

2 Determination in complaint by Mr R Clarke (82434/3)

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.

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