Arcadia Group: Switching from RPI to CPI

The English High Court has ruled that the increase provisions of two DB schemes did not prevent a switch between RPI and CPI for revaluation and indexation purposes.

25th September 2014

Last month the English High Court ruled that the increase provisions of two DB schemes did not prevent a switch between RPI and CPI for revaluation and indexation purposes. The decision in Arcadia Group Ltd v Arcadia Group Pension Trust Ltd affirms a previous case in this respect and provides some new guidance on interpreting such provisions. This is of particular relevance to schemes which, in their rules, refer to a specific index rather than a statutory minimum.

Background

The rules of two Arcadia pension schemes included provisions which restricted revaluations to the annual increase in the Retail Prices Index. This provision appears, at first sight, fairly unambiguous but, in both schemes, the Retail Prices Index was defined as:

"the Government's Index of Retail Prices or any similar index satisfactory for the purposes of the Inland Revenue."

Arcadia, as principal employer, proposed to move both schemes to CPI-based calculations, arguing that the definition in the rules implicitly allowed for an index other than RPI to be selected. The trustees of both schemes, representing the beneficiaries, submitted that the schemes were required to use RPI unless and until RPI was discontinued or replaced. They pointed to the fact that the rules did not identify who was to exercise the power to switch index on behalf of the schemes. They also argued that a switch from RPI was prevented by section 67 of the Pensions Act 1995, on the grounds that members had an accrued right to RPI-based calculations in relation to their past service benefits.

Decision

The Court held that the provisions of both schemes allowed for a switch from RPI to CPI and that this power was not restricted to a situation where RPI was discontinued or replaced. The Court also found that the power to switch index was vested jointly in the principal employer and the trustees of the scheme. In doing so, the Court rejected Arcadia’s argument that the right was vested in the principal employer alone as the original author of the pension scheme. In relation to the section 67 argument, the Court found that members of both schemes had accrued the right to increases and revaluation based on the Retail Prices Index but that this was to be construed as defined in the rules and that definition was not limited to RPI.

Comment

The Arcadia case confirms that even where rules appear to make express provision for RPI, it may still be permissible to switch to a different index. One unresolved question arising from this case may be in relation to exercising the power to switch. Pension scheme documents tend to avoid the joint vesting of powers, preferring to provide for one party acting subject to the consent of the other. Such consent cannot be unreasonably withheld by the other party and this is usually sufficient to prevent deadlock. The Arcadia decision vests the power itself in both parties and this may, in future, result in difficult negotiations between trustees and employers in a switch scenario.