Supreme Court: Barnardo's cannot change pensions uprating rate

The "unanimous and perhaps unsurprising" judgment by the Supreme Court (13-page / 364KB PDF) will have "significant funding implications for the scheme", since it cannot now take advantage of the savings currently offered by using the alternative Consumer Prices Index (CPI), according to pensions expert Isabel Nurse-Marsh of Pinsent Masons, the law firm behind Out-Law.com.

"Those who were hoping for a fundamental rubbishing of pension schemes using RPI will be sadly disappointed," said pensions expert Stephen Scholefield of Pinsent Masons. "As ever, trustees and employers should think carefully about what their scheme rules actually say, even if this might not give the outcome they want."

RPI was traditionally used as a measure of increasing deferred pensions and pensions in payment to account for inflation. In 2010, the government legislated to replace RPI with CPI, which is usually lower, as the measure of inflation for determining increases for all occupational pensions, as it deemed the rate "more appropriate". However, it did not implement any sort of statutory override to ensure that this change would take effect where RPI was 'hard-wired' into the rules of a particular pension scheme.

Barnardo's operates one such pension scheme. The rules state that indexation and revaluation should take place in line with RPI, which they go on to define as "the general index of retail prices published by the Department of Employment or any replacement adopted by the trustees without prejudicing [Revenue] approval". Barnardo's sought to substitute CPI for RPI, something which would significantly reduce the pension fund deficit but which would also be likely to significantly reduce future increases in pensions payable to scheme members.

Both the High Court and Court of Appeal held that the scheme rules prevented the trustees from making this switch. As long as RPI remained an officially published index, there was no "replacement" of the index within the meaning of the rules. "Replacement" in this sense did not give the trustees the power to adopt an index and automatically render it a replacement index, no matter how commercially sensible a decision this might be.

The Supreme Court has now dismissed Barnardo's further, and final, appeal. Lord Hodge, giving the judgment of the court, gave eight reasons for doing so. These ranged from the choice of wording and grammatical construction of the scheme rules themselves, to the requirement on the court to interpret those rules "without any preconceptions as to whether a construction should favour the sponsoring employer or the members".

"[T]he word order and grammatical construction of the phrase 'a replacement adopted by the trustees' suggest that the RPI must first be replaced and that the trustees adopt the replacement," Lord Hodge said in his judgment. "The word order suggests a sequence of events rather than the single event of an index being adopted by the trustees as a replacement."

"[T]he existence of a discretion on the part of the trustees and the requirement that the adoption should not prejudice [Revenue] approval do not militate against this view ... A cautious draftsman may well have chosen to provide for the eventuality of the RPI being replaced by more than one official index. As a result the trustees would be required to exercise discretion in the selection of the appropriate replacement and the [Revenue] themselves would have an interest in making sure that the chosen index was suitable when considering whether to approve the scheme," he said.

"The Supreme Court was very clear in its reasoning, of which there were eight key reasons," said pensions expert Hayley Goldstone of Pinsent Masons.

"While the wording of the Barnardo's scheme is not that common, the decision will be of interest to pensions practitioners and trustees alike where they have been contemplating a shift to CPI. It will also be of interest to the BT pension scheme, whose appeal on a similar point is due to be heard shortly," she said.

In January, the High Court ruled that BT was prevented from making the switch from RPI to CPI by rules restricting such a change to circumstances in which RPI "[ceases] to be published or [becomes] inappropriate". The High Court judge carried out a lengthy analysis of the expert evidence and, although recognising that RPI was a flawed measure of inflation, concluded that RPI had not become inappropriate for protecting members' benefits against inflation.