Thales UK Ltd v Thales Pension Trustees Ltd & Ors

In construing pension-scheme rules, a material change in the compilation of an index concerns the way the index is constructed, not the later effect of that change on the index’s level. Routine changes made to keep a well-managed index fit for purpose are not material changes. Their cumulative effect cannot create a material change. A non-routine methodological change may be material where it causes the index to function in a materially different way. Where the rules require the nearest alternative index, the relevant comparison is with the existing components and characteristics of the index before the change. The altered RPI may itself be the nearest alternative. A power to determine an alternative index is generally exercised once for the relevant change, rather than annually.

The Company sought declarations concerning the construction of rules governing benefits under the Thales UK Pension Scheme. The rules referred to RPI for CARE-salary revaluation and pension increases, but provided for an alternative index if RPI ceased publication or its compilation was materially changed. Separate rules for transferred Barr & Stroud members allowed the Trustees to determine the basis of future increases if RPI was otherwise altered.

The issues included whether RPI remained published, whether its compilation had materially changed, whether the so-called freeze and various methodological changes qualified, and whether the Company or Trustees could substitute CPI, RPIJ, CPIH or another index. The central questions concerned the meaning and practical operation of the relevant gateway provisions.

The Court gave declaratory answers to the questions in the Claim Form.

1. CARE Rules. The phrase “material change in the compilation” directs attention to the construction and methodology of RPI, rather than the effect of a change on the level of the index. Routine changes made as part of ordinary management, including the changes concerning mortgage interest, seasonal items, new-car prices, rental data, clothing and footwear, were not material. Neither the cumulative effect of such changes nor an unexpected effect could convert them into a material change.
2. The 2013 policy described as a “freeze” was too opaque and unpredictable to be a change in compilation. The introduction of the UK HPI into RPI was different. It was a non-routine methodological change affecting a substantial component of the index and including prices paid by the top 4% of households. It materially changed the compilation of RPI.
3. The Company was required, with the Trustees’ agreement, to determine the nearest alternative index within a reasonable time. The relevant comparison was with the existing elements and characteristics of RPI before the change. RPI incorporating UK HPI remained the nearest alternative. The Company could not reasonably adopt CPI, RPIJ, CPIH or another index. The determination operated once for the relevant change and was not subject to annual review.
4. TOPS Rules. “Otherwise altered” had a wider meaning than “materially changed”. Routine changes were capable of being alterations, although the Trustees’ power remained constrained by the requirement to have regard to the alteration. The RPI had been otherwise altered, including by the introduction of foreign and domestic holidays and depreciation of owner-occupied housing. Nevertheless, current RPI, including UK HPI, was the only basis the Trustees could properly determine in response to the relevant change.
5. The Trustees had no power under the relevant proviso to review the applicable rate annually. The proviso applied only where the pension was already in payment and at least one relevant review had occurred before the alteration. RPI had not been replaced for determining the value of principal on repayment of index-linked Government stock, and had not been rebased since 1 June 1991.