UK: Court Of Appeal Rules On Changing Pension Increases From RPI To CPI

Last Updated: 10 November 2016
Article by Elmer Doonan and James Borshell

Barnardo's v. Buckinghamshire [2016] EWCA Civ 1064

Background

The rules of the Barnardo's pension scheme (the Scheme) provide for annual increases of the lower of 5% or the increase in the retail prices index (RPI).  Barnardo's proposed to the Trustees that they substitute the consumer prices index (CPI) for RPI.  If successful this would have reduced the Scheme deficit on a technical provisions basis by c. £36m and on a buy-out basis by c. £74m.  However, it would also have significantly reduced members' pension increases in future years.

The Trustees asked the High Court for directions on whether they had power to change from RPI to CPI.  Warren J ruled on 28 July 2015 that the Trustees could not make the change.  Barnardo's was given leave to appeal to the Court of Appeal.  The members' representatives were also given leave by Warren J to cross-appeal on the ground that, even if the Trustees had power to change from RPI to CPI, they still could not do so as this would breach section 67 of the Pensions Act 1995 as a modification that adversely affected members' accrued rights or entitlements.  The section 67 issue was not raised in the High Court because two High Court decisions: viz Danks v. Qinetiq and the Arcadia case, had decided section 67 had no application and this, prevented the members' representatives raising it at that level.

Did the Trustees have power to change from RPI to CPI?

The Court of Appeal held that the Trustees did not have power to change from RPI to CPI.  This was a matter of interpretation of the definition of RPI in the Scheme rules which stated:

"Retail Prices Index means the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval ...".

The critical words were "or any replacement adopted by the Trustees without prejudicing Approval". Did this mean that RPI would have to be replaced by another index before the Trustees could adopt it, or that the Trustees could adopt another index, such as CPI, whether or not RPI had been replaced?

Lewison LJ (with whom MacFarlane LJ agreed) decided that the Trustees could only move from RPI if it was replaced by another index.  His reasons were:

  1. the natural meaning of the words in the definition indicated that there had to be replacement of the RPI index before adoption by the Trustees;
  2. the definition also referred to the index being replaced or rebased in a way that pointed to this being done by the authority responsible for publishing it;
  3. an Appendix setting out IR limits on benefits, which formed part of the rules, also supported this conclusion; and
  4. the factual background at the time the rules came into effect showed that government indices had been replaced from time to time and it was not surprising that the draftsman provided for this eventuality.

The Chancellor of the High Court delivered a dissenting judgment.  In his view the Trustees had power to move from the RPI to another index.  His reasons were:

  1. the language of the first sentence of the RPI definition was consistent with either of the two possible interpretations and the second sentence of the definition was irrelevant and belonged in the IR limits Appendix;
  2. the earlier rules of the Scheme were clear that only RPI or a replacement for it published by the government could be used.  The current rules introduced the concept of a replacement being "adopted by the Trustees" which gave the Trustees a new discretion and also provided that whatever was adopted must not prejudice "Approval".  These pointed to a substantive change being intended.

Would a change from RPI to CPI breach section 67?

As the Court of Appeal decided that the Trustees had no power to change from RPI to CPI, it was not necessary to decide this issue.  However, as argument had been heard on the matter Lewison LJ dealt with it on an obiter basis and the other judges agreed with him.  He held that if the Trustees had power to change from RPI to CPI there would be no breach of section 67.  He accepted the reasoning in Danks v. Qinetiq and in Arcadia.  In his view the position was an analogous one where a person has a right to "A or B" and one cannot say that he has an accrued right to A.

What are the implications of this decision?

The case may not be finished yet.  Barnardo's is seeking leave to appeal to the Supreme Court.  It remains to be seen if it will be successful.

Whether trustees have power to change from RPI to CPI (or some other index) is a matter of interpretation of the rules of each scheme.  Most pension increase rules will be the product of bespoke drafting and will have different factual matrices behind them so it will be a matter of construction in each case as to whether it is possible to change from RPI to CPI.

Many pension increases have already changed from RPI to CPI.  Employers and trustees of these schemes should review that change to ensure that it was correct as a matter of construction of the rules.  As this case demonstrates construction issues can lead to judges holding different opinions.  If a change from RPI to CPI is questionable, then the employer may be underfunding increases and pensioners may be being underpaid.

Employers who are considering a change from RPI to CPI should note the outcome of the case and seek legal advice on whether it is possible to change.

The decision that section 67 would not have prevented the Trustees from changing from RPI to CPI, had they the power to do so, is good news for all employers/trustees who have made the change but it is worth adding a note of caution on this.  The wording of each pension increase rule will need to be considered in determining if there is a section 67 issue.

If the Court of Appeal had decided that the Trustees had power to change from RPI, that does not mean it would be appropriate to change to CPI.  Whilst CPI is the headline measure of inflation under EU rules, the government publishes a range of inflation indices for different purposes.  Where employers/trustees have changed to CPI, or are contemplating doing so, they should consider whether CPI is the most appropriate index to apply.

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