RPI / CPI: A new hope
A long time ago… back in July 2010, the Government announced that statutory pension increases would move from RPI to (the generally cheaper) CPI.
However, for many employers initial optimism was soon doused with a cold bucket of reality as they discovered their pension scheme rules contained hard-coded RPI-based increases. While these provisions could be amended for future benefit accrual for any schemes still open to accrual, RPI increases were locked in for existing benefits.
It could be said that employers were almost being punished for following good practice and updating their scheme rules to reflect statutory increase requirements. While certainty is all fine and good, this experience must have surely lent weight to the argument that scheme rules should say no more than “your benefits will be what we say they will be.” However, that is an issue for another day!
Over the years that followed there have been a number of cases exploring the extent to which any flexibility built into such hard-coded rules can be used to justify a move to CPI, e.g. if rules provide for the use of an alternative index to RPI in certain circumstances, when are these circumstances met?
However, for employers of schemes with hard-coded RPI increases and no flexibility, their fates were sealed; they were resigned to dreaming about what might have been had they and their trustees not been so diligent.
In the June High Court case of Univar UK Limited v Smith and others an employer’s rectification action was granted. This allowed a hard-coded RPI increase provision in the scheme’s 2008 rules to be unwound on the basis that the parties hadn’t intended for it to provide anything more than statutory minimum increases (which up until then the rules had provided). This case can be distinguished from those before in that no attempt was made to argue that the scheme rules allowed a switch from RPI to CPI; instead the argument was that the hard-coded RPI increases were a drafting error.
Not only is this potentially a useful case for employers looking to save pension costs in these difficult times (assuming their rules haven’t always provided for RPI-based increases), it also demonstrates a much wider interpretation of rectification than we have seen the courts take to date.
Previously, it was understood that court rectification would only be granted where the parties could demonstrate that they intended to achieve one thing and the provision in question achieved something entirely different – not simply where the parties had just not fully realised the consequences of their amendment at the time. Now the scope for rectification looks far more promising.
The Government is proposing to reduce RPI over the coming years so that it will be aligned with CPIH (generally 1% lower) at some point between 2025 and 2030. While this could mitigate some of the impact of applying RPI-based increases instead of statutory increases, it is also likely to significantly reduce the value of the assets where schemes use RPI-linked gilts to hedge against inflation risk.
If ever there was a time for employers to engage with trustees on pension increases, it’s now.
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