Third time still unlucky – Barnardo’s trustees must retain RPI

We have written twice before about the attempts by the trustees of the Barnardo Staff Pension Scheme (the Scheme) to switch the measure for their pension increases from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI): in 2015 with the High Court’s judgment and in 2016 with the judgment from the Court of Appeal.

On both occasions, the Courts ruled that the Scheme rules did not permit the trustees to switch from RPI to CPI unless RPI ceased to be an officially published index.

In view of the financial significance of the matter to the Scheme, the case did not end there. The deficit of the Scheme at 31 March 2017 stood at around £137m[1] and the switch to CPI would have reduced this by between £65 and £75m.

The Supreme Court has now unanimously rejected Barnardo’s appeal and upheld the lower Courts’ decisions.

What did the Scheme rules say?

The Scheme rules provided for pensions in payment to be increased each year by the lesser of “5% and the percentage rise in the Retail Prices Index (if any)…”

Retail Prices Index was defined in the Scheme rules as “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval.”

What did the Court say?

The Supreme Court considered whether the words “or any replacement” in the Scheme rules meant:

• any index that replaces RPI and is adopted by the trustees; or
• any index that is adopted by the trustees as a replacement for RPI.

The first interpretation involved a two-step process: 1) RPI must be replaced and 2) the trustees must adopt that replacement. The Court of Appeal previously held that RPI can only be replaced by the authority responsible for publishing it (the Office for National Statistics (ONS)). Without RPI being officially replaced by the ONS, there was no other “replacement” that the trustees could adopt instead.

Barnardo’s preferred the second interpretation which involved a single-step process and would allow the trustees to adopt another index irrespective of whether RPI was replaced.

The Court held that the word replacement does not naturally suggest selection of an alternative option. The pension increase rule must also be considered in the context of the document as a whole where words and phrases should be expected to have consistent meanings throughout. In addition, the construction of the rule suggested that RPI must first be replaced and that the trustees must then adopt that replacement.

What does this mean for pension schemes?

This case also highlights some of the issues that arise with regards to historic drafting. Where trustees wish to move to a new index, this will be dependent on the wording contained in the relevant provision of the scheme’s rules.

There have now been a range of different cases covering this issue. Each individual case is of limited application as each decision turns on wording which is scheme specific. However, general trends can be interpreted from the way in which the courts have analysed the language used and more cases might be expected.

Furthermore, although RPI lost its status as a national statistic in 2013 and the Government is reducing its use of RPI, it continues to be published and continues to be highly relevant to occupational pension schemes.