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Freshfields Risk & Compliance

| 3 minutes read

Pension scheme trustees seek judicial review of RPI changes

Trustees of some of the UK’s largest defined benefit (DB) pension schemes – BT, Ford and Marks and Spencer (M&S) – are seeking a judicial review of the government’s decision to make changes to the calculation methodology of the retail prices index (RPI), so that it will be aligned with the consumer price index including owner occupiers’ housing costs (CPIH) from 2030. The trustees of these pension schemes, which represent nearly 450,000 members and £83 billion of assets, believe that the decision could have far-reaching implications which have not been fully considered.

In March last year, the UK Statistics Authority (UKSA) and HM Treasury launched a consultation on RPI reform. The UKSA proposed that the shortcomings of RPI should be addressed by bringing the methods and data sources of CPIH into it. As we discussed in our previous blog on this topic, the UKSA already has authority under legislation to implement its proposed changes to RPI in 2030, but the Chancellor’s consent is required to make changes to RPI before then. In November last year, the Chancellor confirmed that he would not consent to the UKSA reformulating RPI calculations before February 2030. For DB schemes which use RPI to index-link pension benefits, this means that the reform of RPI has merely been postponed to 2030, rather than dropped completely. The impact of the change can differ considerably depending on a stakeholder’s circumstances. The sponsoring employers of some schemes that can only use RPI as their index may have welcomed the change, as it is expected to reduce those schemes’ indexation liabilities over the longer term. But many in the industry saw the change as negative in its implications. In seeking judicial review of the decision, the trustees of the BT, Ford and M&S schemes are arguing that the RPI formulation will impact DB schemes in a number of ways.

  • Firstly, the changes will result in lower pension payments and lower transfer values for members. Members currently receiving pension payments from the BT, Ford and M&S schemes will have their annual pension increases calculated using RPI. Despite minimum statutory pension increases being based on the consumer price index (CPI), it is common for DB pension schemes still to use RPI to calculate increases. In fact, the Pensions Policy Institute estimated that 64 per cent of private sector schemes are required by their scheme rules to uprate at least some pension benefits by reference to RPI. However, as RPI and CPIH each take into account a different basket of goods and involve a different mathematical formulation to measure inflation, with CPIH generally producing a lower figure, the trustees expect the changes to RPI to have a detrimental impact on members.

  • In addition, according to the trustees, the UKSA’s proposals are likely to weaken schemes’ funding positions, in turn adding pressure on sponsoring employers. This is because many DB schemes hold a proportion of their assets in index-linked gilts and other assets that have returns based on RPI, and so they will likely see the total value of their assets fall as a result of the change in calculation. While this may be true for the BT, Ford and M&S schemes, the impact of the RPI changes on funding positions will vary from scheme to scheme and depend on the extent to which a scheme is hedged and the nature of its liabilities. Read our previous blog on this topic for more detail.

It is important to remember that the scope of judicial review is limited. The court’s role is not to re-make the decision being challenged, nor is it to consider the merits of that decision. The court is only required to review the process by which the decision was reached. Ultimately, the trustees are pursuing action in order to ensure that the position of their members, and their own position as investors, are considered. If the trustees are unsuccessful, the RPI changes will be implemented as planned from 2030. In that case, DB scheme trustees will need to carefully consider their investment portfolios and communicate clearly to members what the change will mean for them.

However, employers sponsoring DB schemes that must use RPI to increase index-link pension benefits will also want to monitor this case because, if the trustees succeed, the government’s decision could be declared unlawful, or quashed. The UKSA would then need to re-consider its proposals which, as noted above, could impact on the liabilities and funding positions of such schemes.


pensions, europe, financial services, financial services litigation