The finer details of RPI and CPI

Rule 14 of the plan states that a pension in excess of the “guaranteed minimum pension” (GMP) will be increased by 3 per cent a year. “Index” is defined in the definitions of the rules as “the Index of Retail Prices published by the department of employment or any other official index published in substitution for that index or that may from time to time be approved by the Commissioners of the Inland Revenue for this purpose”, but “Index” is not mentioned in Rule 14. The rules say BCH can amend the rules with the trustees’ consent and also contain an augmentation power for individual cases for an amount determined by BCH with trustees’ agreement.

In order to comply with the introduction of the statutory limited price indexation (LPI) mechanism, from April 1997 the plan was administered on the grounds that pensions accrued after that date were increased by the retail prices index, subject to a 3 per cent minimum and a 5 per cent cap. In April 2005, the statutory cap was reduced to 2.5 per cent, but the plan was administered as it had been before the change.

From retiring until 2011, Mr Anderson received increases at 3 per cent on the part of the pension in excess of GMP accrued before April 1997, and at RPI subject to a 5 per cent cap on the part accrued after then. By the time he retired, the statutory 5 per cent cap had been reduced to 2.5 per cent for post-April 2005 benefits, but the trustees had decided to preserve the 5 per cent on a discretionary basis for all service after April 1997. In April 2011, the plan replaced RPI with the consumer prices index.

Mr Anderson complained that the index used in calculating pension increases relating to service after April 1997 had been incorrectly changed by the plan’s trustees from RPI to CPI, arguing that the change was not an automatic consequence of the changes in statute and that it went against section 67 of the Pensions Act 1995 as it worsened his accrued rights.

The Ombudsman partially upheld the complaint, holding that in relation to past increases on benefits accrued after 2005 there had been no active decision by BCH and the trustees regarding whether to retain RPI or substitute another rate.

The Ombudsman stated that, with regard to the pensions accrued from April 1997 to April 2005, the switch from RPI to CPI in the LPI mechanism automatically applied without any amendment to the plan rules. The LPI increases, where these were higher than the minimum 3 per cent under the plan rules, overrode it.

The Ombudsman held that Mr Anderson had no accrued right to increases calculated using RPI and that Section 67 of the Pensions Act did not apply.

Mr Anderson had argued that the definition of “Index” should apply to all sections of the plan, but the Ombudsman held that the definition applies where it is used. In this case, it was only used in two sections of the rules, neither of which apply to pension increases.

Regarding Mr Anderson’s argument that the board should not be permitted to reject the “promised” RPI-based indexation on the basis of affordability, the Ombudsman said no such promise was made. It pointed out that the courts had ruled in similar cases that, although the term “RPI” may be present in explanatory literature, unless there is a clear, unambiguous promise or assurance that RPI will be used in perpetuity, members may not rely on such statements.