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Trouble in Arcadia – pension rules and regulations causing problems for the Greek ideal of unspoiled, harmonious wilderness

31 July 2014

A High Court judgment, helpful for those many employers, trustees and advisers, who are still grappling with uncertainties about how their pension schemes should deal with RPI/CPI issues was given today, 31 July 2014.  The case, Arcadia Group Limited v Arcadia Group Pension Trust Limited, considered very similar Retail Prices Index wording in the scheme rules for two defined benefit schemes in the Arcadia group.

The judge carefully said his conclusions need to be considered against the relevant background. Additionally the position as regards RPI/CPI changes turns on the facts of each scheme, and there are many variations on how RPI, the "Index" or the "Index of Retail Prices" are expressed (often even in the same scheme's documentation).

This judgment is nonetheless useful for schemes that are still considering to what extent they can make the change from RPI to CPI. Getting this right is very important, not only for members, but also for many  employers for whom pension cost savings are still needed to help make their scheme more affordable, and for trustees who simply need to know how properly to administer their scheme and to be sure that they are paying the right amount of pension.

Although this is not a case brought by a disgruntled member as such, it is worth remembering, given the importance of pensions, that members are increasingly willing to challenge trustees and employers if they think there is scope to do so.

The facts

The senior executives scheme rules stated that the aggregate of pension increases since a pension commenced to be paid: "will not exceed the percentage rise since that date in the Retail Prices Index (or any replacement of that Index)"; and "Retail Prices Index" means: "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of HM Revenue and Customs".

The judge noted, although pension schemes must nowadays be registered with, rather than approved by, HMRC, the concept of "Revenue Limits" continues to apply, to some extent, for both schemes. The "Revenue Limits" appendix of the executives scheme stated the maximum pension "may be increased whilst in payment at 3% compound or (if greater) in line with RPI", and "in line with RPI"  means  "over a period means in proportion to increases between figures for the months in which that period begins and ends in the General Index of Retail Prices published by the Department of Employment (or a replacement of that index not prejudicing Approval), with appropriate restatement of the later figure if the Index has been replaced or rebased during the period."  "Approval" meant "treatment of the Scheme as an exempt approved scheme under Chapter I of Part XIV of the [Income and Corporation Taxes Act 1988]". 

The main scheme rules were very similar and stated: pensions are to be increased by the lower of a specified percentage or "the percentage rise in the Retail Prices Index", and the "Retail Prices Index" continues to be defined (in an appendix devoted to definitions) as, "the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue".  Its rules also had an appendix with its "Revenue Limits" that were very similar to those of the executive scheme.

Interestingly the judge seems only to have been asked to consider each scheme's formal documentation ie its trust deed and rules, rather than extraneous scheme documentation such as the scheme booklets and benefit statement etc to see what they said about the level of pension increases to be paid. As each case turns on its own facts, these extra documents may well still need to be considered for any particular scheme. 

The decision

Does each scheme's definition of "Retail Prices Index" give a power for anyone to select an index, other than RPI, for the purposes of that definition? ie Can a power to select an index to be used instead of RPI be implied into a definition clause which anticipated the use of another index but which did not expressly set out how that change was to be made?

Conclusion: Yes, the power could be implied.  The definitions of "Retail Prices Index" for these schemes operate to confer powers to select an index other than RPI as the "Retail Prices Index" and those powers are not confined to circumstances in which RPI has been discontinued or replaced.  Each schemes' definition would reasonably be understood to mean there is a power of selection of an index unconstrained by any requirement for discontinuance or replacement of RPI.

If yes, whether the power is exercisable by (a) the trustee of the relevant scheme, (b) the principal employer or (c) the trustee and the principal employer jointly?

Conclusion: each power of selection is exercisable by the principal employer and the trustee of the relevant scheme jointly. Effectively it follows the scheme's amendment power.

If the power exists, whether CPI would be both "similar" to RPI and "satisfactory" for the purposes of HMRC within the meaning of the definition of "Retail Prices Index"?

Conclusion: CPI is a "similar index satisfactory for the purposes of [the Inland Revenue/HMRC]" within the meaning of the definitions of "Retail Prices Index" used for the schemes.

Whether section 67 of the Pensions Act 1995 precludes the selection of CPI for use in relation to past service? This question was in part a challenge to the 2012 judgment in the QinetiQ case where it was decided that a switch from RPI to CPI for past service benefits did not involve a breach of section 67 of the Pensions Act 1995.
Conclusion: Section 67 of the 1995 Act does not preclude the selection of CPI for use in connection with benefits derived from past service. Members have a "subsisting right" to increases and revaluation at rates consistent with the definitions of "Retail Prices Index", but not to increases and revaluation       specifically by reference to RPI. So the QinetiQ case was correctly decided.

Whether the definition of "Retail Prices Index" found in one scheme's rules took effect as regards active members as at (a) 6 April 1997 - when the Pensions Act 1995 introduced RPI for pension increases or (b) 31 March 2006 -the effective deed of variation making the change? 

Conclusion: The amendment to the particular rule took effect on 31 March 2006. That meant that members of that scheme who had already left service by then cannot be affected by the power of selection arising from the definition of "Retail Prices Index. The amendment to that rule that was made by a deed of variation of 31 March 2006 took effect on that date.   Not a surprising conclusion, we think.

For more information, please contact Michael Jones on +44 (0)20 7203 8917 or michael.jones@crsblaw.com