Pension schemes mull judicial review of inflation indices reform

The trustees of the BT Pension Scheme, Ford Pension Schemes and the Marks and Spencer Pension Scheme are deciding whether to seek a judicial review of the government's decision to align the Retail Prices Index (RPI) with the Consumer Prices Index including owner occupiers’ housing costs (CPIH) from 2030.

The BT, Ford, and Marks and Spencer pension schemes' trustees have announced that, following a joint application, the court has granted an extension of time for them to consider making an "application for a judicial review of the [government's] decision to align RPI with CPIH from 2030". Judicial review is a procedure under which the courts consider the lawfulness of decisions made by public bodies.

Media reports suggest that this extension gives the trustees until 7 April 2021 to make any application for a judicial review. Amid this renewed interest in the proposed alignment with CPIH, what does this mean for trustees and employers of occupational pension schemes?

What's the background?

HM Treasury and the UK Statistics Authority (UKSA) on 25 November 2020 published a joint response to their consultation on when and how to bring the CPIH methods and data sources into the RPI. This would be done with the aim of addressing the perceived shortcomings in the RPI.

While the Treasury was interested in the "when", because, if the chancellor of the exchequer agreed to this change before 2030, it might have to offer to redeem a particular category of gilt that was issued up until 2002, the UKSA was interested in the "how", that is, the statistical method to be used.

The joint response confirms that:

• The chancellor will not consent to the changes to RPI before 2030.
• As a result, the UKSA plans to introduce these changes from February 2030, so as to align the RPI with CPIH, and to use the statistical method on which it consulted.
• After the change, the RPI and CPIH will continue to be calculated and published as separate indices, but the composition of RPI will have changed to align it with CPIH.
• Because "the RPI" will still be used to calculate interest and redemption payments, the government does not intend to offer compensation to the holders of index-linked gilts.

What's the impact?

How could this reform of the RPI affect pension schemes? The response does acknowledge that the change will negatively affect defined benefit pension schemes and their members. For example, the value of assets relative to liabilities is likely to fall where (RPI) index-linked gilts or other assets are being used to hedge CPI liabilities. The RPI is also often used as the basis for calculating pension increases under occupational pension schemes.

There is a statement in the joint response that "[t]he government keeps the occupational pensions system under review and will continue to do so", but this provides little comfort to trustees and employers, who are having to consider a whole range of actuarial, investment and audit impacts, some with immediate effect.

Osborne Clarke comment

If the trustees of the BT, Ford, and Marks and Spencer pension schemes do decide to make an application for judicial review, then the application should be one for all pension scheme trustees and employers to follow with interest.

Pending an application and decision, the safest course of action is for trustees and employers to proceed on the basis that the change to RPI will go ahead in 2030, and that no compensation will be paid to occupational pension schemes.

In addition to the work that employers and trustees are doing with their actuarial and investment advisers, this is a good time for employers to take legal advice on what their scheme rules provide in relation to the increase of pensions in payment and revaluation of deferred benefits. Questions to consider here include:

• Do the rules link these increases to the RPI, or to CPI (or something else)?


• If the link is to RPI, has this always been the case, or have there been accidental/unintended changes to the wording over the years?


• If the link is to the RPI, is the rule or definition wide enough to allow the employer and trustees to make a change to CPI now (with a view to looking at the index again as 2030 approaches), or has RPI been 'hardwired' into your rules?


• Can a change from RPI be made for as long as the Office for National Statistics continues to publish RPI?

 

The answer to these questions, and the impact they have on member benefits and scheme liabilities, will inevitably vary from scheme to scheme depending on how your rules are drafted. For scheme employers, our experience is that these issues and questions are well worth considering, and then discussing with your trustees. For example, finding that your scheme rules could allow you to change the index used to calculate pensions increases (or deferred revaluation) from RPI to CPI (or possibly CPIH) can provide a relatively easy way of managing your scheme liabilities.

We have a lot of experience in this area and would be pleased to advise connect with an expert >