BT not permitted to change pension scheme uprating measure of inflation

Out-Law News | 22 Jan 2018 | 9:48 am | 3 min. read

BT is not permitted to change the rate by which it uprates the benefits of members of one of the strands of its pension scheme from the retail price index (RPI) to the generally lower consumer price index (CPI), the High Court has ruled.

The wording of the pension scheme rules would only permit BT to change the measure should RPI "[cease] to be published or [become] inappropriate", neither of which had happened, Mr Justice Zacaroli ruled. An earlier version of the scheme rules contained slightly different wording, looking at whether the index had been "so amended as to invalidate it", but this did not apply either, according to the judge.

The judge said that whether RPI had become inappropriate or invalidated was a question of objective fact, and not something which BT was entitled to decide. The question fell to be determined by the court if, as in this case, BT and the scheme's trustees were unable to reach agreement.

After analysing the history of RPI and alternative indices in some depth, the judge concluded that it could not be said that RPI had "become inappropriate". In particular, he noted that the use of the word "inappropriate" meant that BT had to do more than show that "it would be better to use another index, or that another index has become more appropriate, or that RPI is merely undesirable".

The judge also noted that there were "reasonable grounds to conclude that jettisoning RPI would lead to ... a material risk for the pensioners under the scheme".

"[N]otwithstanding the powerful statements from [the UK Statistics Authority], [the Office for National Statistics] and others to the effect that RPI is flawed and that it ought not be used as a measure of inflation, I have reached the conclusion ... that RPI has not as this time 'become inappropriate' for the purposes of uprating pensions, within the meaning of that phrase in [the scheme rules]," he said.

However, the judge also found that if BT had had the power to make the change, it was not bound to exercise it "within a reasonable time" or otherwise forfeit that power. This was "largely because of the absence of a defined point which would trigger the start of any such time period", he said.

"In the absence of any defined starting point for giving consideration to the continuing appropriateness of RPI, the most that can be said is that BT is under a duty to do that which a rational person in its position, acting in good faith, would do, and that this may in some circumstances involve taking action within a reasonable time," he said. "That is different, however, from there being a positive duty in all circumstances to do so."

RPI was traditionally used as a measure of increasing deferred pensions and pensions in payment to account for inflation. In 2010 the government legislated to replace RPI with CPI, which is usually lower, as the measure of inflation for determining increases for all occupational pensions, as it deemed the rate "more appropriate". However, it did not implement a statutory override to ensure that this change would take effect where RPI was 'hard-wired' into a particular pension scheme's rules.

The BT case is the latest in a line of cases in which employers, many of which are struggling with increased pension scheme deficits, have sought to implement a change in inflation rate. Each of these cases has turned on the rules of the scheme concerned, with inflation being described in a way in some cases that was "broad enough to allow the calculation to be changed, and sometimes not", said pensions law expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com.

"Where there is no flexibility, some had hoped that the courts would decide that RPI was simply inappropriate, regardless of what the rules said," he said.

"This decision knocks this on the head. If RPI cannot be replaced on the basis of being inappropriate where the rules permit this, there is no chance where they do not. Similarly, those calling for the government to introduce a power to override the scheme rules now have another hurdle to overcome. The much-awaited government white paper on this issue gets more significant by the day," he said.

In its green paper on defined benefit pension schemes, published last year, the government recognised the existence of an inflation protection 'lottery' among schemes depending on individual rules. The paper proposed the introduction of a statutory override to introduce some fairness, with a prospective saving to affected employers of £90 billion. However, the government is yet to respond to a consultation of the issues raised by the green paper.

Pension disputes expert Hadassah Shulman of Pinsent Masons said that the comments by the judge on whether the power had to be exercised within a reasonable time was "of wider interest than just to the RPI/CPI date".

"The judge considered that the power to change the index did not need to be exercised within a reasonable time, largely, it seems, because of the difficulty in assessing when a reasonable time would begin given the power is ongoing," she said.

"There are many powers in pension scheme trust deeds and rules that are continuing and this should provide some reassurance that there is not a countdown to their expiry," she said.