Unions in court fight over public sector pensions

Out-Law News | 26 Oct 2011 | 3:38 pm | 2 min. read

Six public sector unions have begun a legal challenge against a change to the way that increases in their members' pensions are calculated.

The Government changed the measure of inflation in public sector pensions from the retail prices index (RPI) to the consumer prices index (CPI) in April 2011 after announcing the switch in the 2010 budget.

The unions, who have raised a judicial review action in the High Court, have claimed the change was a "deficit reduction measure". They claim that, because CPI inflation is around 1.2% lower on average than RPI inflation, the loss to existing public sector pensioners will be around 15%.

CPI inflation in September was 5.2%, while RPI inflation stood at 5.6% - the highest it has been in over twenty years.

The unions claim that the imposed change was not permitted under social security legislation, which requires the Government to adjust benefits according to the "general level of price increases" each year.

The formula for calculating CPI also includes the spending behaviour of people who might switch to cheaper alternatives as prices increase, including pensioners and students in halls of residence.

The change also overturned promises made by successive governments that RPI would be used in pensions weighting, the unions said.

According to the Office for National Statistics (ONS), both RPI and CPI are based on the difference in price between a fixed 'basket' of goods and services over the course of a year. However, each calculates the average price increase using a different mathematical method.

The CPI does not include changes to the cost of housing, including mortgage payments and council tax. In addition CPI is based on spending by all private and institutional households including university halls of residence and nursing homes. RPI excludes the top 4% of households by income, institutional households and pensioner households which derive three quarters of their income through state pensions and benefits.

Public sector pensions law expert John Hanratty of Pinsent Masons, the law firm behind Out-Law.com said that the case would consider whether the Government had the right to change the legally set measure of inflation for the purposes of the reducing the national debt.

"There are some interesting and highly technical arguments on which the Court will have to rule and the outcome will have a knock-on effect across the pensions world," he said.

The case may also have an impact on private pension schemes. Many such pensions have benefitted from the change to the measure of inflation by reducing their deficits, Hanratty said. This is because the benefits the schemes have to build up for leavers and pay out for pensioners will increase more slowly under CPI.

The six unions that have raised the case are the Fire Brigades' Union, teachers' union NASUWT, the Prison Officers' Association, the Public and Commercial Services union (PCS), UNISON and Unite.

"The switch from RPI to CPI is just another example of how this government wants public servants, pensioners and people entitled to benefits to pay the heaviest price for the recession. For new entrants to the civil service it means an immediate cut in their pensions, ripping up an agreement that we reached just a few years ago," said PCS general secretary Mark Serwotka.

He added that the unions were coordinating the "widest industrial action we have seen in our lifetimes" in a so-called 'Day of Action' over pensions on 30 November.

UNISON general secretary Dave Prentis described the switch as a "cynical multi-million pound raid on pensioners to pay down a deficit they did nothing to cause".

"This flawed measure of inflation does not even include housing costs – a major expenditure for many retired people," he said.

However John Hanratty of Pinsent Masons said that the unions' comments would raise a "hollow laugh" amongst private sector pension scheme members, which had seen increased taxes by the previous Government take between £5 billion and £8bn out of their schemes.