22 Aug 2019

Britvic is reportedly seeking court approval to change the measure used for calculating increases to pensions in payment from its defined benefit scheme, from the retail prices index (RPI) to the consumer prices index (CPI).

If so, it will be the latest case (though probably not the last) asking the courts to sanction such a switch. When we last revisited moving from RPI to CPI, the case law was already building. There was also the possibility that the Government might introduce a statutory modification power to allow schemes to make the switch irrespective of the terms of their scheme rules. However, last summer the Government decided against this course of action, deciding to monitor the situation for the time being. This meant that trustees and employers considering a switch from RPI to CPI remained subject to the lottery of the precise wording used in their scheme rules and how such wording might be interpreted by case law.

The case law has, of course, continued to evolve. In 2018 the Supreme Court in Barnado's v Buckinghamshire analysed the wording of the well-known charity's pension increase rule which the Employer argued allowed the Scheme Trustees the option to change inflation indices without a rule change. The provision referred to the rate of inflation protection being the "prescribed rate" which linked to a reference to RPI published by the Department of Employment, or "any replacement adopted by the Trustees without prejudicing approval".

The unanimous decision of the Supreme Court was that this did not give the Trustees a discretion to change indices unless RPI ceased to be published and was replaced by another index. Both the Supreme Court and the majority of the Court of Appeal viewed this as the natural meaning of the promise made to members under the trust deed. Arguments around the inappropriateness of RPI to reflect the real increase in the cost of living ran up against this issue.

Applying a similar "natural meaning" test, the Court of Appeal in BT v BT Pension Scheme Trustees Limited stopped a proposed change from RPI to CPI where the scheme rules provided for change if RPI had "become inappropriate" or had been "amended [so] as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases". The Court found that the Employer had not made the case that RPI had become inappropriate (and did not have the Trustee's agreement which made it an issue for the Court), nor that changes to the calculation of RPI over the previous years showed that it had been invalidated on the relevant basis for the Employer's power to engage.

And so we are still in the lottery of exact trust deed wording, at least for so long as RPI remains a published index. Should you have any questions about your own inflation protection rule, or be concerned about any changes that you have already made, please contact your usual WBD pensions adviser.