UK Pensions - High Court decision thwarts switch from RPI to CPI

The High Court has handed down its judgment in a 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.

The Court considered the meaning of two forms of wording, both of which are different to the forms of wording which have previously been considered by the Courts. 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 is the meaning of “becomes inappropriate”?

The first form of wording (in the 2016 Rules) provides as follows:

“The cost of living will be measured by the Government’s published General (All Items) Index of Retail Prices or if this ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustees, decides”

In relation to this form of wording, the Court decided that: 

  • the employer 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);     

the de-designation of RPI as a national statistic in March 2013;

the creation (in 2013), and subsequent abandonment (in 2016), of RPIJ;

statements by the National Statistician that RPI is a flawed measure of inflation; and

the fact that RPI has been superseded by CPI in a number of contexts.

What is the meaning of “so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases”?

The second form of wording (in the 1993 Rules) provides as follows:

“If the General Index ceases to be published, or is so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases, the Principal Company shall substitute such other index or appropriate basis of comparison as it shall in consultation with the Trustees decide”.

In relation to this form of wording, the 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”.
Comments

This case adds to a growing list of Court decisions in this contentious area. It will be of interest to schemes and employers considering whether their scheme rules permit a switch from RPI to CPI. However, it is unlikely to provide the answer for many, unless they 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.