Personal Pension  

RPI to CPI pension switch is lawful

Earlier this year the Pensions Ombudsman dismissed a complaint by a pension scheme member. He claimed he had relied on references to RPI-based indexation in the scheme information when deciding to sign a compromise agreement in 1999 and take early retirement.

Mr Leigh was employed by BAE Systems plc and was a member of the Royal Ordnance Pension Scheme. The scheme rules stated that pensions in payment were increased in line with orders set out under section 59 of the Social Security Pensions Act 1975. An explanatory booklet dated August 1994 also specified that “after state pension age, your…scheme pension in excess of GMP is increased in line with RPI”. The booklet emphasised that it did not override the scheme rules and should be treated as a guide only.

Mr Leigh officially left his employment on 31 May 1999 following an incident at work with potential disciplinary repercussions for him. Upon leaving BAE, he received a payment under a compromise agreement and took official early retirement on 1 June 1999. The scheme pensions administrator sent him a letter on 14 June 1999, which included a statement that “at state pension age, your pension… over and above your GMP will be increased... by RPI”.

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From April 2011, however, increases to Mr Leigh’s pension in payment were linked to CPI, rather than RPI. Mr Leigh had reached state pension age and complained that he had agreed a “retirement contract” with his employer at the end of his employment, under which he was contractually entitled to pension increases linked to RPI. He claimed this contract was evidenced by: (i) the compromise agreement; and (ii) the letter of 14 June 1999 from the pensions administrator.

Mr Leigh further submitted that when agreeing to the compromise agreement and early retirement package, he had relied on scheme information, including the 1994 booklet and separate assurances from BAE’s first chairman that it would continue to match RPI, unless the financial position of the scheme dictated otherwise.

The ombudsman dismissed Mr Leigh’s complaint and held that the switch to CPI-linked pension increases was lawful. BAE was under no obligation to consent to fund increases based on RPI even if the scheme was in a favourable financial position.

None of the scheme information Mr Leigh received constituted any promise or assurance that was “clear, unambiguous and devoid of relevant qualification” that RPI would be the index of review in perpetuity. Instead, it could reasonably be treated as a statement of current practice. The wording in the explanatory booklet did not constitute a promise beyond the scheme rules.

Similarly, the letter Mr Leigh received on 14 June 1999 merely set out the rules applicable at that time and the assurances from BAE’s first chairman stated that under certain conditions an index other than RPI could be used in the future. The ombudsman therefore concluded that the information Mr Leigh had received was not “substantially misleading”.

In any event, the ombudsman held that even if the scheme information had been misleading, Mr Leigh would still not have been entitled to RPI increases as he had not acted to his detriment based on an understanding that the RPI-based increases were fixed. The ombudsman decided that his decision to take early retirement was far more likely to have been influenced by his compromise payment than any potential variation in the future measure of inflation used for pensions in payment.