Supreme Court: Barnardo's wording does not allow RPI/CPI switch

The UK’s highest court ruled on Wednesday that the children's charity cannot change the inflation protection it provides to members of its DB scheme from the retail price index to the consumer price index.

It is worth observing that the Barnardo's appeal was dismissed because of the specific wording of the scheme’s rules, in particular, wording specifying a linkage to retail prices or a replacement

Simon Bentley, BMO

Sponsors of the Barnardo's Staff Pension Scheme had attempted to argue that the wording of a clause in its scheme rules allowed trustees to change indexation applied to members' benefits from RPI to CPI.

CPI is generally held to be a more accurate measure of inflation. The Office for National Statistics has emphasised RPI's shortcomings and publishes only the minimum necessary information to ensure that existing users, including the £432bn index-linked gilt market, can continue to operate.

As RPI usually provides a figure about 1 percentage point higher than CPI, it is more expensive for employers but provides better pensions for members. Many schemes have RPI hardwired into their rules.

Charity denied switch

Barnardo's had argued that its scheme's definition of RPI as "the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval", meant it could adopt a new measure even while RPI continues to be published.

However, the Supreme Court unanimously rejected these arguments. It found that as pension scheme rules are drafted by legal experts and are intended to have effect long into the future when contemporary conditions may no longer prevail, the scheme could only change to CPI if RPI was replaced.

"I am persuaded that the judge and the majority of the Court of Appeal were right to conclude that the correct interpretation of the first sentence of the definition is... that 'the RPI' means 'the RPI or any index that replaces the RPI and is adopted by the trustees'," said Lord Hodge in the judgment.

The finding will mean that Barnardo’s will not see any reduction in its DB deficit, which stood at £137.7m in April 2017 on an accounting basis.

However, a spokesperson for the charity said it has “robust” plans in place to tackle the funding gap, and welcomed the clarity brought by the judgment.

“We recognise our obligations to all our stakeholders, including current employees and former staff who are contractually entitled to a pension,” the spokesperson said. “Our plans are designed to ensure that we reduce the deficit effectively while protecting our ability to deliver outstanding services for vulnerable children and young people.”

Court avoids wider debate

In its judgment, the court deliberately avoided any discussion of whether RPI is appropriate as a measure of inflation, and also chose not to consider the impact on Barnardo’s deficit.

This narrow and literal focus on the wording of the scheme deeds was to be expected, according to legal experts.

“For this case it was a question of, ‘What do these words mean?’, and unfortunately that will have consequences one way or the other, but you can’t have the tail wagging the dog and say just because this would have particularly bad consequences we have to come to a different view,” said Mark Smith, partner at law firm Taylor Wessing.

Wording still key

The focus on the meaning of the scheme rules will have limited application to other schemes, although Stephen Scholefield, pensions partner at law firm Pinsent Masons, said there will be others drafted in the same way.

He added that it was “a useful reminder that the rules mean what they mean and not what you hope they mean”.

However, lawyers said the decision was notable for the topics it left open to debate, such as whether trustees exercising a legitimate right to downgrade benefits come into conflict with section 67 of the Pensions Act 1995, which prevents accrued rights being eroded.

Smith said that while no Supreme Court decision had been reached on this question, the High Court and Court of Appeal have sided with trustees, meaning further challenges are unlikely.

Meanwhile, Scholefield said the avoidance of a discussion of whether RPI is appropriate will have implications for a similar case involving BT, where arguments were based around the suitability of the index. The telecoms giant is considering an appeal.

No end in sight for rules lottery

If the court has opted to maintain what is often dubbed the ‘rules lottery’ when assessing whether a scheme can change to CPI, there seems little prospect of change from the government or statistics agencies either.

Scholefield doubted the appetite for any statutory override for schemes, and not a single bank derivative trading desk surveyed recently by BMO Global Asset Management said they thought RPI would be restated in terms of CPI or replaced altogether.

“It is worth observing that the Barnardo's appeal was dismissed because of the specific wording of the scheme’s rules, in particular, wording specifying a linkage to retail prices or a replacement,” said Simon Bentley, director of LDI client portfolio management at BMO.

“It is very difficult to view CPI as a replacement for RPI, firstly because they have been used in parallel, secondly, because one is a household index and the other a macroeconomic index and thirdly because the latter includes a measure of housing costs whereas the former does not.”