The sponsoring employer and trustees of the Arcadia scheme, acting jointly, were able to switch from RPI to CPI for calculating increases to pensions in payment and revaluation of deferred benefits
This update looks at the issues in the case, and the considerations for schemes that may now have more flexibility to switch in the light of this decision.
In 2011 the government adopted the Consumer Prices Index (CPI) in place of the Retail Prices Index (RPI) as part of the formula for determining statutory rates of revaluation and indexation. Trustees and sponsoring employers of occupational pension schemes had to consider what the change meant for their scheme.
The effect depended on how the wording of a scheme's rules interpreted the statutory provisions. Where rules referred directly to the relevant legislation the switch to CPI was automatic. Other rules had RPI 'hard-coded' in so that it remained the appropriate index. In other cases it was not clear how a definition should be interpreted or whether the wording allowed any discretion to select an alternative index.
Danks v Qinetiq Holdings Ltd
In Qinetiq, the definition of 'Index' referred expressly to RPI but continued 'or any other suitable cost of living index selected by the Trustees'. The trustees asked the court to confirm if the decision to switch would amount to a 'detrimental modification' under section 67 Pensions Act 1995 ("section 67").
The court held that it would not. A member's right (to indexation and revaluation) was not an entitlement or accrued right until the calculation had been done. At the point of calculation the trustees could choose to use either RPI or CPI, meaning that CPI could also be applied to past service benefits.
Qinetiq paved the way for schemes to switch to CPI where the rules conferred an express power to choose an alternative index. The position was not so clear for schemes with RPI hard-coded in and no such power to choose. This was the situation in Arcadia.
The Arcadia decision
The definition of Retail Prices Index in the Arcadia scheme rules referred to RPI 'or any similar index satisfactory for the purposes of' HMRC/the Inland Revenue. The court was asked several questions on the interpretation of this wording:
Was there a power under the definition to select an index other than RPI?
Yes. The power of selection can be implied where the definition anticipated the use of another index but did not say how the change would be made. The power is not confined to circumstances in which RPI has been discontinued or replaced.
Who can exercise the power of selection?
The judge considered that the power was vested jointly in the trustees and the employer. Although not expressly set out, it would be odd for the power to vest solely in the employer, given that the power of amendment was exercisable by the employer with the consent of the trustee.
Would CPI be a 'similar' index which is 'satisfactory' for the purposes of HRMC?
Yes. As schemes no longer have to be approved by HMRC and CPI has been endorsed by the government, there was no basis for HMRC to consider CPI as anything other than satisfactory.
Does a switch to CPI for use in relation to past service fall foul of section 67 Pensions Act 1995?
No. The judge held that Qinetiq was correctly decided, and that switching to CPI for past service did not adversely affect members' accrued rights so did not breach section 67. Members were entitled to have their benefits determined by reference to the scheme's definition of RPI, which included a discretion to choose an alternative index.
The decision makes clear that the power to select an alternative index will turn on individual circumstances and the precise wording in a scheme's rules. Following Arcadia, schemes with similar definitions may now be able to look at making the switch from RPI to CPI. Key considerations will include establishing who can exercise the power to select an alternative index, and examining how closely wording follows the definition in Arcadia.
Some pre A-day rules may refer to an alternative index that does not prejudice the approved status of the scheme. As there is no longer a requirement for schemes to be approved by HRMC, it could be that this wording would not be a barrier to switching, although it has not been considered by the courts.
On the other hand, it seems unlikely that there would be any flexibility to switch index in a definition that refers to 'such similar index as may replace' RPI. Given the judge's comments that the power in Arcadia was unconstrained by a requirement for RPI to be discontinued or replaced, an express reference to the need for replacement is arguably going to act as a constraint on any power to switch.
In a further development, the trustees of the BA pension scheme have just been granted costs protection to allow them to defend proceedings brought against them by BA. BA has accused the trustees of improperly using their powers to increase benefits, as a result of the government's decision to switch to CPI. This highlights the importance for trustees to consider how to exercise any discretion they may have, bearing in mind their duty to act in the best interests of members.
For more information please contact the authors or your usual Shoosmiths pensions contact. Our pension litigation specialists are also available to assist trustees or employers who wish to seek guidance from the court on the implications for their scheme
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.