RPI or CPI – how to calculate pension increases

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The High Court has given judgment in a case concerning the use of the retail prices index (RPI) as an index for calculating increases to pensions in payment.

The rules

The rules of the BT Pension Scheme permitted the employer to adopt an alternative index for calculating increases to pensions in payment if the current index, in this case RPI, became inappropriate. The wording of the relevant rules is set out below.

The 2016 rules stated: “each pension in payment…will be increased by the increase in the cost of living during the 12 months up to and including the previous January…subject to a maximum increase in each year of 5%.”

The 1993 version of the rules stated: “The cost of living will be measured by the Government’s 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.”

A sub-rule added: “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 (sic) of calculating increases, the Principal Company shall substitute such other index or appropriate basis of comparison as it shall in consultation with the Trustees decide.”

The issues

The Court considered the question of which party (or parties) had the power to decide whether the cost of living index referred to in the rules had “become inappropriate”. Should this be a question for the employer to decide alone, should the employer decide this along with the trustee, or, was this an objective question of construction? The Court also had to determine whether RPI had “become inappropriate”.

BT submitted that the rules should be construed as conferring a power on BT to determine that the relevant index had become inappropriate. BT argued that the words used in the rules were extremely broad, required a judgment to be made or an opinion to be formed, and therefore could not be determined by an objective test, as this would give rise to unsatisfactory consequences. BT also argued that throughout the rules, similar powers of determination were conferred on the trustee and on BT, individually or jointly, and as such the draftsman would not have intended for one out of a vast number of decisions to be determined by an objective test. In addition, BT submitted that since the employer had the power to determine the alternative index to be used, the rule also permitted BT to determine that the original index had become inappropriate.

The Court disagreed with BT’s argument, stating that the question of whether the index had become inappropriate was one of objective fact. In the Court’s view, on a proper construction of the words used in the rules, no power was conferred on any party. In addition, the absence of a power in this context, whereas powers were conferred elsewhere in the rules, confirmed the Court’s conclusion that the test was an objective question of fact, as the draftsman would have included such a power if intended. It was further held that there was no inconsistency between the question of whether the index had become inappropriate, being one of objective fact, and BT having a power to choose an alternative index if, as a matter of objective fact, the current index ceased to exist or became inappropriate.

During the hearing a lengthy analysis of the advantages and disadvantages of using RPI as an index was undertaken. It was ultimately held that RPI had not become an inappropriate index as there had been no changes in RPI that affected the appropriateness of the index; the test was whether the index was appropriate and not whether it was the most appropriate index.

Practical implications

This case emphasises the need for employers and trustees to fully understand their scheme rules and their powers, and for the correct steps and processes to be followed when any significant changes are proposed and implemented.

The scheme is currently undergoing an actuarial valuation which is expected to show a significant deficit. We understand that BT is considering whether to appeal the judgment. BT would hope to succeed on appeal and for it to be decided that it did have the power to decide whether RPI had become inappropriate. If BT were to decide that RPI had become inappropriate it could then potentially exercise its power to change the index used to the consumer prices index (CPI), thereby reducing the scheme’s deficit.

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