RPI To CPI: Court Allows Switch For Both Past And Future Service

Over recent years, many employers with DB schemes have considered changing the index used for revaluing deferred benefits and increasing pensions in payment. In 2011 the statutory index for revaluation and indexation was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). It is generally considered that CPI is likely to show lower increases than RPI and so schemes switching from RPI to CPI will be able to record a decrease in liabilities.

The index which should be applied will depend on the detail of the scheme rules. Some rules feed into the statutory provisions and, in which case, will already be using CPI. Others contain rules, or definitions, which give the employer or trustees the power to select an alternative index (sometimes only in specific circumstances). Many schemes will have an entrenched index which can only be changed using the scheme's power of amendment.

A recent case involving two Arcadia pension schemes shows the court allowing a switch from RPI to CPI, for both past and future service. Although the case turns on the detailed wording of the scheme provisions, it may be helpful to other schemes wishing to make the change.

The schemes both require revaluation and indexation based on a definition of "Retail Prices Index" which provides "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue". It was accepted that CPI was "similar" to RPI but at issue was whether this rule allowed someone to select an index other than RPI while RPI still existed (and if so, whom) and the role of the Inland Revenue (now HMRC).

The court held that the wording did allow CPI to be adopted. The power to select a new index was to be exercised jointly by the employer and trustees (on the basis that other alterations to benefits under the schemes required trustee input, so the index selection should too). CPI was considered "satisfactory" for the purposes of HMRC, in the absence of any express confirmation, as there are no grounds on which HMRC could properly or reasonably consider CPI anything other than satisfactory (particularly in view of the fact that...