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We examine the latest case addressing the issues arising out of the change to a consumer prices index.

In 2010 the government changed the way that pension increases and revaluation calculations would be calculated. The changes meant a move away from a Retail Prices Index (RPI) basis to a Consumer Prices Index (CPI) basis.

This change applied to the statutory minimum levels by which private sector salary-related occupational pension schemes must revalue deferred pensions and increases in pension payments.

The results of the change have not been straightforward. Depending on the way individual scheme rules were written, some had used the statutory provisions, some schemes had their revaluation and/or increases change automatically to CPI, some have found that RPI had been ‘hard wired’ into the wording of their scheme rules and others have been left uncertain as to the answer.

Disputes with members and trustees

Given the likely future reduction in increases following the switch to CPI, tensions have arisen between employers and trustees or members.

We previously commented on several Pensions Ombudsman complaints in relation to schemes making the switch. To date, none have been successful but there have been some court actions to obtain directions on the drafting of the governing scheme rules.

The Arcadia case

The latest ruling in Arcadia Group Limited v Arcadia Group Pension Trust Limited (as Trustee of the Arcadia Group Pension Scheme), AG Senior Executives Pension Trustee Limited (as Trustee of the Arcadia Group Senior Executives Pension Scheme) has given useful guidance allowing a switch from RPI to CPI for both past and future service. Although the case turns on the detailed wording of the scheme provisions, it may assist other schemes wishing to make the change.

The Arcadia case also provides useful clarification that even if scheme rules appear to expressly refer to the 'Retail Prices Index', this does not guarantee that members have an accrued right to revaluation or indexation by reference to the RPI.

For example, in the case of Danks v Qinetiq Holdings Ltd (2012), the High Court rejected the argument that a decision by the trustees of the pension scheme to switch to CPI based indexation and revaluation amounted to a detrimental modification of member’s subsisting rights contrary to section 67 of the Pensions Act 1995.

Impact of switching to CPI

In February 2011, following a revision of its initial assessment, the Department of Work and Pensions estimated that there would be an overall saving for DB schemes of £83 billion over 15 years. On the assumption that 20% of private sector schemes provide statutory minimum revaluation and indexation in their scheme rules, a switch to CPI would lead to a £1.2 billion saving in the first year of the change.

Following a survey conducted among 42 large clients at the end of 2010, consultants Towers Watson estimated that the switch will reduce FTSE 100 pension liabilities by over £15 billion.

Although the Arcadia and the Qinetiq cases open up the possibility for this change, careful consideration must be given as to the detail of the particular scheme rules. For example, it is not clear if a court would come to the same conclusion if the change required an exercise of the scheme’s power of amendment, as opposed to a modification under the express terms of an existing rule. It seems unlikely there will be too many more challenges to moves to CPI based revaluation and indexation.

Where the implications of this change from RPI to CPI based calculations are being considered in relation to a particular scheme, legal advice should be taken. This is particularly important if your pension scheme documents were consolidated (i.e. if you had an updated definitive deed executed) and the definitions of the scheme ‘index’ were ‘updated’ by drafts-people. Any modifications in the light of the RPI/CPI changes need to be made carefully to ensure that they could not be seen as a detrimental change to the previous definition.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Pensions law

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