Various cases have looked at the question of changing the index and, at the time of writing, the position is that (if your scheme rules allow it – a big “if”) a move from RPI to CPI (other indices are available) is possible in respect of benefits that have already built up without falling foul of section 67 of the Pensions Act 1995.

Before exercising any power, trustees should identify the relevant considerations (and disregard irrelevant ones). They must then balance those considerations in a rational manner. Relevant considerations include:

·       the effect of any change on the size of members’ headline benefits;

·       the effect of any change on the security of those benefits (including the impact on the funding position, covenant, any mitigation being offered by the employer and the administrative costs of any change – including the cost of dealing with member complaints);

·       member expectations and what has been communicated to members on this point;

·       the accuracy of the candidate indices as measures of cost of living; and

·       the views and interests of the employer (although not such as to subvert the proper purpose of the scheme).

While the impact on headline benefits will be scheme specific, in most cases the impact is likely to be significant and will increase over the longer term. It is also worth noting that different members might have slightly different interests. For example, a pensioner may feel that greater long-term security for the scheme is significantly more important for younger members than for him or her, and that headline benefits based on RPI rather than the (generally) lower CPI are better for him or her.

The question is then whether any increase in security outweighs the lower headline benefits. To evaluate this properly, trustees will need to understand in detail what (if any) mitigation is being offered, and how much extra security is provided by moving to the alternative index. What will this mean in tangible terms for members? Covenant and actuarial advice will be key here.

Consideration should also be given to the position the scheme would be in if a move to an alternative index is rejected. What would the RPI based recovery plan look like? Is this affordable for the employer? Examination of the employer’s solvency position over the term of the likely recovery plan based on RPI increases should be carried out. Only then will trustees be in a position to make a fully informed decision.

As to what has been communicated to members, it is important for trustees (and the employer) to identify whether it is likely that anything has been provided to members that could constitute a binding commitment to RPI increases.

In terms of the accuracy of RPI as a basis for calculating pension increases, the current position, following the decision in the recent BT case, is that it remains valid for such purposes. It seems likely that whilst RPI remains a published index and is used as a measure of the increase in the cost of living this will remain the case. Trustees are entitled to consider the accuracy of RPI and CPI as a basis for calculating pension increases. However, members’ interests and the security of benefits under the scheme should generally be the trustees’ primary focus. 

Trustees can also take into account the views of their employer. However, they should not give too much weight in isolation to an employer’s wish to simply save money. Affordability (and ultimately the security of benefits) is the most important consideration.