Pension Increases - RPI or CPI and how to work out what your rules allow

It is now more than five years since the Government announced that occupational pensions legislation would use the Consumer Prices Index (CPI), instead of RPI, for pensions uprating. The Pensions Minister declared CPI “a more appropriate measure of pension recipients’ inflation experiences”. However, we are still seeing new Court decisions over when schemes are able to make such a switch. Only recently, the Pensions and Lifetime Savings Association has renewed the call for the government to help pension schemes still grappling with the “drafting lottery” which allowed some schemes to switch to CPI and requires others to stay with RPI.

The status of RPI

RPI ceased to be designated as a National Statistic in early 2013, because it was considered to be outdated and its underlying formulae no longer met international statistical standards. However, the Office of National Statistics (ONS) continues to publish the RPI every month, having previously noted the “significant value to users” in maintaining continuity so that RPI can, at least for the time being, “be used for long-term indexation and for index linked gilts and bonds in line with user expectations.”

That may not always be the case. Paul Johnson’s independent review of UK consumer price statistics, published in January this year, declared that RPI was “not fit for purpose”. He recommended that CPIH (a variant of CPI which includes a measure of owner-occupiers’ housing costs) should become “the starting point for uprating wages, benefits and other payments”. On the back of his report, the UK Statistics Authority launched its own consultation describing RPI as a ‘legacy’ index and seeking views on its future development. The final report is scheduled for early 2016.

However, for the moment, despite no longer being the Government’s preferred method of measuring inflation, RPI continues to be published.

When can trustees change to CPI?

When trustees and employers are looking at their scheme rules, they must do so in the context of the considerable number of cases there have already been on this issue.

In 2012, in Danks & Ors v Qinetiq Holdings Ltd, the scheme rules defined “Index” as “the Index of Retail Prices published by the [ONS] or any other suitable cost-of-living index selected by the Trustees”. The trustees asked the court whether a decision to select CPI instead of RPI under this definition, which would apply to both revaluation and increasing pensions in payment, would breach section 67 of the Pensions Act 1995 (which restricts scheme modifications which would or might adversely affect members’ “subsisting rights”).

The judge held that that it would not. The trustees could decide at any stage to change the Index in accordance with the rules and their fiduciary duties, so long as they acted in accordance with their fiduciary duties. A member’s subsisting right was to increases and revaluation at rates consistent with the definition of RPI in the scheme rules (including any power to vary it), not to increases and revaluation specifically by reference to RPI.

Last year came a further judgment, Arcadia Group v Arcadia Group Pension Trust. Arcadia was the principal employer of two schemes, each of which provided for pension uprating by reference to “the Government’s Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue.” Arcadia applied to the court for directions on the extent to which, under this definition, CPI could be selected instead; and, if so, who could exercise such a power. The trustees argued that the definition required RPI to be used until the index was discontinued or replaced.

The judge held that the definition allowed CPI to be chosen as an alternative: the power to select “any similar index” did not only engage in circumstances when RPI had ceased to exist. In the absence of express reference as to who should decide the index to be used, that power should be construed as belonging jointly to the principal employer and trustees.

The Pensions Ombudsman has also had several tries at interpreting similar provisions in scheme rules. In 87252/2 Swithenbank, scheme rules provided that increases would be capped by “the increase in the cost of living over a preceding relevant period chosen by the Trustees...” Using this definition, the trustees moved from applying RPI for the cap to CPI, saying they had done so in order to continue to track the government’s favoured index for measuring inflation. The Deputy Ombudsman held it was not unreasonable for them to decide to continue to apply a policy adopted in the past (albeit that the effect of doing so was to change the index used).

PO-824 Post was the lead case when 850 Airways Scheme members complained about increases switching automatically from RPI to CPI, under rules that cross-referred to public sector increase provisions. A rules proviso stated that “should it become necessary to review the basis of such annual adjustments steps shall be taken to ensure that [they] continue to be made upon an appropriate national index or indices reflecting fluctuations in the cost of living …” The member argued that the trustees should have used this proviso to restore RPI increases. However, the Ombudsman said that CPI was clearly an “appropriate” index under the proviso, even if it was not the only one. The trustees’ decision had been made taking account of relevant advice, was within the range of reasonable decisions and was not procedurally improper.

The Barnardo’s case – not all rules are so flexible

The most recent development was the decision in Buckinghamshire v Barnardo’s, published this autumn. The scheme employer took the view that the trustees had power under the rules to move from RPI to CPI, but the trustees were less sure and sought the opinion of the High Court. Definitions of “Index” and “Retail Prices Index” in the scheme rules required another index to have been published “in place of or in substitution for RPI”, or for a “replacement” of RPI to have been adopted by the trustees.

The court found that so long as RPI remained an officially published index, the trustees did not have power under either definition to adopt CPI in its place. The judge emphasised that RPI was not “replaced” when ONS stopped recognising it as a national index: “the ONS itself continues to compile RPI and to recognise its continued use for certain official purposes. However commercially sensible it might be for CPI (or some other index) to be used in the sort of situation where, in the past, RPI was used, that is not a “replacement” of RPI in any ordinary sense of the word”. In addition, any “replacement” index would have to be one that had the same status as RPI had when the rules in question were drafted, namely an officially published index, and be a measure of price inflation based on a basket of elements, rather than e.g. wage inflation.

The Barnardo’s case was about rule interpretation and is not an authority on when, where trustees do have such a power, it is proper for them to exercise it. However, the judge did say that, where there is a power to switch between indexes, “it ought properly to be exercised only to ensure that the index in use best reflects the policy of providing protection from inflation” (the purpose of the power).

Member expectations

Where the measure of indexation under scheme rules is changed, the Pensions Ombudsman has now held in a string of determinations that this cannot be successfully challenged merely because past member communications had referred to RPI increases. Booklets and announcements do not, of themselves, override contrary provisions of scheme rules, and the Ombudsman has taken account of the fact that, prior to 2010, few would have contemplated a different index being applied. The Ombudsman has not been persuaded that, had members known at the time of those earlier communications that the chosen index might change in future, they would have acted any differently. For example, in determination 85946/1 Treadwell, he said he found it “highly unlikely” that a member would otherwise have decided, as she claimed, to take steps to enhance her pension provision. Her reasonable expectation would have been of “inflation proofing in a general sense”.

So where does this leave us?

We know from the case law that where scheme rules permit a switch to CPI, trustees can change the index used, going forward, without breaching member’s subsisting rights. We also know that trustees will often be able to defend member complaints based on previous communications. Nevertheless, the difference in outcome between the Arcadia and Barnardo’s decisions shows that much can turn on how rules definitions are framed, and the precise ‘official’ status of RPI at any time.

The judge’s comments in the new case also reinforce the truism that what is “commercially sensible” may sometimes play second fiddle to what the rules actually say!

Other things to be aware of...

HMRC has issued a new VAT Briefing. HMRC was due to change its approach to when and how employers can recover VAT on costs incurred in running a pension scheme from 1 January 2016.

However, concern about whether schemes and employers would be able to meet this deadline and uncertainty over how the new requirements might work in practice have resulted in HMRC announcing that it is extending the transitional period before the new requirements come into force until 1 January 2017.

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A recent European Court decision could have implications for UK pension schemes if they or their administrators transfer member data to the US.

One of the principles in the Data Protection Act is that "Personal data shall not be transferred to a country… outside the European Economic Area unless that country… ensures an adequate level of protection for the rights and freedoms of data subjects…"

The European Commission had agreed that US companies that had signed up to "Safe Harbor" principles did provide an adequate level of protection. However, the decision in Schrems v Data Protection Commissioner concluded that this was not the case.

The Information Commissioner’s Office in the UK has responded saying: "businesses that use Safe Harbor will need to review how they ensure that data transferred to the US is transferred in line with the law. We recognise that it will take them some time for them to do this". It is also working with other European data protection agencies to produce guidance for organisations that transfer data to the US.