Retail prices index v consumer prices index – The case study of Mr R

Mr R was a pensioner member of the Thales UK Pension Scheme (TOPS Section) (the Scheme). Annual increases to pensions in payment under the Scheme had been calculated by reference to the retail prices index (RPI).

However, in September 2016, the Scheme’s trustee (the Trustee) announced that it intended to change the basis of pension increases so that the consumer prices index (CPI) would be used instead of the RPI. This change would be applied retrospectively from January 2011.

As a consequence, future increases were likely to be lower than they would have been had RPI continued to apply and Scheme members would have been overpaid since January 2011, as their benefits would have been increased at too high a rate. The Trustee agreed to “write-off” these overpayments but proposed to apply no further pension increases until Scheme members’ benefits matched the level that they would have been had they been increased by reference to the CPI since 2011.

Mr R complained that Rule 1.11(b), which governed the rate of increase to pensions in payment, provided for RPI to be used, so the Trustee was wrong to apply CPI retrospectively.

Mr R considered that the first part of Rule 1.11(b), which referred to the “retail prices index subject to a maximum of 5 per cent” required the Trustee to apply RPI to pension increases, as it had ‘hard-coded’ RPI into

Rule 1.11(b). The Trustee and the Scheme’s principal employer (the Principal Employer) considered that the key part of Rule 1.11(b) was the reference

to “order under Section 2 of Schedule 3 of the Pension Schemes Act [1993]” (the Order) in the second part of the Rule. On that interpretation of Rule 1.11(b), CPI should have applied automatically since 2011, when the Government had changed the basis of the increases set out in the Order from RPI to CPI.

The Ombudsman upheld Mr R’s complaint, having considered thoroughly the detailed submissions provided by the Trustee and the Principal Employer. The Ombudsman considered that:

• There was nothing modifying, altering or qualifying the words “retail prices index” or the 5% cap in Rule 1.11(b), so they should be given their ordinary and natural meaning.
• Hard coding a particular index into a pensions increase rule had been common practice in 2000, when the Scheme Rules were drafted. Since the draftsman expressly referred to RPI, that was the index by which he intended pensions in payment to increase.
• The word order used in Rule 1.11(b) was relevant. Had the intention of the draftsman been to provide increases only by reference to the Order, the more natural way of drafting the Rule would have been to refer to the Order first and then follow it with an explanation of what index currently applied.

The Ombudsman directed the Trustee to increase Mr R’s pension by RPI capped at 5% and to pay any arrears due as a consequence of the Trustee having frozen Mr R’s pension increases, plus simple interest at the Bank of England base rate.

This was appealed but the appeal was dismissed.

Related determinations

• Thales UK Pension Scheme (TOPS section) (PO-16892)