Jack Jones looks at the wider significance of the Danks v Qinetiq case that backed the right of trustees to switch from RPI to CPI.
The judgement in Danks v Qinetic – handed down at the high court last month – paved the way for trustees of the Qinetiq scheme to switch to CPI-linking and enabled them to thrash out a funding agreement to tackle a mounting deficit.
But lawyers involved in the case believe it will be of wider significance in defining when trustees can exercise their powers of discretion without falling foul of Section 67 of the Pensions Act 1995.
This legislation severely restricts trustees looking to make changes that could adversely affect a member’s subsisting – or accrued – rights.
Although not the first time a debate around the legality of switching from RPI to CPI has reached the High Court, it is believed this was the first case to concentrate on this aspect of legislation, and the first big case on s67 since Aon v KPMG in 2005.
Last month’s case was brought by trustees of the scheme, who were seeking legal clarity on how their powers of modification could be used, with representatives of Qinetiq arguing that that they could make the switch and the counsel for a representative beneficiary giving the counter argument.
The case boiled down a question of whether members earned the right to an increase at the rate applied when they earned a benefit or the rate applied when they retired or had deferred pensions revalued.
If the former was true then RPI-linking would be classed as a subsisting right that could not be altered, even though scheme rules permitted trustees to select “any other suitable cost of living index”.
Maurice Turnor Gardner partner Jenny McKeown represented the member. She says: “There was no clear consensus one way or the other in the pensions legal profession – there are people who have given advice that a switch in these circumstances would affect a subsisting right and there are those who said it wouldn’t.”
This caution stemmed from the Aon v KPMG case in which the Court of Appeal held that the exercise of a power to reduce pension benefits if a subsequent valuation revealed a deficit constituted a modification to accrued rights.
Allen & Overy partner Neil Bowden – counsel for Qinetiq – agrees that this judgement could have been interpreted to mean that a decision to select a different measure of inflation in this instance would be caught by s67.
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