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Speaker
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Transcript
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Helen Cracknell, Solicitor, Burges Salmon
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Hello everyone, my name is Helen Cracknell and I'm a solicitor in the Pensions team. Welcome to episode six of the Burges Salmon Pensions Pod. Chris has sadly lost his voice today so won't be featuring in today's podcast, but we'll look forward to hearing from him soon. In our last episode we looked at how trustees can prepare for this forthcoming single code of practice, if that sounds of interest please check out our website. And in today's podcast we'll be discussing key cases in relation to RPI and CPI.
Our guests today are Suzanne Padmore, a partner in the Dispute Resolution team, and Amy Khodabandehloo, a senior associate in the same team. Suzanne and Amy, welcome to the podcast.
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Suzanne Padmore, Partner, Burges Salmon
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Thank you.
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Amy Khodabandehloo, Director, Burges Salmon
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Thanks for having us.
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Helen
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Thanks both so the issue of RPI and CPI is incredibly topical at the moment.
Inflation's quite big in the mainstream news with the highest rates for 30 years and this is all linked to the rising global price of energy, as businesses are passing down the costs on their consumers.
So this all means that rising interest rates will mean that people notice a drop in the strength of the pound in their wallet and we'll come on to say what this all means in relation to the expected alignment of RPI to CIPH, but all of this is very important for pension schemes as it will have a big impact on both assets and liabilities. Regardless, the impact will be very scheme specific. So Suzanne, could you tell us a bit more about what's been going on?
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Suzanne
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Yes that's absolutely right Helen, there have been a series of cases on RPI and CPI in the courts in recent years which at their heart is usually the question of whether or not as schemes rules allows the rate of increases to pensions and payment to be determined by reference to RPI or CPI, and I think it's readily acknowledged that the outcome of that question, especially across very large schemes, has a huge financial impact for the employer and therefore the funding position of the scheme, but in relation to members I think there's been a tendency to think that pensions with guaranteed increases, linked to whatever measure, is a really valuable pension in an event, even to the extent that if members assert a right for their increases to be increased in line with RPI and the trustees and employer cannot switch to CPI, then that might be a windfall for members. But the current cost of living crisis is really bringing this into sharp focus and not least members’ direct interest in the issues in their pensions may increase, to excuse the pun. Would it be a good idea just to briefly run through the different indices?
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Helen
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Yes please, just to clarify that for our listeners.
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Suzanne
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Great so RPI, the Retail Prices Index, this has long been the UK-based statistic to measure inflation by reflecting the change in cost of certain retail goods and services. It was downgraded in 2013 as it was said not to meet international statistical standards, but it had already fallen out of favour before then, most listeners will know that the public sector pensions have been increased with reference to CPI since 2011, that's the Consumer Prices Index, but RPI is still used for some purposes, which are also relevant to pensions, for example and importantly what is payable on index linked gilts, which lots of schemes are invested in.
So moving on to CPI this is an internationally recognized statistic which measures a market basket of items including food, shoes, clothing etc. CPI is generally expected to be lower than RPI and one of the reasons for this is because RPI includes housing costs whereas CPI does not. So this takes us on to CPIH which is CPI but including housing costs, and this tends to sit somewhere between the two.
I had to look yesterday on the ONS website and for December 2021, for example, CPI was 4.8 CPIH was 5.4, whereas RPI was a whopping 7.5. I think, I can't help mentioning because of it's come to light in the recent sort of inflation crisis, the Vimes Boot Poverty Index. The poverty campaigner Jack Monroe is campaigning for this, it's recently been coined and it's a more realistic measure actually reflecting the real life price increases that people are facing, particularly in the supermarkets for food, so listeners might want to look that one up too.
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Helen
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Thanks Suzanne, there's some really great background there. Could you tell our listeners a bit more about what's been going on in the specific pensions realm.
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Suzanne
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Yes, so I said earlier there's been loads of cases in relation to switching from one index to another, for specific schemes, and we're going to come on to those specifically, but more widely the government has announced that RPI will be aligned with CPIH from February, 2030 and that might seem some time away but everything is relative so not really in relation to pension schemes, and this will have a huge adverse impact on asset value.
In response to that announcement there is currently a claim by the trustees of the BT, Ford and Marks and Spencer pension schemes for judicial review of the government's decision to do this alignment, this is because of the impact on pensions and payment if RPI's still used for increases those will reduce, but also what I said earlier that this switch will have a hugely negative impact on the value over time of assets, particularly those held in index linked guilds. The trustees say that because of these impacts they have a fiduciary duty to take action against the government's decision.
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Amy
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And it's probably worth explaining as well that a judicial review claim is limited to assessing how a public body reached decision, in the hope the decision will be quashed or will have to be made again with a better process, it's not the same as a civil claim where the claimant seeks specific compensation from the defendant.
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Helen
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So change in the index rates will impact trustees with annuities and like you said Suzanne, other assets that are tied to RPI which would weaken the funding position and add pressure on scheme sponsors, but also on schemes that have RPI linked benefits as members could be made poorer. At a scheme level, how do you think all of this is relevant?
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Suzanne
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So disputes or court cases arising following the switch for public sector pensions to CPI in 2011, and the general downgrading of RPI in 2013 so that it's no longer a national statistic, have been quite a number of those. The cases almost always come about because the employer of a scheme wants to switch from RPI to CPI and the trustee either doesn't want to switch or wants the court's direction because the trustees are uncertain as to whether the scheme rules permit a switch or not. The outcomes between the various cases have been quite different and I would say in some instances quite unexpected.
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Helen
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So what kind of things do these cases usually focus around?
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Amy
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So at that core they all hinge on the relevant indexation rule in the scheme rules and what's known as the trigger provision, so the circumstances in which the rule permits an index other than RPI to be applied.
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Helen
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Given that each indexation rule can be quite different, as definitely with my experience with my clients, it must be quite hard to establish the common theme between the cases, that would be helpful in the future for interested employers and trustees to draw on?
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Suzanne
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Yes, by nature they are all different so it is quite hard to establish a clear set of rules that applies generally, and the facts of each case will differ, but we can draw some themes and lessons learned from the published cases which we'll go on to. It's possible that a particular case might be relevant to a scheme's circumstances, so you know there might be similar enough drafting that a particular scheme can follow one of the published cases if they have a similar definition of index and similar balance of powers.
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Amy
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Yes that's right, so as Suzanne said some of the case law follows a particular theme for example quite a lot of the recent cases have hinged on whether it's become, in some way, inappropriate to calculate pension increases by reference to RPI, or whether it could be said that RPI is no longer a valid index.
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Helen
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Could you take us through some of those recent cases?
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Amy
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Yes, so for example Talis, which is a 2017 case, the index there was RPI or if RPI is not published or its compilation is materially changed, the nearest alternative index, and the court found that RPI had been materially changed because a new house price index had incorporated into it, but perhaps rather frustratingly for the employer the court found that the nearest alternative index was in fact the RPI as materially changed. So a switch to CPI wasn't allowed in that case.
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Suzanne
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Yes thanks Amy, so another example is the Supreme Court decision in Buckinghamshire and Barnardos, which was in 2018, and this is where things started to get perhaps a bit unexpected and they started in the High Court in 2015 and ended up in the Supreme Court, as I said, in 2018.
Here the index was RPI or any replacement adopted by the trustees. The court needed to decide whether the trustees could switch from RPI to CPI i.e. the definition gave them the power to choose a replacement, but the High Court, Court of Appeal and Supreme Court were all agreed that the trustees could not switch to CPI, because even though RPI was no longer recognised as a national statistic it had not been replaced by the ONS, for example, and indeed remained published.
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Amy
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Thanks Suzanne, and there's also BT from 2018, in that case the index was RPI or if RPI ceased to be published or became inappropriate, another index chosen by the employer and trustees.
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Suzanne
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I think Amy we're probably proving the point that each case is quite different on the wording.
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Amy
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Yes, that's exactly right, the nub of the issue for the Court of Appeal to decide in BT was whether RPI had become inappropriate and the court said that RPI had not become inappropriate for the purpose of pension increases, and so a switch to CPI was not permitted.
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Helen
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Didn't Atos also deal with this in 2020?
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Suzanne
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Yes, that's right, so where the scheme rules provided for pension increases in line with RPI or where RPI is not published, any substituted index published by the ONS or its successor as agreed by the employer and trustees and the court said there which probably is a more expected outcome was that RPI was still published.
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Amy
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One final example of this particular theme of issue coming up was Arup in 2020, and here the scheme rules provided for RPI or if the composition of RPI changes or is replaced by another similar index, then another index chosen by the trustees, and there the court didn't permit the switch and the key reason was that the court found that replacement needed to be an action of the ONS.
So even with plans to align RPI with CPIH in 2030, even then it doesn't seem that RPI will actually be replaced by the ONS for the purpose of overcoming this kind of trigger provision.
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Helen
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So there's lots of different definitions there and just worth saying to some of our listeners that each of the trustees should consider the precise legal drafting of the index in their own rules. Quite interestingly there's lots of rejected claims there, do you know of any successful ones?
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Suzanne
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Yes that is a good point. We should mention those too so Danks and Kinetic in 2012, this was one of the first RPI CPI cases, we acted for the trustees in that case. The scheme rules provided that pension increases should be linked to RPI or any other suitable cost of living index selected by the trustees, and the trustees asked the High Court to interpret that wording and determine for them whether they had the power to choose an index other than RPI, and the court said yes the trustees could switch from RPI to CPI.
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Helen
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So there the Kinetic trustees might have had advice that they were able to switch, but they obviously weren't comfortable doing so until they had the court approval.
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Suzanne
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Yes exactly.
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Amy
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There's also Arcadia which was another case that allowed a switch to happen, that's back in 2014.There the index was RPI or any similar index satisfactory for the purpose of the inland revenue, and there the high court agreed that CPI was a similar enough index, so permitted the switch.
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Suzanne
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And I think just to bring us right up to date we should mention Britvic in 2021. Here the rules provided that pension increases would be in line with CPI, or any other rate decided by the employer. The employer was unsuccessful in the High Court because that decided that RPI could only be substituted for a higher rate, not a lower one, whereas the Court of Appeal held that the language used in the pension inquiries rule only had one possible meaning and was not ambiguous, and that is more in line with the court's standard approach of looking at the natural and ordinary meaning of the words.
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Amy
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All of the cases we've just covered are dealing with issues of interpretation, there are other types of RPI CPI cases where the issue isn't about interpretation and instead it's about whether RPI has been hardwired into the rules and whether that was intended, and whether that could be avoided by rectification which was the question that the court was determining in Univar, which is a case that Burges Salmon acted in for one of the represented members.
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Helen
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So Amy, as you said clearly lots depends on the precise drafting of each of the rules, Suzanne do you think there are any key takeaways from these cases for our listeners?
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Suzanne
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I think what all the cases highlight, whatever the wording, is the fact that the court will take quite a rigid approach to the interpretation of pension increase rules, like it does with interpretation of other parts of scheme documentation.
The starting point will be to look at the natural and ordinary meaning of the word, and also I think if anyone's looking into this in detail the starting point would be the specific guidance laid down in Barnardo's, because that is a Supreme Court decision so it has the most binding authority.
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Helen
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And then what does this all mean for trustees and employers moving forward?
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Suzanne
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So RPI CPI is still a hot topic, many schemes still have you know different drafting, so if they come across this issue, particularly if employers are seeking to reduce costs and wanting to switch, the wording might mean there is still uncertainty. The trustees are probably aware that members facing the cost of living crisis should want to assert a right to have the right rate of increases that they're entitled to.
So if trustees prefer a higher rate, or don't want to make a switch to a lower rate, that can have away from the impact on members but have a massive impact on scheme liabilities, many of the cases we've talked about involved the question of liabilities changing in the sort of tens of millions, so it is a really expensive issue for employers as well. I would say if listeners haven't checked what their rules say, I'm aware most schemes have probably already done this, but it is something that could be done. Discussions between employers and trustees and take legal advice and consider if there is scope to switch rates. Alternatively, whether there is a potential hard wiring issue that Amy referred to and whether that could be avoided by separate action.
So the separate issue of the alignment of RPI to CPIH and we've said that as that will have an impact on schemes that are invested in index-linked gilts, so again that has an impact on scheme funding from an asset value perspective as opposed to a benefit cost arising from increases to pensions and payment.
So overall RPI CPI CPIH and the current cost of living crisis has a lot of different impacts on employers, trustees and members and it goes to show how important it will be for all three of those stakeholders and schemes to address the issue.
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Helen
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Thanks for coming on the podcast Suzanne and Amy and sharing your expertise with us. I know I've had a lot of clients reaching out about this issue at the moment and I'm sure it will only increase in the future.
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Suzanne
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Thank you for having us.
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Amy
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Thanks Helen.
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Helen
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Thank you for listening to the Burges Salmon Pensions Pod.
If you'd like to know more about our Pensions team and how our experts can work with you, you can contact myself, Chris or any of our team via our website.
This episode was the last for our series one, but be sure to look out for our series two starting in May of this year. In our next series we're going to be looking at key themes for 2022, so consolidation, governance, GMP equalization, ESG, personal pensions and regulatory powers.
All of our previous episodes are available on Spotify, Apple or wherever you listen to your podcasts.
Don't forget to subscribe and thanks for listening.
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