The UK Supreme Court has ruled that a charity cannot change the way it calculates inflation-linked uplifts to defined benefit (DB) pension payments.
In the landmark ruling yesterday, judges unanimously ruled that children’s charity Barnardo’s could not shift its inflation measure from the UK retail prices index (RPI) to the consumer prices index (CPI). CPI is typically lower, meaning the change would have likely reduced future payouts.
However, lawyers said the ruling was unlikely to set a precedent for many other UK schemes as it related to the particular wording of the Barnardo’s scheme rules.
Stephen Scholefield, pensions partner at Pinsent Masons, said: “Those who were hoping for a fundamental rubbishing of pension schemes using RPI will be sadly disappointed. As ever, trustees and employers should think carefully about what their schemes rules actually say, even if this might not give the outcome they want.”
Jane Kola, partner at ARC Pensions Law, said: “The decision confirms that the index to be used to increase benefits in both deferment and in retirement depends on the exact wording of scheme rules as they apply to members.
“There is no hard and fast rule that schemes can or can’t change their index. Schemes need to ensure that they have looked at all of their rules, not just the last set.
“This is a rule of which the drafting is likely to have evolved over time. This means that some members will be entitled to RPI, some CPI, and some may be subject to a change to the index either at the discretion of the trustees, the employer, or both.”
According to the judgment, the rules of the £688m (€790m) Barnardo’s scheme defined RPI as “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the trustees without prejudicing approval”.
The rules also stated that pension payments should be increased in line with RPI “with an appropriate restatement… if the retail prices index has been replaced or rebased during the period”.
The judges ruled that this meant the trustees could only move away from RPI if it was formally removed as a measure of inflation by the government. Although it is used less often than other measures, RPI remains an official UK statistic.
A bigger case on the horizon
Pinsent Masons’ Scholefield said the next big test for the RPI/CPI debate related to the BT Pension Scheme. The UK High Court ruled against the trustee board of the BTPS earlier this year in relation to its attempt to switch from RPI to CPI for inflation-linked benefits, but the trustees appealed to the Supreme Court.
“In the BT case, the wording is about whether RPI has become inappropriate,” Scholefield told IPE. “This is much more subjective. It’s a much more principles-based discussion than the issue that the Supreme Court had in [the Barnardo’s] case.”
He added that the BT ruling would be “much more significant” for UK pension schemes, because if RPI was deemed to be “inappropriate” as a measure of inflation it could prompt schemes with more flexibility in their rules to move to alternative measures – which could potentially reduce liabilities.