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Mr Justice Vos has given judgment in the case of Danks v
QinetiQ Holdings Limited. The case related to the powers of
pension trustees to uprate their members' benefits on the basis
of the Consumer Prices Index (CPI) rather than the Retail Prices
Index (RPI) in order to provide a level of protection against
inflation. The case arose following on from the Government's
announcement in 2010 that it would allow increases by reference to
RPI instead of CPI. CPI is generally lower than RPI by around 0.7
per cent, and so entails less cost for schemes and their
employers.
The QinetiQ scheme rules defined the term "Index" as
"the Index of Retail Prices... or any other suitable
cost-of-living index selected by the Trustees...". The
issue was whether the trustees' selection of CPI, instead of
the default position of RPI, would be a "detrimental
modification" under Sections 67 and 67A of the Pensions
Act 1995, by virtue of being a change that "would or might
adversely affect any subsisting right" of members. If so,
it would have been voidable by the Pensions Regulator, and the
trustees would in addition potentially have faced civil penalties
from the Regulator.
Mr Justice Vos found that the definition of
"Index" gave the trustees the flexibility to
select an index other than RPI prior to applying an uprating
calculation to a member's benefits (either the revaluation of
deferred benefits or increases to pensions in payment).
However, he noted that the discretion given to the trustees
amounted to a fiduciary power. A decision to switch would therefore
have to be made for a proper purpose.
The judge drew a distinction with the earlier Court of Appeal
decision in Aon v KPMG (2005), in which exercising a power
to vary benefits would have involved the trustees unwinding rights
that had already vested in members. In this case, no members had
any right to increases or revaluation on the basis of RPI until the
increases or the revaluation had actually been granted.
Finally, the judge held that the definition of
"Index" gave the trustees flexibility to
designate different indices for different purposes relating to
increases to pensions in payment and the revaluation of deferred
pensions.
Clyde & Co comment
The definition of "Index" in the QinetiQ
Scheme is not an uncommon one, so this judgment opens the door for
switching to CPI and reducing costs. However, the judgment did not
sanction the switch from RPI to CPI – it merely said that
the trustees had the power to make the switch. As the judge noted,
a trustee power like that conferred by the definition of
"Index" will be fiduciary in nature, and some
care must therefore be taken when such a power is exercised.
Trustees therefore have to make a decision to switch in the context
of their own schemes. In the case of the QinetiQ scheme, the
deficit was Ł191 million as at 31 December 2010 (on an
ongoing basis), and this may have militated in favour of the
trustees taking the action that they were seeking to take. Other
schemes – without large deficits or with a strong
employer covenant – may find it harder to justify a
switch. The legal saga may not be over yet: there are press reports
of further legal action in the pipeline from scheme members
challenging the trustees of the QinetiQ scheme's actual use of
the power.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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