The twitch to switch: BT unable to change index from RPI to CPI under pension scheme rules

BT’s efforts to switch from RPI to CPI under the pension scheme’s rules, which would reduce its £14bn deficit, have been rejected.

In the recent case of British Telecommunications v BT Pension Scheme Trustees, the High Court had to decide:

1. whether the scheme rules gave BT (alone, or alongside the trustee of the scheme) the power to decide if RPI was an appropriate measure of inflation
2. whether RPI had become an inappropriate measure

The rule in question provides for increases to pensions in payment in line with RPI or “if it ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustees, decides”.

As to the first issue, the Court determined that whether RPI had become inappropriate was a question of objective fact and, in the absence of agreement between BT and the trustee, was to be determined by the Court.

With regard to the second, following analysis of expert evidence, the Court held that replacing RPI could not be justified simply because it was better or more appropriate to use another index. Moreover, it could not be said that one measure alone was correct to use.

This dismissed the assertions that RPI had effectively been superseded due to various recent developments including the Government’s decision to switch to using CPI from 2010 as the basis for calculating statutory pension increases and the Johnson Review recommendation in 2015 that the Office for National Statistics adopt CPIH (Consumer Prices Index including owner occupiers’ housing costs) as its main measure of inflation.

The court decided that BT could not replace RPI with CPI as RPI has not become inappropriate, nor changed enough to invalidate it as an index in uprating pensions. The court accepted the possibility that RPI may become inappropriate in the future, for example if there was a wholesale loss of confidence in RPI as an accurate measure of inflation, but concluded that this would be unlikely unless the Government stopped publishing it completely.

This case follows a number of others concerning the power to move from RPI to CPI which have turned on the specific wording of the rules. Schemes with a similar power to change the indexation measure where the current measure becomes inappropriate should bear this judgment in mind and, as appropriate, seek legal advice on the interpretation of their rules.

The Government’s White Paper on ‘Security and Sustainability in Defined Pension Schemes’ to be published later this year is expected to provide further clarification on whether the Government will legislate to allow schemes which have RPI hardcoded into their rules to change to CPI.