It was common practice in the early 2000s for legal advisers to summarise the pension increase requirements of the Pensions Act 1995, rather than simply cross-refer to the statutory requirements.
As a result, many schemes have RPI seemingly “hard coded” into their rules, without a decision ever being taken to do anything other than what the Pensions Act required. Following the QinetiQ and Arcadia cases, some schemes have a power to choose an alternative index to RPI, although trustees have not always agreed to exercise it.
Other sponsors, such as Barnardo’s, have asked the Court to confirm the meaning of their trust deed and been told that they must continue to use RPI.
However, in 2020 Univar successfully applied for rectification of its scheme’s rules, the effect of which was to apply statutory revaluation and pension increases (i.e. using CPI as the current measure of inflation). The judge agreed that it was not the trustees’ and the company’s intention to hard code RPI when the rules were consolidated in the early 2000s (finalised in 2008).
In our experience, many schemes are likely to have a similar history to Univar and so could also potentially rectify their rules in order to apply statutory increases to pensions in payment, or possibly “compromise” the benefit to achieve a portion of the liability saving without all of the costs and risks of litigation.
More detail of the Univar case and its implications
The Univar Scheme had, until 2008, only discretionary pension increases written into its rules. Prior to 6 April 1997, such increases were awarded broadly in line with RPI. After 1997, the Scheme applied statutory increases to post-97 benefits, with occasional augmentation. In 2008, a rules consolidation was completed and (as was common practice) the requirements of the Pensions Act 1995 were summarised in the new rule, referring to the Scheme’s definition of “Index”. (In the Univar case, RPI was also hard coded into the revaluation provisions, but this is less common).
Interestingly, the definition of “Index” used in the Univar rules was similar to that in the QinetiQ case, so it would have been possible for the trustees & company to agree to use CPI without an application to court, but we understand that the trustees declined Univar’s request to do so.
The court granted rectification, as the judge found (based on the evidence presented) that the trustees and the company had only intended the statutory requirements to apply to post-1997 benefits, and had not intended RPI to be hard coded into the rules.
What does this mean for pension schemes that use RPI?
The “lottery” whereby the ability to move away from RPI depends on the wording chosen by the trustees’ legal advisers has caused higher liabilities for many sponsors. In our experience, very few (if any) trustees and sponsors would have taken an active decision to hard code RPI into scheme rules (rather than just apply the requirements of the Pensions Act 1995 and, where relevant, the Pension Schemes Act 1993 for revaluation).
We consider that many schemes who have been advised that they are required to use RPI could, potentially, rectify their rules in order to adopt statutory increases.
If rectification is an option, then sponsors will want to ensure that the cost/benefit analysis stacks up (the costs of obtaining rectification can be significant), so it is important to understand the liability saving that would be achieved at an early stage in the process.
An alternative option, where the cost/benefit analysis might not support full rectification, is to seek to “compromise” the pension increases. This generally involves providing an actuarial uplift to members’ benefits (representing a proportion of the liability saving) while switching to statutory increases for the future (so the sponsor realises the balance of the liability saving). Any such compromise would still need to be approved by the Court, but the costs are likely to be significantly less than full rectification.
There may also be some schemes, like Univar, where there is a power to switch index, but the trustees have declined to exercise it. The prospect of successfully obtaining rectification following Univar could be a factor that may tip the balance for the trustees towards agreeing to exercise an existing power to switch, in order to save the costs of rectification proceedings.
Our experience
We have helped many trustees and sponsors grappling with this issue, and our wide-ranging experience enables us to quickly identify possible solutions and help you to find the right one. We’d be happy to have an initial discussion with you about the options.
Please contact Ian Mylrea if you would like to arrange an informal discussion.
