RPI and CPI
Most final salary pension schemes are required by law to increase pensions in payment by a minimum amount and to revalue deferred members’ benefits each year in order to help protect a member’s pension against inflation. In what circumstances can a scheme's revaluation method be changed from RPI to CPI?
Revaluation and pension increases – RPI v CPI
The minimum percentage increase in a member’s pension or deferred pension is published each year by the Government and is calculated by reference to a particular index. Historically, these increases were calculated using the Retail Price Index (RPI). However, from April 2011, the Government announced that it would in future use the Consumer Price Index (CPI) instead. In January 2013 the Office of National Statistics announced that RPI would no longer be recognised as a national statistical measure because it did not meet internationally accepted standards.
CPI is widely considered to be a lower-cost revaluation requirement. This has meant that most employers in the private sector have sought to follow the switch from RPI to CPI when increasing and revaluing pensions under their schemes, as the cost savings for employers can be considerable. However, many schemes have found that switching to CPI might not be as simple as they might have hoped.
Recently, the Government has published a consultation response on proposed reforms to RPI (which will not be implemented before 2030). For members whose benefits are linked to RPI, the change is likely to result in reduced benefits over the course of their lifetime. At a scheme level, the impact will vary depending on scheme rules and on the details of their liability matching strategy. You can read more here.
Restrictions in scheme rules
Different schemes will have different rules regarding the index to be used for revaluing deferred pensions and increasing pensions in payment. For some schemes, revaluation and increases to pensions are tied to the index adopted by the Government and so will have changed automatically to CPI in 2011.
However, for many schemes, their rules will specify the use of RPI (in other words RPI is ‘hard-wired’ into their rules) or will provide for RPI but will give the trustees and/or employer the power to switch to an alternative index in certain circumstances. Unfortunately, there is no overriding or modifying statutory power which gives private sector pension schemes the power to switch from RPI to CPI and so whether the trustees and employer have the power to switch or not will depend on the precise wording of their scheme’s trust deed and rules, as illustrated by the Supreme Court’s decision in the Barnardo’s case. Trustees should consider whether the reforms to RPI would trigger a review of the index under scheme rules.
There have been a number of RPI/CPI cases before the courts in recent years either seeking guidance on the interpretation of the rules, or pursuing a rectification claim (eg Univar). To learn more about rectification, visit www.allenovery.com/rectification.
Case law on changing from RPI to CPI
In Danks v QinetiQ (in which we acted for the employer), the court was concerned with whether the move from RPI to CPI would amount to a detrimental modification and as such would not be permitted under statute.2 The case turned on whether members had an accrued right to the use of a particular index – RPI. In that case, the court found that the member’s right was to an increase but not an increase by reference to a particular index, and so the trustees and employer were free to select an index other than RPI.
In the Arcadia case,3 the rules stated that increases should be calculated by reference to the ‘Retail Price Index’. Retail Price Index was defined as ‘the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of [HMRC]’. The court held that this wording allowed the employer to select an index other than RPI and that the CPI was a ‘similar index’ for the purposes of HMRC.
However, in the Barnardo’s litigation, the courts consistently held that the scheme’s rules meant that there was no power under the rules to change the index from RPI to CPI.4 In this case, ‘Retail Prices Index’ was defined as the ‘General Index of Retail Prices or any replacement adopted by the trustees without prejudicing Approval’. The issue was whether this definition meant RPI or any index that is adopted by the trustees as a replacement for RPI; or whether it meant RPI or any index that replaces RPI and is adopted by the trustees. Ultimately, the Supreme Court confirmed that the latter view was the correct one. However, the court declined to consider the issue of whether an RPI/CPI switch is a detrimental modification for the purposes of the Pensions Act 1995 – the Court of Appeal had commented (without deciding the point) that it was not a detrimental modification.
In December 2018, BT plc lost an appeal against the High Court’s ruling5 that it did not have the power to amend the index used to calculate pension increases. The Court of Appeal upheld the view that the test set out in the scheme rules had not been met; RPI had not become ‘inappropriate’ for the purposes of the Rules.
In the recent Ove Arup case, an attempt to switch from RPI was also unsuccessful. The relevant rule stated ‘If the composition of the Index changes or the Index is replaced by another similar index, the Trustees … may make such adjustments to any calculations using the Index … as they consider to be fair and reasonable’.
Summary
Moving from RPI to CPI can save an employer a considerable amount of money, but whether or not the employer and the trustees have the power to make that switch will depend on a careful analysis of the scheme’s rules. Where there is doubt about the power to switch to CPI, some trustees and employers have sought guidance from the courts. However, with the upcoming changes to RPI, the frequency of these types of claims may reduce. To learn more about applying to the court for guidance, visit www.allenovery.com/highcourt.
1 Barnardo’s v Buckinghamshire (2018).
2 Section 67 of the Pensions Act 1995.
3 Arcadia Group Ltd v Arcadia Group Pension Trust Ltd (2014).
4 Buckinghamshire v Barnardo’s (2015, High Court); Barnardo’s v Buckinghamshire (2016, Court of Appeal); Barnardo’s v Buckinghamshire (2018, Supreme Court).
5 BT plc v BT Pension Scheme (2018).