Substituting another pensions increase index for ‘RPI’ – a scheme rules lottery!

John Wilson

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In the recent case of Carr v Thales Pension Trustees Ltd, the High Court affirmed a Pensions Ombudsman determination on the interpretation of a pension scheme rule relating to pension increases.

The Ombudsman had upheld a member’s complaint, determining that the Retail Prices Index (RPI) had been hard-coded in the rules as the measure of price inflation for increasing pensions in payment. There was nothing in the scheme rules to modify or qualify the term “retail prices index” or the 5% scheme cap on indexation. So, despite the company wanting to change the measure of price inflation in line with the consumer price index, the Ombudsman found that these should be given their ordinary and natural meaning.

On appeal, the High Court held that a “natural and ordinary” reading of the scheme rule gave primacy to the limb that provided for increases to be in line with the RPI.

Even more recently, in Arup & Partners International Ltd v Trustees of the Arup UK Pension Scheme, the principal employer of the Arup pension scheme sought declarations from the High Court on the measure of price inflation for pension increases.

The pension scheme rules provided that the trustees could adjust pension increase calculations if the composition of the Retail Prices Index changed or if RPI was “replaced by another similar index”. The employer argued that RPI had been ‘functionally’ replaced since the Consumer Prices Index (CPI) and Consumer Prices Index, including Housing (CPIH), had come to be regarded as the main measure of inflation for use by pension schemes.

The High Court held, however, that on the true construction of the relevant rule, RPI was “replaced” only if it was discontinued and another similar index was introduced or declared by the responsible body to be in its place. The scheme rule in question did not contemplate any form of ‘functional’ replacement.

It could be you …

These cases demonstrate that the correct measure of price inflation for pension increases continues to be a scheme rules ‘lottery’. There have been nine reported court cases since CPI replaced RPI for State and public sector pensions – only two have resulted in a change to the way that pensions are increased.

On a different, but still price inflation related note, the High Court has been more receptive when asked to correct a mistake in scheme rules. In Univar UK Ltd v Smith and others, the High Court granted rectification of rules regarding inflation-linked pension increases for the defined-benefit section of the Univar Company Pension Scheme. References to an increase calculated using the Retail Prices Index, incorrectly added on a rules rewrite, will be replaced by increases based on the Consumer Prices Index. Had rectification not been granted, it was estimated that that the oversight would increase scheme funding costs by around £23 million!

The ongoing government consultation on reform of the RPI Methodology (where it is recommended that the publication of RPI should cease) could be a ‘game-changer’, but any reform may be up to ten years away. In the meantime, it seems inevitable that further cases relating to the interpretation of pension scheme increase rules will end up before the courts even though past cases suggest that attempts to reduce the rate at which pensions are increased are, in most cases, unlikely to succeed.

John Wilson

Post by John Wilson

John is Head of Technical, Research and Policy with over 33 years’ experience in employee benefits knowledge management

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