Pension schemes to seek judicial review of inflation indices reform

Will the Retail Prices Index change for occupational pension schemes in 2030?

The trustees of the BT Pension Scheme, Ford Pension Schemes and the Marks and Spencer Pension Scheme have today (9 April 2021) announced that they will be seeking a judicial review of the government’s decision to align the Retail Prices Index (RPI) with the Consumer Prices Index including owner occupiers’ housing costs (CPIH) from 2030. This followed an extension of time granted by the court to consider an application.
The application must now be reviewed by the UK Statistics Authority and the chancellor, Rishi Sunak, who will have 21 days to prepare a response. The court must then decide whether to grant permission to proceed to a full hearing.
Amid this renewed interest in the proposed alignment with CPIH, what does this mean for trustees and employers of occupational pension schemes?

What’s the background?

HM Treasury and the UK Statistics Authority (UKSA) on 25 November 2020 published a joint response to their consultation on when and how to bring the CPIH methods and data sources into the RPI. This would be done with the aim of addressing the perceived shortcomings in the RPI.

While the Treasury was interested in the “when”, because, if the chancellor of the exchequer agreed to this change before 2030, it might have to offer to redeem a particular category of gilt that was issued up until 2002, the UKSA was interested in the “how”, that is, the statistical method to be used.

The joint response confirms that:

  • The chancellor will not consent to the changes to RPI before 2030.
  • As a result, the UKSA plans to introduce these changes from February 2030, so as to align the RPI with CPIH, and to use the statistical method on which it consulted.
  • After the change, the RPI and CPIH will continue to be calculated and published as separate indices, but the composition of RPI will have changed to align it with CPIH.
  • Because “the RPI” will still be used to calculate interest and redemption payments, the government does not intend to offer compensation to the holders of index-linked gilts.

What’s the impact?

How could this reform of the RPI affect pension schemes?

The response does acknowledge that the change will negatively affect defined benefit pension schemes and their members. For example, the value of assets relative to liabilities is likely to fall where (RPI) index-linked gilts or other assets are being used to hedge CPI liabilities. The RPI is also often used as the basis for calculating pension increases under occupational pension schemes.

There is a statement in the joint response that “the government keeps the occupational pensions system under review and will continue to do so”, but this provides little comfort to trustees and employers, who are having to consider a whole range of actuarial, investment and audit impacts, some with immediate effect.

Open Trustees comment

The application for judicial review submitted by the trustees of the BT, Ford, and Marks and Spencer pension schemes is one for all pension scheme trustees and employers to follow with interest.

Pending a decision on the application, it would be prudent for trustees and employers to assume that the changes to RPI will go ahead in 2030, and that no compensation will be paid to occupational pension schemes.

As such trustees and employers may wish to consult with their actuarial and legal advisers to consider what the scheme rules provide in relation to pension increases and revaluation of preserved benefits. In particular they should consider whether:

  • the scheme rules link increases to RPI, CPI or some other index?
  • if increases are linked to RPI, whether this has always been the case or whether there have been any unintended changes to the wording over the years?
  • if increases are linked to RPI, whether the rule or definition is broad enough to switch to CPI now or whether RPI has been ‘hardwired’ into the scheme rules?
  • can a change from RPI be made for as long as the Office for National Statistics continues to publish RPI?

The answer to these questions, and the impact they have on member benefits and scheme liabilities, will inevitably vary from scheme to scheme depending on how the rules are drafted. Finding that the scheme rules allow for a change to the index used to calculate pension increases or revaluation in deferment would provide a relatively easy way of managing scheme liabilities and should inform discussions between trustees and employers.