The Court of Appeal dismisses appeal by Barnardo's to switch inflationary index from RPI to CPI for the purposes of applying anti- inflationary protection to pension scheme members
On 2 November 2016 the Court of Appeal gave its decision in Barnardo's and others v Buckinghamshire . The appeal was made by Barnardo's and related to the operation of its defined benefit pension scheme.
Barnardo's being a well-known charity, wished to reduce the costs for the scheme (which it will be primarily responsible for) by moving away from the more expensive Retail Prices Index (RPI) for the purposes of providing anti-inflationary protection for pension scheme members, in terms of revaluing deferred member benefits until their normal retirement age and also in relation to increases to pensions in payment. Barnardo's wished to apply the Consumer Prices Index (CPI) to protect members' benefits against inflation in both these aspects.
Against this background in 2014 the Office for National Statistics said that RPI met the required standards as a national statistic. So in this way the intended move can be said to not solely relate to the desire to apply a weaker index.
The pension scheme rules contained a definition of "Index" which read "RPI or any other replacement adopted by the Trustees without prejudicing Revenue Approval". The arguments in court focused on the meaning of replacement in this context.
Barnardo's argued that this rule gave the Trustees a discretion to use another inflationary index, like CPI (which is arguably a better index anyway) as if the words read "any other index adopted by the trustees as a replacement".
The Court (but only by a majority decision) found in favour of the Trustees, who argued that the construction of this definition meant that CPI could only be used where RPI had been replaced as a national statistic.
The dissenting judge found in favour of Barnardo's arguments. One reason for this was that at the time the scheme rules were drafted in 1988, there were four similar inflationary indexes published, which would lead to a more logical construction of the rules as allowing a trustee discretion to switch inflationary index.
This case also contained a cross-appeal on the question of whether members had any accrued rights to the application of RPI as an anti-inflationary measure for pension increases. The Court upheld previous case law (in the decisions of the High Court in QuinetiQ ad Arcadia) and ruled that up until the trustees selected the index there can be no accrued right to any payment resulting from that decision.
It is helpful that the position on accrued rights has been clarified.
However, this case makes it clear that there is no overriding power for schemes to move away from the application of RPI for anti-inflationary increases relevant to protection of deferred pension benefits and pensions in payment. This means that schemes will have to consider the meaning of their own rules on a case by case basis. This decision is not an easy one for employers who naturally wish to consider ways to reduce their DB liabilities but at the same time wish to apply inflationary protection. Employers will have to consider more creative ways to reduce their DB liabilities. This may be an area the Government decides to intervene and introduce new overriding legislation, Watch this space!