Pensions: Is this the end for RPI?
Author: Heather Chandler and Jacqui Piper
On 19 March 2013, the Office for National Statistics (ONS) published two new price indices (RPIJ and CPIH) and de-designated RPI as a National Statistic.
The new indices have been released as 'experimental indices' until the UK Statistics Authority has completed its assessment in summer 2013.
In the meantime, RPI figures will continue to be published by the ONS, and there has been no indication as yet that it will necessarily cease to be published or be replaced by the RPIJ.
As with RPI, the RPIJ is based on a basket of domestic goods - currently around 700 - weighted to reflect their respective shares within household budgets. Based on the conclusion of a consultation carried out by the National Statistician that the 'Carli' formula (used to calculate RPI) does not meet international standards, however, the RPIJ replaces this with the 'Jevons' formula. The result is that estimates of inflation using RPIJ will be lower than or equal to those using RPI.
Where scheme rules refer directly to the legislation, a change to CPI will already have occurred. For all other schemes, the ability to switch to the lower CPI or RPIJ indices as the basis for relevant calculations will depend upon how the 'index' is defined in the scheme's trust deed and rules.
Many schemes essentially have one of two broad types of definition:
- RPI or 'any other index' adopted by the trustees and/or the principal employer
- RPI or any 'replacement' or 'substitute' index.
Where the former is used, it is possible to argue that this could allow a change of index to CPI or RPIJ. This is supported by the High Court in the case of Danks v QinetiQ Holdings Ltd.
However, unless the power to change the index lies solely with the principal employer, the trustees will be bound by their duty to act in the best interest of all beneficiaries. It will be difficult, therefore, to justify a change to an index which would result in lesser increases to members' pensions unless there are other prevailing circumstances.
In contrast, with respect to the second definition, RPI has not in essence been replaced or substituted by either the CPI or the RPIJ, and figures will still be available showing changes in it over time. It would not, therefore, be appropriate to use this discretion to move to CPI or RPIJ.
Of course, the position may change once the evaluation period for the RPIJ is complete or if the ONS otherwise decides to stop publishing RPI figures.
Trustees are advised to keep abreast of all updates in this respect and to seek legal advice where there is any uncertainty about their application to specific trust deeds and rules.
If you are concerned about how this change might affect your scheme, please call your usual Shoosmiths contact or one of our pensions specialists.