The High Court has held, in the case of British Telecommunications plc v BT Pension Scheme Trustees Limited, that the employer was not allowed to substitute a different cost of living index for RPI where the pension increase rule allowed this if RPI "ceases to be published or becomes inappropriate". The employer plans to appeal.
The background to the case is that the statutory minimum basis for pension increases changed from RPI to CPI from 1 January 2011, but the impact on individual schemes depended on the wording of their scheme rules.
The case involved both sides calling statistics experts as witnesses as they argued over whether RPI had become inappropriate. The employer's arguments included that the way in which RPI was calculated gave it an "upward bias", and that the Office for National Statistics had described RPI as a flawed measure of inflation with serious shortcomings.
The judge held that RPI had not "become inappropriate" in the context of the scheme's pension increase rule. Key points were:
- the test was an objective test, not dependent on the opinion of the scheme's employer or trustees;
- "inappropriate" implied something more than simply being less appropriate than a possible alternative index;
- the meaning of "becomes inappropriate" had to be considered in the light of the rule's purpose, namely to calculate pension increases to reflect increases in the cost of living. The test was whether RPI had become inappropriate in that specific context, not whether RPI had become inappropriate more generally;
- the use of the word "becomes" before "inappropriate" implied that something had to have changed in order for the rule to be invoked. However, the flaws in RPI relied on by BT were already known in 2002 when the relevant wording was introduced, and had been repeated in new definitive documentation adopted in 2016;
- if jettisoning RPI would introduce a material risk that pension increases would not keep up with the cost of living increases experienced by the scheme's pensioners, that was a significant argument against ceasing to use RPI;
- in this case, there was such a risk. Any index could only be an estimate of how the cost of living would be felt in practice by particular households. It was impossible to say that RPI was a less good estimate than CPI of the increase in cost of living experienced by the actual pensioners of the Scheme;
- whilst there was evidence that RPI might overstate inflation, there was also convincing evidence that CPI could potentially understate inflation;
- RPI continues to be used in many contexts (including some dictated by government or national regulators), including in ways that affect the outgoings of large sections of the population.
The judge also considered the meaning of an earlier differently worded version of the rule, which referred to RPI being “…so amended as to invalidate it as a continuous basis for calculating pension increases”. He held that no reasonable decision-maker could reach the view that this had happened. For this to be the case, the change would need to be of a type which made a comparison with the previous year's index figure "like comparing apples with pears".
The employer has been granted leave to appeal and expects the appeal to be heard within the next year.
It remains the case that whether or not it is possible to switch from RPI to CPI will depend on the specific wording of a scheme's rules, but where trustees are asked to consider agreeing to switch from RPI to CPI this case may be helpful in terms of giving the trustees guidance on the factors to take into account in deciding whether nor not to do so.
An important aspect of the BT scheme rule was that it provided for use of an alternative to RPI only if RPI had "become inappropriate" on an objective basis. The outcome may have been different had it referred to RPI becoming inappropriate in the opinion of the employer and/or the trustees.