Switching to CPI may just have become a little easier

Rowan Harris contributed to the writing of this blog post.

When the government changed statutory minimum pension increases in 2011 to refer to increases in the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI), many employers and trustees were flung into a flurry of activity on what that meant for their schemes (see our previous note on the QinetiQ case).  A few years on, and the implications are still being worked through.

Yesterday, the High Court handed down another judgement in this area which may be of help to those trying to get to grips with their rules.  Arcadia Group Limited approached the High Court to determine whether the rules of two schemes of which it was Principal Employer conferred a power to select an index other than RPI.

Broadly, the rules of both schemes defined the 'Retail Prices Index' used to determine pension increases as 'the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue/HM Revenue & Customs'.

The judge found that this wording allowed the selection of an index other than RPI.  There was no requirement for RPI to be discontinued or replaced before CPI could be considered a suitable alternative.  The judge found that the power of selection rested jointly with the employer and the trustees.

This judgement potentially increases the number of schemes which may be able to choose an alternative index. Whilst legal advice will be needed to make sure that any change is possible, companies and schemes may now have more flexibility on pension increases than they previously thought.

It may also be good scheme governance to review the increase awarded each year in light of changing scheme circumstances and the indices available.  In particular, the company and trustees should carefully document any decisions, paying particular attention to what might become an established practice.