Skip to content

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.

Danks v QinetiQ

Click here to read more

This case concerned the ability to move from RPI to CPI for the purposes of increasing pensions in payment and revaluing deferred pensions. 

What measure of price inflation should be applied to the defined benefits of deferred and pensioner members in occupational pension schemes? The measure is scheme-specific, and is set out in each pension scheme’s trust deed and rules, subject to a statutory minimum. Until 2011, the statutory minimum was calculated by reference to the Retail Prices Index (RPI). In June 2010, the DWP announced that this measure would change to the Consumer Prices Index (CPI) from January 2011. The Government believed, among other things, that the CPI provided a more appropriate measure of pensioners’ inflation experiences, was consistent with the measure used by other institutions, and would save occupational pension schemes significant sums of money in the longer term. The legislation introducing the changes to CPI, however, was not overriding and so the question arose as to whether schemes, whose rules expressly referred to RPI, could change the measure of price inflation to CPI.

Practical implications

Points for employers and trustees to bear in mind following this judgment include the following:

  • The ability to move from RPI to CPI turns on the precise wording of a scheme’s rules.
  • Subtle variations of a scheme’s rules will determine whether there is an ability to adopt CPI for the purposes of revaluation and increases to pension.
  • Section 67 was not a bar to adopting CPI but this might not always be the case.
  • Note: The issue of RPI/CPI has recently been considered by the Supreme Court in the Barnardo’s case.

The facts in more detail

Many occupational pension schemes refer generically to an ‘Index’ in calculating pension revaluation and increases, which gives flexibility to change between inflationary measures. Other schemes, such as the Qinetiq Pension Scheme (the Scheme), hard-code a specific definition of ‘Index’. In the Scheme, this was defined as: ‘the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees’. As pensions legislation restricts changes that can be made to a member’s accrued rights or entitlements, if a scheme’s definition of ‘Index’ gives members an accrued right or entitlement to increases/ revaluation by reference to RPI, the trustees might be prevented from switching to CPI.

In this case, we advised the trustees of the Scheme on making an application to the High Court to determine whether a change from RPI to CPI as a suitable cost-of-living index under the Scheme might be voidable on the basis that it adversely affected members’ accrued rights or entitlements. The Scheme’s significant deficit meant that the answer to these questions would play a significant part in the determination of the trustee and sponsor’s deficit reduction strategy.

The key questions that Mr Justice Vos had to consider were:

i) whether pensioner members had a present entitlement to a pension that would be increased on the basis of RPI every year;

ii) whether a member with a deferred pension has an accrued right to revaluation on the basis of RPI when they take their pension in the future; and

iii) whether a change between measures had to be definitive, or whether it is reversible with the possibility of hybrid rates for different periods of service.

Decision

The Court held that a pensioner member did not have an entitlement or accrued right to a specific rate of increase until the Index had been chosen and the calculation had been made. Similarly, in respect of point (ii) above, a deferred member’s right to revaluation would not arise until their benefit crystallised. Mr Justice Vos admitted that this may be perceived as unfair if the revaluation basis changes between the points at which two deferred members take their benefits. He noted, however, that the cause of any perceived unfairness is due to the fact that revaluation only occurs when benefits crystallise.

On point (iii) above, it was held that the Scheme’s trustees may indeed use a different cost-of-living index for different purposes under the Scheme. Mr Justice Vos determined that the definition of ‘Index’ could justifiably be interpreted as being ‘for particular periods or purposes’, that the statutory revaluation regime also provides for hybrid rates to be employed, and that the operation of a single index from a specific date would be ‘cumbersome and unworkable in practice’.

This case concerned the ability to move from RPI to CPI for the purposes of increasing pensions in payment and revaluing deferred pensions. 

What measure of price inflation should be applied to the defined benefits of deferred and pensioner members in occupational pension schemes? The measure is scheme-specific, and is set out in each pension scheme’s trust deed and rules, subject to a statutory minimum. Until 2011, the statutory minimum was calculated by reference to the Retail Prices Index (RPI). In June 2010, the DWP announced that this measure would change to the Consumer Prices Index (CPI) from January 2011. The Government believed, among other things, that the CPI provided a more appropriate measure of pensioners’ inflation experiences, was consistent with the measure used by other institutions, and would save occupational pension schemes significant sums of money in the longer term. The legislation introducing the changes to CPI, however, was not overriding and so the question arose as to whether schemes, whose rules expressly referred to RPI, could change the measure of price inflation to CPI.

Practical implications

Points for employers and trustees to bear in mind following this judgment include the following:

  • The ability to move from RPI to CPI turns on the precise wording of a scheme’s rules.
  • Subtle variations of a scheme’s rules will determine whether there is an ability to adopt CPI for the purposes of revaluation and increases to pension.
  • Section 67 was not a bar to adopting CPI but this might not always be the case.
  • Note: The issue of RPI/CPI has recently been considered by the Supreme Court in the Barnardo’s case.

The facts in more detail

Many occupational pension schemes refer generically to an ‘Index’ in calculating pension revaluation and increases, which gives flexibility to change between inflationary measures. Other schemes, such as the Qinetiq Pension Scheme (the Scheme), hard-code a specific definition of ‘Index’. In the Scheme, this was defined as: ‘the Index of Retail Prices published by the Office of National Statistics or any other suitable cost-of-living index selected by the Trustees’. As pensions legislation restricts changes that can be made to a member’s accrued rights or entitlements, if a scheme’s definition of ‘Index’ gives members an accrued right or entitlement to increases/ revaluation by reference to RPI, the trustees might be prevented from switching to CPI.

In this case, we advised the trustees of the Scheme on making an application to the High Court to determine whether a change from RPI to CPI as a suitable cost-of-living index under the Scheme might be voidable on the basis that it adversely affected members’ accrued rights or entitlements. The Scheme’s significant deficit meant that the answer to these questions would play a significant part in the determination of the trustee and sponsor’s deficit reduction strategy.

The key questions that Mr Justice Vos had to consider were:

i) whether pensioner members had a present entitlement to a pension that would be increased on the basis of RPI every year;

ii) whether a member with a deferred pension has an accrued right to revaluation on the basis of RPI when they take their pension in the future; and

iii) whether a change between measures had to be definitive, or whether it is reversible with the possibility of hybrid rates for different periods of service.

Decision

The Court held that a pensioner member did not have an entitlement or accrued right to a specific rate of increase until the Index had been chosen and the calculation had been made. Similarly, in respect of point (ii) above, a deferred member’s right to revaluation would not arise until their benefit crystallised. Mr Justice Vos admitted that this may be perceived as unfair if the revaluation basis changes between the points at which two deferred members take their benefits. He noted, however, that the cause of any perceived unfairness is due to the fact that revaluation only occurs when benefits crystallise.

On point (iii) above, it was held that the Scheme’s trustees may indeed use a different cost-of-living index for different purposes under the Scheme. Mr Justice Vos determined that the definition of ‘Index’ could justifiably be interpreted as being ‘for particular periods or purposes’, that the statutory revaluation regime also provides for hybrid rates to be employed, and that the operation of a single index from a specific date would be ‘cumbersome and unworkable in practice’.

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.


Barnardo’s v Buckinghamshire (2018).

2 Section 67 of the Pensions Act 1995.

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).

BT plc v BT Pension Scheme (2018).

 

Pensions in dispute navigation banner
Common scheme disputes