UK Pensions - Another switch from RPI to CPI is frustrated by the Courts

Following hot on the heels of the Barnardo’s decision last month, the Court of Appeal has handed down its judgment in another case (British Telecommunications plc v BT Pension Scheme Trustees Limited) which looks at whether the wording of the relevant scheme rules allows a switch from RPI to CPI as the index by reference to which pension increases are calculated. The effect of the decision is that BT will not be able to switch from RPI to CPI, but the case is likely to be of interest to other schemes and employers considering this change.

What did the scheme rules say?
The Court considered the meaning of two forms of wording. The first form of wording allows for a switch if RPI “becomes inappropriate”, while the second allows for a switch if RPI is “so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases”.

What did the High Court decide?

In relation to whether RPI had “become inappropriate”, the High Court decided that:

  • BT does not have the power to determine whether RPI has “become inappropriate” – instead, it is a question of objective fact and, in the absence of agreement between the employer and the trustee, is to be determined by the Court;
  • in order for RPI to have “become inappropriate”, RPI must have become inappropriate (and not just less appropriate than any alternative index) for the purposes of calculating pension increases payable to scheme members; and
  • the following matters and events, whether by themselves or in combination, were not such as to have caused RPI to have “become inappropriate” within the meaning of the relevant rule:
    • - the impact on the formula effect (which causes RPI to be consistently higher than CPI) of a change to the collection and use of clothing prices in 2010;
    • - the decision by the United Kingdom Statistics Authority in January 2013 to "freeze" the formula used in calculating RPI (although "routine" changes continue to be made to the calculation); and
    • - the de-designation of RPI as a national statistic in March 2013.
In relation to whether RPI has been “so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases”, the High Court decided that:
 
  • the scope of the wording is significantly narrower than the “becomes inappropriate” wording considered above – the rule is not engaged at all unless there has been an amendment to RPI (i.e. a direct change to the way RPI is calculated). Further, it is not any amendment that is required, but an amendment which invalidates RPI as a continuous basis for the purposes of calculating increases; and
  • the matters and events listed above, whether by themselves or in combination, are not sufficient to permit the employer to form the view that RPI has been “so amended as to invalidate it as a continuous basis for calculating pension increases”.
What has the Court of Appeal decided?
The Court of Appeal has dismissed BT’s appeal, concluding that:
 
  • the High Court’s construction of the scheme rules was correct; and
  • the High Court was entitled to conclude that the clothing change, the freeze and the de-designation did not mean that RPI had “become inappropriate” or that RPI was invalidated as a continuous basis for the purposes of calculating increases.
Comments
This case adds to the growing trend of the Courts frustrating attempts by employers to switch from RPI to CPI. However, as with all of the RPI / CPI cases, the outcome turned on the construction of the relevant scheme’s rules, so it will only be directly relevant to schemes which happen to have the same form of wording in their scheme rules.
 
If you would like us to consider the scope for change under your scheme rules, please speak to your usual Linklaters contact.