RPI/CPI pensions cases: legal update on latest case law Alexandra Tomlinson RPI/CPI Pensions Cases | 26 January 2018
Overview Background Why are we still talking about RPI/CPI? What can we learn from the case law in the Courts? What’s next? 2 RPI/CPI Pensions Cases | 26 January 2018 CMS
Background 2010 Budget Scheme rules Consider: • Pension increases; and • Revaluation Differences between RPI and CPI 3 RPI/CPI Pensions Cases | 26 January 2018 CMS
The QinetiQ case (2012) First of the High Court cases Index: “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 choosing CPI instead of RPI would breach section 67 of the Pensions Act 1995 Held: • s67 was not breached • Trustees could change the “Index” at any time, subject to fiduciary duties • Trustees could use RPI for some purposes or periods of time and CPI for others 4 RPI/CPI Pensions Cases | 26 January 2018 CMS
The Arcadia case (2014) Two schemes provided for increases and revaluation 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 to determine if CPI could be selected instead, and, if so, who could exercise such a power Held: • rules definition did allow CPI to be chosen • power to select “any similar index” did not only engage in circumstances when RPI had ceased to exist • joint trustee and principal employer power • no s67 issue, members had a subsisting right to increases and revaluation at rates consistent with the definitions of “Retail Prices Index”, but not to increases and revaluation specifically by reference to RPI 5 RPI/CPI Pensions Cases | 26 January 2018 CMS
The Barnardo’s case (2015-2018) Definition of “Retail Prices Index” referred to “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval ” When could a new index be adopted? Had RPI been replaced? Held: • so long as RPI remained an officially published index, the Trustees had no power to adopt CPI in its place • RPI was not “replaced” when ONS stopped recognising it as an official statistic Employer appealed to Court of Appeal which dismissed the appeal Supreme Court 2018 – worth waiting for? 6 RPI/CPI Pensions Cases | 26 January 2018 CMS
The Thales case (2017) Scheme established in 2007 and received transfers in from 9 other schemes. Case considered two different sections of the scheme Judge held, “this case…is not concerned with, and is not the place to debate, the suitability of RPI for the uprating of pensions let alone whether some other index, with CPI the main candidate, is somehow “better”.” TOPS Section: increases based on RPI but if RPI was “ revised to a 1. new base or if that Index is otherwise altered ” then the trustees could determine a new base, having regard to the alteration made to RPI CARE Section: increases based on RPI but, “If the Government retail 2. prices index for all items is not published or its compilation is materially changed , the Principal Employer, with the agreement of the Trustees, will determine the nearest alternative index to be applied .” 7 RPI/CPI Pensions Cases | 26 January 2018 CMS
Thales case: was RPI “otherwise altered”? Held that it was However, the trustees’ power to select a new basis is constrained by the wording of the scheme rules that they must “have regard to the alteration ” “ It is clear that the Trustees do not have a free range to adopt whatever basis they like. ... If the alteration makes no material difference at all, it would be wrong for Trustees to depart from RPI as altered… The most material alteration is introduction of UK HPI into the RPI. Taking that by itself, I consider that RPI as varied by the introduction is the only basis which the Trustees could properly determine, for the same reasons that it is the nearest alternative index under the CARE Rules .” 8 RPI/CPI Pensions Cases | 26 January 2018 CMS
Thales case: had the compilation of RPI materially changed? The employer argued that the compilation of RPI had materially changed Held change to inclusion of UK HPI in 2017 was a material change to the compilation Regarding changes to the compilation: • changes should not be looked at cumulatively • routine changes adopted to keep RPI fit for purpose should be ignored • it is the change itself that must be material, not the effect of a change • a change is material if it results in the RPI functioning and operating in a way which either does not fulfil its original purpose (to provide a measure of inflation for the typical household) or does so in a way which is materially different from the way in which it did so before the change Regarding the “freezing” of RPI: • “the “freeze” is so opaque and its consequences so unpredictable that it cannot sensibly be described as a change in compilation at all” 9 RPI/CPI Pensions Cases | 26 January 2018 CMS
Thales case: what is the nearest alternative to RPI? Although it was held that the compilation of RPI had materially changed and that it had been otherwise altered, the judge suggested that ‘new’ RPI could not be automatically excluded as a candidate for the replacement index The employer could not select the most appropriate index for pensions uprating – it had to be the closest index to the ‘old’ RPI On the basis that the introduction of UK HPI to RPI is the only material change to its compilation, RPI with that change is the nearest alternative index No obligation on the employer to annually test whether the new index remains the closest index to ‘old’ RPI 10 RPI/CPI Pensions Cases | 26 January 2018 CMS
The BT case (2017) Heard in December 2017, judgment handed down last week 1. The 2016 Rule “The cost of living will be measured by the Government’s published General (All Items) Index of Retail Prices or if this ceases to be published or becomes inappropriate , such other measure as the Principal Company, in consultation with the Trustees, decides.” Held: • Decision on inappropriateness was a question of objective fact for Court • Failure to decide if RPI had become inappropriate within a reasonable time did not cause the power to make that determination to lapse • “… notwithstanding the powerful statements from the UKSA, ONS and others to the effect that RPI is flawed and it ought not to be used as a measure of inflation… RPI has not at this time “become inappropriate” for the purposes of uprating pensions…” 11 RPI/CPI Pensions Cases | 26 January 2018 CMS
The BT case (2017) 2. The 1993 Rule “ If the General Index ceases to be published or is so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases …” Held: • BT is relevant decision maker, Court’s role limited to assessing whether decision was made rationally and in good faith • The word “continuous” emphasises the essential function of the index to provide a comparison from year to year, a change in formulation of RPI meaning no year to year comparison could be made may open the gateway • The amendments to RPI that have happened could not be relied on by a rational decision maker to determine that RPI had been amended as to invalidate it for the purposes of the rule Appeal? 12 RPI/CPI Pensions Cases | 26 January 2018 CMS
What’s next? Await outcome of the Barnardo’s Supreme Court decision Check scheme rules very closely Changing opinions on RPI? More cases on the horizon? Expedition? 13 RPI/CPI Pensions Cases | 26 January 2018 CMS
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