This case provides the most up to date guidance from the Courts on how to interpret and apply rules dealing with revaluation and increases to be applied to pension benefits.
The case also summarises some of the key features of RPI and CPI and how they are compiled. This is relevant in deciding between indices that aim to protect the value of pension benefits against the effects of inflation.
Our pensions experts consider what this case means for the practical application of revaluation and indexation provisions, particularly for schemes whose rules include a mechanism that contemplates switching to a different index. In addition, they focus on the comments made in the judgment regarding RPI and CPI more generally, and consider how these comments may be applied in other contexts.
Consider the wording in your rule carefully
Small changes in language could make a significant difference to the analysis.
Apply the wording on the page
Views on suitability, purpose, and merits of one index compared to another are unlikely to be relevant for interpreting a rule (except where those concepts are specifically incorporated).
Exposition on the compilation of RPI and CPI
There is some detail of the way consumer price indices are compiled and operate, and what has changed in RPI and CPI over the years. This may assist others in the interpretation of similar rules (and save them some research).
RPI was the index to be applied
In the particular circumstances of this case, the judge was supportive of the continued role for RPI.
What was the case about?
- This was a case in which the proper construction of two sets of rules providing for the uprating of pension benefits were put before the Court. The provisions each used the Retail Prices Index (RPI) but each included a mechanism which contemplated that on the occurrence of certain events RPI might be departed from.
- The Company argued that these triggers had been activated by recent events and that RPI could be departed from in favour of another index, such as CPI. PwC acted for the Company, which was represented in Court by Robert Ham QC and Emily McKechnie.
- The Trustees (acting in their own capacity and as Representative Defendants) argued that no trigger event had occurred and, if one had occurred, RPI should continue to apply for both sets of rules. Gowling WLG acted for the Trustees, who were represented in Court by Brian Green QC and James McCreath.
The issues to be determined related to the wording of two provisions:
Career Average Revalued Earnings (CARE) Benefits, accrued from 2008 onwards, were to be uplifted by reference to RPI (subject to specified caps). This normal rate was subject to a rule which stated that "if the Government retail prices index for all items is not published or its compilation is materially changed, the Principal Employer, with the agreement of the Trustees, will determine the nearest alternative index to be applied."
TOPS pre-97 benefits
Benefits accrued by members of a legacy scheme prior to April 1997 were to be uprated by reference to RPI, subject to a rule which provided that "if the Retail Prices Index is revised to a new base or if that Index is otherwise altered after a date which is relevant in respect of a pension in terms of this Rule, all subsequent variations in that pension will be on a basis determined by the Trustees having regard to the alteration made to the Retail Prices Index."
The Court was asked, in particular, whether there had been a material change to the compilation of RPI and, if so, what was the nearest alternative index to be applied (for the purposes of the CARE rules); and, whether RPI had been 'otherwise altered' and if so what indices it was open to the Trustees to apply (for the purposes of the TOPS rules)
Events in the history of RPI
The Company pointed to various events in the history of RPI which, it submitted, should be looked upon as having triggered these rules. For CARE the list of changes went back to 2008 (i.e. the date of the CARE governing deed) and for TOPS back to 1991. Most notably, the events were:
- Inclusion of data on spending for foreign and domestic holidays in 1993-1994;
- Inclusion of a measure of depreciation in owner occupied housing in 1995;
- Changes to the price collection for some items of clothing and footwear in 2010;
- The ONS announced that it would "freeze" the formula used to determine RPI in 2013;
- The house price index employed within RPI was switched to the new UKHPI in 2017; and
- The Company further submitted that these and other changes, taken cumulatively, could satisfy the triggers in the rules.
The Trustee submitted that, since RPI was a dynamic and evolving index, changes (and the Trustee argued that 'freezing' wasn't a change at all) were to be expected and were not ones which could compel a move away from RPI.
Whilst the Company accepted that for some of these the changes to methodology might be considered minor, it submitted that the 'effect' or 'impact' of those changes was relevant to whether the change in compilation should be considered material. For example, it pointed to the changes in 2010-11 after which RPI began to diverge significantly from CPI. The Trustee submitted that the wording of the rule compelled one to focus on what had actually happened to the compilation of RPI, not to look at effect. Small changes could have big effects and vice versa. Further, that construction would be administratively unworkable, since some effects might not become apparent for some time, during which pension uplifts needed to be applied.
On the question of how nearest alternative (CARE) or 'having regard to' the change (TOPS) should be applied, the Company submitted that concepts such as use and purpose of the available inflation measurement indices could be relevant to the exercise of discretion under the rules. The Trustees for their part submitted that, treated as a matter of construction and for any of the changes that had been put forward as triggering the ability to change index, RPI as altered/changed was the nearest alternative and the index to be applied.
Judgment of Mr Justice Warren
A change is material "if it results in the RPI functioning and operating in a way which either does not fulfil its original purpose (to provide a measure of inflation for the typical household) or does so in a way which is materially different from the way in which it did so before the change" (). The introduction of UKHPI into the RPI was considered by Mr Justice Warren to be such a change (and also an alteration to RPI for the purposes of TOPS, the concept of alteration being one which should be given a 'wide meaning'), since it involved an adjustment to the population coverage, which is a significant part of the way in which RPI is compiled. In doing so, Mr Justice Warren rejected the notion that the effect of a change to the index could be relevant for assessing materiality of changes to compilation or that changes could be looked at cumulatively.
Mr Justice Warren went on to say that he could not see how RPI as changed was not the nearest alternative to be applied on CARE, since if anything it "more accurately serve[s] its purpose". Equally, for TOPS, he said that it was not open to the Trustees to exercise their discretion to apply any other index but RPI.
When giving his judgment, Mr Justice Warren referred to another untrammelled discretion in the rules, contrasting it with the mechanisms he had been asked to construe - "under this power, any index might be selected - CPI for instance - provided that the Trustees act properly in the exercise of their fiduciary obligations, typically if they considered it to be in the interests of the beneficiaries of the Scheme to do so" ().
Points to take away from the judgment
- In the particular circumstances of this case, the Judge was supportive of a continued role for RPI (), whether or not alternative indices were perceived as "better" (). He found it hard to see how CPI could "win the competition" of being nearest to RPI following the introduction of UKHPI data ().
- Mr Justice Warren avoided being drawn into arguments as to the respective merits of the indices in his interpretive exercise. He did, however, state that RPI and CPI both achieve the purpose of protecting members from the effect of price inflation ( and ), and RPI continues to serve all of the functions that it did before the recent change to RPI (). He also recognised that RPI is still widely used ([29(viii)]).
- Where there is a power or obligation to review the index, that will need to be done within a reasonable period of time or the ability to make any switch may be lost.
- Mr Justice Warren provided a useful summary of the characteristics and compilation of RPI and CPI, which may assist in the interpretation of similar rules.
 Thales UK Ltd v Thales Pension Trustees Ltd & ors  EWHC 666 (CH)