Unions lose challenge to on public sector pension inflation change

In a unanimous judgment (22-page / 281KB PDF), the Court of Appeal upheld an earlier decision that the Government was legally entitled to change the measure of inflation in public sector pensions from the retail prices index (RPI) to the consumer prices index (CPI) in April 2011.

The unions had argued that the switch was a "deficit reduction measure" that the Government could not adopt under the Social Security Administration Act. This Act makes reference to the "general level of prices" as a comparator to be used when up-rating pensions to take account of inflation.

In his judgment, the Master of the Rolls acknowledged that the switch would "detrimentally affect the value of every pension in payment" as well as affecting the way in which the value of career average pension schemes are calculated. However, "as a matter of ordinary language" CPI could "fairly be said" to be a measure of the general change in prices.

"It is obvious... that there will be more than one way of measuring a change in general prices over a particular period," he said. "Questions such as which particular goods and services one takes, precisely how one determines the price of each good and service and how one weights each good and service must, within the limits of rationality, be a matter of opinion and judgement."

He added that it was also relevant to consider that CPI was used as a measure of inflation in other European countries, as well as by the Bank of England since December 2003.

The Government changed the measure of inflation in public sector pensions from the RPI to the CPI in April 2011 after announcing the switch in the 2010 budget. At the time of the original judicial review trade unions including the Public and Commercial Services Union (PCS), UNISON and Unite claimed that because CPI inflation is around 1.2% lower on average than RPI inflation the resulting loss to existing public sector pensions would be around 15%.

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 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. It does not include changes to the cost of housing, such as mortgage payments and council tax. RPI excludes the top 4% of households by income, institutional households and pensioner householders which derive three quarters of their income from state pensions and benefits.

As part of the High Court's original judgment last year Mr Justice McCombe disagreed with his colleagues, saying that the Government did not have the power to "find a method that will produce savings and then see whether it can be said properly to measure" the change in prices. However, the Master of the Rolls explicitly said as part of his appeal judgment that the Secretary of State was "not precluded" from giving some weight to the effect on the national economy in limited circumstances.

"The applicants' contention that, whatever the circumstances, the Secretary of State should, as a matter of course, be required wholly to put out of his mind the effect on the national economic situation when carrying out his functions... seems to me unreal," he added. However, he qualified this by saying that choosing an index that was more detrimental to pensioners "simply because the former index was beneficial to the national exchequer" would not be permissible.

The Court of Appeal refused to grant the unions permission to appeal to the Supreme Court, however the unions are entitled to ask the Supreme Court for that permission directly. Thompsons, the law firm representing some of the largest unions, said in a statement that they were "considering their next steps".

Public sector pensions law expert John Hanratty with Pinsent Masons, the law firm behind Out-Law.com, said that the public sector's so-called "gold plated" pensions were beginning to look "distinctly more like alchemists' lead" compared to their counterparts in the private sector.

"This decision leaves us with a two-tier pension system now in the UK," he said. "Public service schemes such as Government schemes, the Universities' Superannuation Scheme and all other schemes which have their inflation protection linked to the pension increases legislation or the preservation or Pensions Acts legislation are measured by reference to the CPI measure of inflation. Many private sector schemes, however, are tied into the more expensive RPI measure of inflation, which significantly increases the costs on companies who - in many cases - can least afford it."

The public service unions were once again voting on national strike action over changes to public service pension schemes, he added. The Government published its Proposed Final Agreements on the reforms, based on discussions with the unions, earlier this month.