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For RPI v CPI read Jarndyce v Jarndyce

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The pensions industry is set for a period of Dickensian litigation over indexation says Teresa Hunter

TERESA HUNTER

Teresa Hunter is personal finance editor of Scotland on Sunday

The parties to it understand it least, but it has been observed that no two Chancery lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises. Innumerable chief executives have been born into the cause; and chairman married into it; innumerable old people have died out of it.

“And still the case of RPI versus CPI drags its dreary length before the court, perennially hopeless.”

With apologies to Dickens and Bleak House, the mounting propagation of law suits over up-rating pensions in line with the consumer prices index rather than the higher retail prices index looks more like that interminable legal black hole, Jarndyce versus Jarndyce by the day, although no one has yet blown his brains out.

One group, comprising the Staff Side of the Police Negotiating Board, The National Association of Retired Police Officers, GMB, FDA, Prospect, and the Civil Service Pensioners Alliance has already applied for a judicial review to establish whether the move by the Government to link future rises in public sector pensions to CPI is legal.

But the fight is by no means restricted to the public sector. Trustees at British Airways have resigned over plans to peg annual pension rises to CPI, and staff are meeting to consider appropriate action.

As more companies seek to trim pensions costs, it seems inevitable a large number of such cases will find their way to court, giving actuaries, advisers and pensions managers many sleepless nights.

Employers are obliged to make certain statutory increases that require a linking to RPI. Under law, pensions accrued between 1997 and 2005 must rise in line with the annual increase in RPI up to 5 per cent. After 2005, the RPI link remains, but it can be capped at 2.5 per cent.

The Prudential court case was about what happened to pension increases outside this remit. The scheme, which dated back to the time of the First World War, provided that pensions would rise each year to take account of inflation. In practice, they rose in line with RPI.

When the company discovered the fund was in deficit in 2005, it sought to cap the annual non-statutory rise to 2.5 per cent, while also increasing its contributions. The scheme has now returned to surplus.

But pensioners were not happy, and the trustees were unclear about the legality of this action, breaking as it did, with a practice that was 100 years old, and which clearly ran contrary to employee expectations.

Apparently, there were three weeks of heated exchanges in the court on nothing else but the meaning of “good faith”. The judgment found that the scheme rules were clear, and the century’s-old practice of RPI upratings were paid at the discretion of the employer. He was therefore entitled to change his policy whenever he pleased.

This judgment may encourage other employers who would dearly love to cut their pensions costs, by capping the bill which goes with indexation, but only if they are happy to fight their day in court.

And this could be a good thing, not only for pensions lawyers. We need a few court judgments to clarify the law on this issue.
That the first before the bench will be public sector is not entirely helpful as they are a special case. Their annual uprating is the subject of an act set down by parliament each year.

Beyond that the unions themselves can’t seem to agree on the grounds on which they are challenging. For some, it is a breach of contractual employment rights, while others maintain it is a change to their terms and conditions without appropriate negotiation and consultation.

Others are limiting action strictly on the damage to their pensions, while others again argue they are being robbed of their rightful expectations. Their expectations of pension may prove to be greater than what they end up receiving.

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