To Switch Or Not To Switch: That Is The Question

The High Court's consideration of whether the rules of the Barnardo's Staff Pension Scheme allowed its trustees to adopt CPI in place of RPI, as the measure of inflation-proofing to be applied to members' benefits, provides further clarity on how difficult issues of this nature should be approached by trustees.

In the latest in a line of cases involving the switch from RPI to CPI, the High Court has considered whether the trustees of the Barnardo's Staff Pension Scheme (the "Scheme") had power under the Scheme Rules to replace RPI with CPI for the purpose of calculating revaluation of deferred pensions and increases to pensions in payment. The decision1 turns on its facts but highlights the need to be very aware of the nuances hidden within scheme rules and how these should be interpreted.

RPI to CPI - a refresher

In the 2012 Qinetiq case2 the High Court held that a decision by the trustees of the Qinetiq scheme to switch the basis for calculating pension revaluation and indexation would not be a "detrimental modification" under section 67 of the Pensions Act 1995, as the scheme rules allowed the use of the RPI "or any other suitable cost-of-living index selected by the Trustees".

In the 2014 Arcadia case3 the High Court held that the rules governing an employer's two defined benefit pension schemes did not prevent the schemes switching from RPI to CPI in revaluing deferred pensions and increasing pensions in payment. Broadly, the rules provided that inflation-proofing should be based on the "Retail Prices Index". This term was defined as "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of [HMRC]".

The Barnardo's case - background

The Scheme, a final salary scheme, is closed to both new members and future accrual. Depending upon the date on which members left service, they are subject to different editions of the Scheme's rules.

Barnardo's, the principal employer, proposed that the trustees of the Scheme substitute CPI for both revaluation and indexation. In current economic conditions, increases by reference to CPI are considered to be less costly than RPI increases. A fair enough proposal you might say, but the trustees and the principal employer needed to overcome the hurdle of making sure that such a switch was possible under the Scheme's rules.

Whichever edition of Rules came in to play, the Scheme revaluation and indexation increases were, strictly speaking, calculated by reference to RPI.

In...