RPI switch doesn’t measure up for Barnardo’sThe Supreme Court has dismissed an appeal by the charity Barnardo’s and held that the trustees of the Barnardo’s pension scheme do not have the power to select an alternative index to the Retail Prices Index (RPI) for the purposes of revaluing pensions before they come into payment and for indexing pension payments. Linking pension increases to a lower rate of inflation such as the Consumer Prices Index (CPI) can significantly reduce the costs of funding defined benefit pension schemes, and as such there have been a series of cases asking the courts to interpret the scheme’s powers to select an alternative index. For Barnardo’s, using RPI rather than CPI to revalue deferred pensions and index pension payments will significantly increase the costs of funding the defined benefit pension scheme.
Under the rules of the Barnardo’s pension scheme, “Retail Prices Index” is defined as “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval”. Barnardo's, the sponsoring employer of the scheme, appealed against the Court of Appeal decision which held that this definition was not wide enough to give the trustees a power to change the index until RPI ceases to be published as an official index (for further details, see our alert “Stuck with RPI – the Barnardo’s case”).
Whilst this case largely turns on the specific wording of the power to select another index, it doesn’t affect earlier High Court decisions which confirmed that there are circumstances when pension scheme trustees can select an alternative index for revaluation and indexation purposes. As the Supreme Court agreed with the Court of Appeal on the meaning of RPI under the rules of the Barnardo’s pension scheme, it did not address the issue of whether the exercise of the power to select an alternative index would be an amendment to accrued benefits prohibited by pensions legislation. However, the position remains the same as under the earlier High Court decisions which held that exercising a power to change the index that is used for the purposes of revaluing deferred pensions and calculating pension increases would not affect a member’s accrued benefits.
Issues for employers and trustees to consider
Schemes that have been waiting the outcome of this decision should now review their rules. Whether there is a power to select an alternative index will depend on the particular rules of the scheme but previous cases have established that wording such as “any other suitable cost-of-living index selected by the Trustees” and “any similar index satisfactory for the purposes of the Inland Revenue” could allow schemes to select an alternative index. Schemes that have more restrictive wording referring to the replacement of RPI, as in the Barnardo’s scheme, may not be able to select an alternative index until RPI is officially replaced as an index.
If trustees determine that they do have a joint or sole power to select a different index to the RPI, this will be relevant to employers and trustees negotiating scheme funding arrangements, as trustees will need to consider whether to exercise that power, and the extent to which they have a duty to take into account the economic interests of the employer.
To discuss the impact of this judgment on your pension scheme, please contact your usual pensions team contact or one of our team below.