Pensions | RPI / CPI: Supreme Court hands down its judgment in the Barnardo's case

Today (7 November 2018), the Supreme Court handed down its judgment in Barnardo's v Buckinghamshire and others. In a unanimous decision, the Court ruled that the scheme's definition of 'Retail Prices Index' (which refers to "the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval") does not allow the trustees to replace the Retail Prices Index (RPI) with the Consumer Prices Index (CPI).

What was the case about?

The rules of the Barnardo Staff Pension Scheme provide for pensions in payment to be increased by the lesser of 5% and "the percentage rise in the Retail Prices Index (if any) over the year ending on the previous 31 December". The rules define 'Retail Prices Index' as: "…the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval. Where an amount is be increased 'in line with the Retail Prices Index' over a period, the increase as a percentage of the original amount will be equal to the percentage increase between the figures in the Retail Prices Index published immediately prior to dates when the period began and ended, with an appropriate restatement of the later figure if the Retail Prices Index has been replaced or re-based during the period".

The court was asked to confirm whether this definition means that the trustees:

• could at any time decide to adopt another index (for example, CPI) to replace RPI; or
• would only be able to adopt the index that replaces RPI if and at such time as the RPI is discontinued and replaced.

What did the Supreme Court decide, and why?

The High Court and the Court of Appeal had both decided that the scheme's definition of RPI would only allow the trustees to adopt the index that replaces RPI if and at such time as the RPI is discontinued and replaced. The Supreme Court reached the same decision.

The Supreme Court gave a number of reasons for its decision. These included the following:

• the word 'replacement' "does not naturally suggest the selection of an alternative to an option which remains available";
• "the word order and grammatical construction of the phrase 'a replacement adopted by the trustees' suggests that the RPI must first be replaced and that the trustees adopt the replacement";
• in practice, only the authority responsible for publishing the RPI can rebase it. In view of this, the logical interpretation of the words "replaced or rebased" is that the draftsman also intended 'replaced' to mean 'replaced by the authority responsible for publishing it';
• this is supported by the definition of "in line with RPI" in the Inland Revenue limits appendix, where it is "clear that the definition … is referring to the replacement or re-basing of the RPI by an official body responsible for the production of that index";
• the fact that Inland Revenue guidance would have allowed the trustees to agree a different index with the Superannuation Funds Office does not change anything, because the draftsman did not reflect the wording of the guidance in the scheme rules; and
• the fact that an earlier version of the scheme rules contained a different definition of 'Index' did not change anything, because there had been a "wholesale re-drafting of the earlier rules" and "the nature of a pension scheme, which may have members who have no knowledge of the prior rules, makes it unprofitable to delve into the archaeology of the rules in this case".

Osborne Clarke comment

The question of whether it is possible to change the index used to calculate the indexation or revaluation of pension benefits will depend on the specific wording of a scheme's rules. There have been a number of decisions in this area in recent years and employers and trustees should take legal advice if they are considering whether it is possible to change index.

Because of the decision it reached, the Supreme Court did not need to consider a cross appeal on a question which would have affected a lot of schemes. This was the question of whether section 67 of the Pensions Act 1995 (which protects the benefits members have built up) would have prevented the trustees from changing the index. As a result, the law is still as decided in earlier cases: where the scheme rules allow trustees to change the index, section 67 is not a barrier.