Funds

In a judgment issued on 7 November 2018, the Supreme Court unanimously denied Barnardo’s permission to switch from the Retail Prices Index (RPI) to the generally lower Consumer Prices Index (CPI) as its measure for calculating pension increases.

The Barnardo Staff Pension Scheme (the “Scheme”) is a defined benefit pension scheme which closed to new entrants in 2007 and which later closed to future accrual on 1 May 2013. The Scheme rules provide for pensions in payment to be increased by reference to the Retail Prices Index, which is defined in the rules as “the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval”. Barnardo’s had argued that this wording allowed the trustees to adopt a new inflationary measure even while RPI continues to be published, a move which would result in a significant reduction of the Scheme’s deficit.

The Supreme Court considered the critical words “or any replacement adopted by the Trustees without prejudicing Approval”. The key question was whether this wording means:

a) RPI or any index that officially replaces RPI and is subsequently adopted by the trustees; or

b) RPI or any index that is adopted by the trustees as a replacement for RPI (whether or not RPI continues to be published)?

Upholding the earlier decisions of the High Court and the Court of Appeal in this case, the Supreme Court decided that the first interpretation was correct, involving a two stage process in which RPI must first be replaced by an official body responsible for its publication and its replacement then adopted by the trustees. In its interpretation of the Scheme rules, the Court’s emphasis was on the natural meaning of the words used (i.e. using a more literal, textual approach) rather than taking a purposive approach in light of background facts.

This judgement is one of many in this contentious area in recent years. Whilst of interest to schemes and employers considering whether their scheme rules may permit a switch from RPI to CPI, it should be noted that this case was fact specific, turning on the precise wording of the Scheme rules. The starting point for other schemes considering whether to switch should be a careful review of their own rules, and the powers and discretions available to both trustees and employers.

If you would like to discuss anything raised in this blog, please get in touch with your usual contact at Brodies.

Jennifer Crawford

Senior Solicitor at Brodies LLP
Jen has specialised in pensions law since 2011 and works as an assistant solicitor within our specialist pensions team.
Jennifer Crawford