19 Aug 2014

RPI and CPI – switching to something 'similar'


Pensions alert email

The High Court has decided in the case of Arcadia Group Limited v Arcadia Group Pension Trust Limited & Anor, that a switch to CPI could be made under the definition of "Retail Prices Index" in the scheme rules.

The question considered by the court was whether the definition of "Retail Prices Index" as used in two pension schemes of the Arcadia group, gave a power to select an index other than RPI to apply to revaluation and pension in payment increases.

The definition considered in the scheme rules provided that "Retail Prices Index" is "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue".

Trustee and employer arguments
The trustees argued that under the definition of "Retail Prices Index" the relevant schemes were required to use RPI until it is discontinued or replaced.

The arguments made by the employer were that the "Retail Prices Index" could be RPI or any other similar index meeting the requirements of the definition. By reference to Revenue material it was argued that another index could be adopted in preference to RPI rather than because that index had ceased to exist.

Decision of the court
The court effectively sided with the employer. The judge held that the better view was that the definition of "Retail Prices Index" operated to confer a power to select an index other than RPI and that power was not confined to circumstances in which RPI has been discontinued or replaced.

The judge also noted that CPI would be a similar index to RPI for Revenue purposes as was required by the definition of "Retail Prices Index". Therefore CPI could be applied to revaluation and pension in payment increases.

An argument was raised by the trustees in relation to the operation of Section 67 of the Pensions Act 1995, which in broad terms prevents changes being made which could detrimentally affect the rights a member has accrued in the past. It was argued that a previous High Court decision, QinetiQ, had been decided wrongly on this point, the contention being that Section 67 would prevent a switch to application of CPI to benefits which had already accrued.

The judge rejected this argument and upheld QinetiQ. The judge noted that members have a "subsisting right" under Section 67 to increases and revaluation at rates consistent with the definition of "Retail Prices Index" (which contained the power to select another index) but not to increases and revaluation specifically by reference to RPI. Therefore Section 67 did not preclude the selection of CPI for use in connection with benefits derived from past service.

Relevance of the case
This case once again highlights that much can turn on the precise wording of the scheme rules. Had the wording of the definition of "Retail Prices Index" been even in the slightest way different, the judge may have arrived at a different conclusion. Before considering any changes to the measure of inflation to be applied therefore, trustees and employers should consider the relevant definitions in their scheme rules properly before deciding on whether any switch can be made.



Philip Goodchild

Philip Goodchild

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