Employers have been encouraged to assess whether they can switch from the retail prices index to the consumer price index to reduce their liabilities, after a High Court ruling last week.
The High Court ruled the Arcadia Group, the owner of BHS and Topshop, could amend two of its defined benefit schemes. Justice Newey found the retail group's schemes could switch to using CPI rather than RPI to calculate pension increases and revaluations, but the decision should be made by both the employer and trustees.
More employers are looking at ways to make the change from RPI to CPI to calculate pension increases and revaluations in order to reduce their schemes’ liabilities.
Employer v trustees
Arcadia Group argued “the retail prices index” could refer either to RPI or a similar index meeting the requirements of this definition, and that an index other than RPI could be used as a matter of preference, not only if the latter ceased to exist.
However, the trustees maintained Arcadia's executive and group schemes must continue to use RPI until it is discontinued or replaced and the words, “or any similar index satisfactory for the purposes of [the Inland Revenue/HMRC]” were included to cater for this.
Zoë Murphy, partner at law firm Sackers, said the wording of a scheme’s rules is “crucial” in determining whether employers and trustees can change the inflationary index used to increase or revalue benefits.
In this case the words “or any similar index” are key, Murphy said.
Duncan Buchanan, partner at law firm Hogan Lovells, said from an employer’s perspective it was a positive decision.
“Those employers [with] a DB scheme, we would expect them to go and look at their trust deeds and rules and go and look at the definition of the index base,” he said.
Buchanan said making the change could have a big impact on schemes’ liabilities.
“There’s a massive impact on the funding level – for some schemes it’s tens if not hundreds of millions of pounds,” he said.
Justice Newey found the definition as written in the scheme rules gave the power to select an index other than RPI and this was not confined to circumstances in which RPI has been discontinued or replaced. However, he ruled the power to change the index used rests jointly with the employer and the trustees.
The justice also ruled that section 67 of the Pensions Act 1995 does not preclude the use of CPI in relation to past service benefits and members only have a subsisting right to increases and revaluation at a rate consistent with the definitions of RPI.
Jason Shaw, senior associate at law firm Allen & Overy, said the decision will be welcomed by the many schemes that have already made the move from RPI to CPI in light of the Qinetiq decision.
In 2012 the High Court ruled the Qinetiq Pension Scheme could switch to using CPI for pension increases and revaluations, and it could do this in relation to the whole of members’ benefits.
“Had the trustees of the Arcadia schemes been successful in their case, those schemes would have been faced with the unenviable prospect of having to re-examine the validity of their purported switch from RPI to CPI,” he said.
The Arcadia Group Pension Scheme’s rules state pensions will be increased by the lower of a specified percentage or “the percentage rise in the retail prices index”.
Similarly, the Arcadia Group’s Senior Executives Pension Scheme’s rules stated that the aggregate of pension increases for pensions in payment “will not exceed the percentage rise since that date in the retail prices index (or any replacement of that index)”. A spokesperson for the Arcadia Group said the company has received the judgment and is assessing its options.
Examining scheme rules
Some trustees may be reluctant to adopt CPI rather than RPI as an inflationary measure since pensions are more likely to increase at a lower rate in the future.
The 12-month rate for CPI stood at 1.9 per cent, while RPI was 2.6 per cent at June this year, according to the Office for National Statistics.
Zoë Murphy, partner at law firm Sackers, said the decision was unsurprising. “If you have already got a rule like that and you have changed your index, you may have felt that you would have had to be quite robust in changing the index and now this gives comfort to those employers,” she said.
However Penny Cogher, partner at law firm Speechly Bircham, said while the judgment gives some clarity to trustees and employers, it only considers the schemes’ formal documentation rather than extraneous material such as scheme booklets.
Cogher said: “It may be you have to look beyond what the scheme rules themselves say and also look at extra external documents before you can just automatically say, ‘Just because our scheme rules are the same as Arcadia’s rules we must be able to take the same decision’.”
