Thornbury Engineering: Switching Past-Service Indexation from RPI to CPI
Thornbury Engineering Pension Scheme is a UK defined benefit scheme with 1,850 members: 300 active, 900 deferred and 650 pensioners. It provides 1/60th final salary with a normal retirement age of 65, and pensions in payment and deferred pensions are increased annually by RPI, capped at 5%. The scheme has been closed to new entrants since 2012. The employer, Thornbury Engineering Ltd, proposes to close the scheme to future accrual on 1 April 2026 and to switch the indexation of all past-service benefits from RPI to CPI, capped at 2.5%, using rule 32.1. That rule permits amendment with actuarial confirmation that accrued rights are not materially prejudiced. The actuary estimates the switch reduces liabilities by £18m, from £210m to £192m; the buy-out deficit is £70m. The trustee board of eight, including two member-nominated trustees, is split. The GMB union has threatened industrial action and argues that members were promised RPI. The employer says the change is essential to avoid insolvency.
1. Advise the trustees on the legal and actuarial tests they must apply before consenting to the RPI-to-CPI change, and explain why the £18m liability reduction is not by itself decisive.
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The starting point is the scheme's amendment power and the statutory protection in section 67 of the Pensions Act 1995. Rule 32.1 cannot be used to modify accrued rights unless the modification is not a protected modification, or the correct actuarial certificate is obtained. The trustees need independent legal advice on whether the change is a protected modification and whether the rule 32.1 certificate is the right route. An actuarial confirmation that members are not 'materially prejudiced' is a hurdle, not a discretion: even with a certificate, the trustees must decide whether exercising the power is in members' interests.
The £18m reduction in liabilities does not answer that question. It shows the employer gains, but the trustees must ask: What is the countervailing benefit to members? Is the employer's covenant stronger because the scheme is less costly, or is the employer simply extracting value before a possible insolvency? A weak covenant may make an affordable, viable employer better for members than a legal victory that precipitates failure; a strong covenant may make the switch unnecessary. The trustees should compare the proposal with alternatives, including retaining RPI with higher contributions, a contingent asset, or a partial switch limited to future accrual.
The trustees must also consider members' reasonable expectations, the history of RPI in communications, the coverage of the actuarial certificate, and whether different groups are affected differently. Pensioners bear the immediate inflation risk; deferred members bear it later. The trustees should document the conflict between the employer's funding objective and members' benefit expectations, take independent actuarial and legal advice, and not treat the employer's insolvency warning as conclusive without covenant evidence.
2. Explain the statutory consultation requirements that apply to the closure to future accrual and to the indexation change, and outline how the trustees should handle member communications where the workforce is unionised and the employer is threatening insolvency.
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The closure to future accrual is likely to be a 'listed change' under section 259 of the Pensions Act 2004 and the Occupational Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006. The employer, not the trustees, must consult affected members for at least 60 days before making the change, provide written information about the proposal, consider responses and give reasons for the final decision. The trustees must be consulted separately. The indexation change for past service is not a listed change in the same way, because it concerns accrued benefits rather than future accrual, but it is a section 67 modification and may require member consultation under the scheme rules or a promise made in scheme communications. If redundancies are also proposed, separate collective consultation rules may apply.
The trustees should separate the employer's consultation from their own decision-making. They should not allow the employer to present the trustee decision as a fait accompli. Communications should explain what is proposed, what is not yet decided, which body is responsible for which decision, and what members can do. The trustees should use plain English, provide worked examples of the effect on a typical pension, signpost independent advice, and be clear that the Pensions Regulator does not approve benefit changes.
Where the employer warns of insolvency, the trustees should test the claim through covenant advice and avoid misleading members that rejecting the change will preserve the scheme. They should also manage the union relationship: meet the union, explain the trustees' legal duties, and avoid sharing confidential employer information without consent. A communication log and a clear decision paper will help demonstrate that the trustees acted properly.
3. The employer offers an alternative: retain RPI but increase contributions by £3m a year for five years and grant the scheme a £25m charge over its distribution warehouse. Assess this against the CPI switch, including the risks to members and to the Pension Protection Fund.
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The alternative needs to be valued as a package, not as a choice between 'RPI' and 'CPI'. The £3m a year for five years is £15m nominal, but its value depends on when it is paid and whether the employer survives. The warehouse charge could be valuable, but only if it is legally enforceable, properly perfected, ranks ahead of or alongside other creditors, and the warehouse has a reliable realisable value in insolvency. The trustees need legal advice on the charge, valuations, prior charges, negative pledge and insolvency ranking. A charge over a distribution warehouse may be illiquid and may fall in value in a logistics downturn.
Against that, the CPI switch gives immediate certainty of lower liabilities but transfers inflation risk to members. The trustees should compare the two on member outcomes, covenant support, and PPF risk. If the employer is likely to become insolvent, a higher nominal contribution promise may be worth little, while a robust charge could improve recovery. If the employer remains viable, retaining RPI preserves members' expectations and avoids a difficult section 67 dispute.
The PPF dimension is important. If the scheme enters the PPF, the PPF will assess the scheme's assets and may challenge transactions that removed value from the scheme. The trustees should consider whether accepting a weak charge or releasing the employer from a stronger obligation could be a moral hazard issue. They should also consider whether the arrangement is a 'contingent asset' that can be certified for funding purposes. The decision should be documented with covenant advice, legal advice and an assessment of member outcomes under each option.