Defined Benefit  

Supreme Court upholds pension inflation ruling

Supreme Court upholds pension inflation ruling

The trustees of the Barnardo’s pension scheme will not be able to change the measure of inflation used for pension payments after the scheme's appeal was dismissed by the Supreme Court.

The Supreme Court unanimously dismissed the appeal this morning (7 November), telling the scheme it had to honour the existing rules.

Barnardo's had sought to switch the measure with which it raises the value of its members' pensions from the Retail Price Index (RPI) to that of the Consumer Price Index (CPI).

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CPI is generally lower than RPI, and the latter has not been considered a "national statistic" by the Office for National Statistics since 2013 because the formula used to calculate it did not meet international standards.

But the Supreme Court ruled the Barnado's scheme should continue using RPI.

In his ruling, Lord Hodge said: "While, since 1991, the RPI has fallen from favour as an appropriate measure of the cost of living, it is not appropriate to use hindsight of such post-execution events to assess whether a provision makes good commercial sense.

"While the requirement of indexation by reference to the RPI imposes obligations on Barnardo’s and contributes to the pension deficit at a time when many see the CPI as a more reliable index for the cost of living, the court must construe the scheme without any preconceptions as to whether a construction should favour the sponsoring employer or the members."

The scheme had already lost its case in the High Court and later the Court of Appeal in November 2016, when it was ruled a pension scheme's deed did not afford trustees the ability to select the inflation measure by which increases are made.

The Supreme Court has now upheld this ruling.

Barnardo’s had argued the clause in the scheme rules defining RPI empowered the trustees to replace it with another index they considered a more suitable measure of price inflation regardless of whether or not the RPI continued to be published.

The clause reads: "'Retail Prices Index' means the General Index of Retail Prices published by the Department of Employment or any replacement adopted by the trustees without prejudicing approval."

But the members of the scheme were concerned the adoption of the CPI as the index would reduce the benefits which they received from the scheme over time.

They argued the clause did not empower the trustees to depart from RPI for the purposes of the indexation if RPI continued to be published.

Lord Hodge agreed with the members and ruled the word order of the clause suggested RPI must first be replaced and that the trustees adopt the replacement.

Jon Greer, head of retirement policy at Quilter said: "The switch from RPI to CPI indexation for pensions in payment may seem an obscure and relatively unimportant issue, but this Supreme Court case shows the change isn’t insubstantial as it would also have a wider impact on society.