The High Court has ruled in favour of the BT pension scheme trustees and denied BT the right to change the measure by which increases for its Section C scheme are calculated, but BT has said it is considering an appeal.
Some schemes have made the change to the consumer price index. In February 2017, John Lewis's triennial valuation indicated that the company had successfully reduced its scheme deficit to £479m in March 2016 down from £840m in March 2013, a fall that was partly attributed to a switch to CPI from the retail price index.
But whether this kind of change is allowed or not varies from scheme to scheme, as it hinges on the exact wording of the scheme rules – a situation some have described as a 'rules lottery'.
BT had argued that it could, following talks with the scheme trustee, switch the measure from RPI to CPI.
BT's Section C scheme has about 83,000 members. Pension increases for the scheme are currently conducted on an RPI basis, which typically offers greater increases than CPI. BT had attempted to switch the scheme from RPI to CPI.
Philippa Childs, national officer at union Prospect, which represents BT's managerial staff, told Pensions Expert: “Prospect nationally has always campaigned to retain RPI as an indexation measure, and so obviously we’re pleased with that outcome.”
At the moment CPI, or perhaps CPIH, seems to be the best alternative
Deborah Cooper, Mercer
“We’re being relatively cautious about it, because obviously some of our members – the ones that are in [sections] A and B – have already had that change,” she added.
In a statement on its website, BT said: “We are disappointed with the decision and will now consider the judgment in detail in order to decide next steps, including the possibility of an appeal.”
Scheme rules come first
The case centred around the idea that the use of RPI for the measurement of pension increases had “become inappropriate” in relation to scheme rules.
A sponsor’s ability to adjust the basis for these calculations is contingent upon these rules, according to Ruth Bamforth, director at law firm Walker Morris. These vary across every pension scheme.
“There is no one overriding approach to it,” she said. “The government specifically said that they’re not going to allow schemes to just move from RPI to CPI as they did in the public sector.”
The government said in its green paper last year that it would not implement a statutory override to allow schemes to transfer to CPI.
“Some rules say you can do whatever the law tells you, you can do some statutory override. As we know, what’s happened from [using] statutory override is that CPI is now being used as the measure. Therefore, schemes which say, ‘You do what the law says,’ move automatically to CPI,” Bamforth added.
No index is perfect
The case highlights the potential difficulties of sustaining pension arrangements while enacting pension increases on an RPI basis. It also indicates the vulnerability of pensioners to a probable fall in the value of their benefits brought about by a switch to CPI.
Economists have long debated the virtues of both indices, along with the CPIH measurement. CPIH refers to 'consumer price inflation including owner-occupiers’ housing costs', and was officially recognised by the UK Statistics Authority last year.
Deborah Cooper, partner and senior DB actuarial consultant at Mercer, observed the “formula effect”, which contributes to differences in calculated pensions increases between the RPI and CPI measures.
The arithmetic mean is employed when calculating RPI, while the geometric mean is used to measure CPI. Cooper said RPI has lost support in the economic community.
“There’s never going to be one index that’s appropriate for every pensioner, because in the pensions community, people’s costs of living are going to vary,” she said.
“They need to have an index that’s simple, that’s respected in the economic community, and robust, supported and stable. At the moment CPI, or perhaps CPIH, seems to be the best alternative,” she added.
BT’s union disputes rumble on
The Communication Workers’ Union is involved in a separate dispute with BT over the company’s review of its pension arrangements. Its consultation on the review closed to responses from members on January 17.
Prospect members agree to BT pension deal
BT managers represented by union Prospect have voted in favour of a new pensions deal that will boost pay and aims to incentivise members of its defined benefit BT Pension Scheme to join the defined contribution scheme.
The union declined to comment on its consultation but welcomed the High Court’s decision to allow the Section C scheme to retain RPI.
Andy Kerr, deputy general secretary telecoms and financial services, said: “We welcome the news that the uncertainty on this issue has been resolved, and that the court has upheld the use of the RPI as the relevant index for pension increases in Section C of the BT Pension Scheme.”
