Trustees of the Barnardo Staff Pension Scheme will not be allowed to provide indexation of benefits in line with the consumer price index, according to a Court of Appeal decision earlier this week.
The ruling is the latest development in a lengthy debate over whether benefit promises can be changed to accommodate employers and lessen scheme deficits.
It concluded that the rules of the BSPS would not allow for a change unless the retail price index was officially replaced by the government.
It’s quite incredible really that this boils down to what the individual scheme’s draftsman put in the relevant scheme rules at the time
Arron Slocombe, Baker & McKenzie
Ruling in Barnardo’s & Ors v Buckinghamshire & Ors, judges also approved the decisions made in two separate cases, including one between Arcadia Group, owned by Sir Philip Green's wife Tina Green, and its pension scheme, affording some protection for schemes that have exercised a legitimate right, as laid out in their rules, to change their policy.
A definitive ruling?
Barnardo’s rules – the subject of the dispute – read: “The General Index of Retail Prices published by the Department of Employment or any replacement adopted by the Trustees without prejudicing Approval.”
Two out of three judges opted for a strict interpretation of 'replacement', meaning that the scheme would “need to have had RPI replaced by an official body”, said Arron Slocombe, partner at law firm Baker & McKenzie.
Source: Department for Work and Pensions
However, one of the lord justices found clearly in favour of the Barnardo’s trustees, opening up the possibility, if not a certainty, of a further appeal in the Supreme Court.
“If it’s got something which is a split view clearly it’s an arguable point,” said Slocombe.
Playing the rules lottery
In ruling on Barnardo’s, the court also confirmed two earlier High Court decisions, Danks v Qinetiq Holding Ltd and Arcadia Group Ltd v Arcadia Group Pension Trust Ltd.
The rules of both schemes had allowed for trustees to select an alternative index for pension increases.
The Court of Appeal found that this was not in contravention of section 67 of the Pensions Act 1995, which prohibits a detrimental modification of accrued benefits.
Source: DWP
Lawyers said the combined effect of these rulings will mean that schemes’ ability to switch will still be highly dependent on the exact wording of their rules, despite the statutory minimum having been changed to CPI in 2010.
“I think there is still a rules lottery,” said Slocombe. “It’s quite incredible really that this boils down to what the individual [schemes's] draftsman put in the relevant scheme rules at the time.”
Government look hesitant
Nonetheless, any action to remedy this would have to be a legislative rather than judicial decision.
“The onus is on the government to act,” said David Brooks, technical director at consultancy Broadstone, who welcomed the decision not to let the Barnardo’s trustees override their scheme rules.
“If they think schemes should be able to undo those promises [government] should either draft the legislation or take other steps to allow that to happen. To date they have been reluctant to do so and, I suspect, that position will persist.”
Clive Weber, partner at law firm Wedlake Bell, said the ruling on section 67 may have made it easier to enact change.
“[The government] could give some overriding power to trustees to switch indices in much more flexible circumstances and they wouldn’t have to make any change to section 67,” he said.
However, Weber said that the prospect of a public outcry at widespread indexation change would likely prove politically toxic.
CPI and RPI gap at largest for five years as schemes eye law change
The RPI and CPI were the farthest apart they have been for five years in July’s inflation figures, prompting debate that legislation could level the playing field for schemes using RPI for benefit increases.
Are trustees safe?
Schemes may be able to take some comfort from the indication that where trustees act within the powers given to them by the scheme rules, they would not be in breach of section 67.
But Fuat Sami, partner at law firm Sackers, said the obiter dicta nature of that part of the judgment – meaning it is not legally binding – could be an indication that further challenges are still likely.
“Because they are not binding comments, the judgment isn’t as conclusive as trustees and employers would have hoped,” he said.
