Following the Barnado’s case, schemes wanting to switch to using CPI for pensions uprating face a “legal lottery”
Back in 2010 the Government decided to use the Consumer Price Index (CPI) rather than the Retail Price Index (RPI) as the inflation measure used for uprating pensions each year.
As many schemes have RPI written into their rules, however, some have asked the courts for guidance on whether they have the ability to move to the generally lower CPI measure.
In 2012 the trustees of defence technology company QinetiQ Holdings’ scheme were told they could make the switch, with the trustees of retailer the Arcadia Group’s scheme receiving a similar decision in 2014.
However, when children’s charity Barnardo’s asked its trustees to start using CPI rather than RPI for calculating increases to pensions in payment and revaluing deferred pensions the court ruled that it would not be possible.
What does it mean for trustees?
Key to all three decisions was the wording of each scheme’s rules. In the case of the QinetiQ scheme the rules said that RPI “or any other suitable cost-of-living index selected by the trustees” could be used when uprating, while the Arcadia scheme’s rules said that RPI “or any similar index satisfactory for the purposes of the Inland Revenue” was permitted.
In the Barnardo’s scheme the rules state that RPI “or any replacement adopted by the trustees” can be used. However, Mr Justice Warren decided that this meant a replacement for RPI introduced on an official level as opposed to a different index chosen by the trustees to replace RPI.
Trustees seeking to make the change from RPI to CPI should therefore pay particular attention to how their own scheme’s rules are worded.
As Francois Barker, a partner at the law firm Eversheds, says, the Barnardo’s case “serves to demonstrate that rules which at first glance seem very similar can as a result of minor variances be read very differently by different judges, and that scheme rules should accordingly be reviewed with caution”.
It is understood that Warren J has given the Barnardo’s trustees permission to appeal his decision, although it is not clear if or when they will do so.
The decision has also failed to bring clarity by way of a general principle that trustees of other schemes can follow.
As Norton Rose partner Lesley Browning says: “At the time the statutory switch to CPI-linked indexation and revaluation was implemented, many advisers commented that the failure to introduce an overriding or modifying power allowing schemes to switch from RPI to CPI created a ‘legal lottery’.
“The effect of this, as illustrated by this case, is that schemes may or may not be able to make the switch to CPI under the existing terms of their rules.”