Pension switch ruled lawful by High Court
The government's public sector pensions policy has been given a major boost following a High Court ruling.
Trade unions had complained about how pensions are being protected against inflation, with the Consumer Prices Index (CPI) replacing the faster-rising Retail Prices Index (RPI).
The High Court has now ruled that the government's switch was lawful.
This confirms a reduction in the value of future annual pension increases for millions of public sector pensioners.
The policy also saves the government billions of pounds in the coming years and is a major area of disagreement within the public sector pensions dispute.
Up to two million public sector workers went on strike on Wednesday over pension rights.
Announcing the decision, Lord Justice Elias said three of the four grounds of challenge had been dismissed unanimously, while one was rejected by a 2-1 majority.
"The use of RPI has in the past been merely current practice. Looked at objectively it could not properly be asserted therefore that any promise of its continued use had to be assumed," the judgement stated.
The unions were given permission by the judges to appeal to the Court of Appeal on some of the issues raised.Pension shift
CPI and RPI are measures of inflation - or the cost of living - based on the prices of baskets of goods and services. The RPI basket includes mortgage interest payments and some other housing costs, and is generally higher owing to the formula used to calculate it.
The use of CPI for inflation-proofing policy was first applied in April this year.
How the switch affects you
- A typical teacher's annual pension is £10,000 a year
- Were RPI of 3.4% to be used for inflation proofing, total pension payments in 20 years of retirement would be £284,923
- Assuming CPI of 2% instead, total payments would be £245,500 - a difference of £39,423 over 20 years
It saw pensioners in schemes covering civil servants, teachers, NHS employees, local government and others, receiving an increase of 3.1% instead of 4.6%.
On Tuesday, new projections published at the time of the Autumn Statement showed the government is now assuming the gap between the measures will widen from 1.2 to 1.4 percentage points a year.
If someone retired on an annual pension of £10,000 a year - a typical figure for a teacher - then over 20 years the uprating of their pensions by 2% (the Bank of England's CPI target) would see them accrue total pension payments of £245,500.
If a 3.4% RPI figure was used instead - because this would be 1.4 percentage points higher - the pensioner in question would receive £284,923. That's a difference of £39,423 over 20 years.
Michaela Berry, of pension law firm Sackers, pointed out that the ruling would bring some certainty to those private sector schemes which had also moved to CPI.
"Many private sector pension schemes have also seen their pensions being revalued by reference to CPI," she said.
"Whether a private sector scheme is affected by the switch has been something of a lottery, depending on whether the rules expressly built in a reference to RPI or referred to the legislation that relies on the government to determine what method of measuring inflation is used."'Appropriate'
The Office for Budget Responsibility, the independent but government-funded economic forecaster, said that by 2016 the gap between CPI and RPI could be as high as 1.8 percentage points, predicting that CPI will go down to 2% by then, while RPI stays higher at 3.8%.
Why does CPI rise more slowly than RPI?
One reason is that CPI excludes most housing costs of home owners.
But more importantly the two measures use different arithmetical methods.
The one used in the CPI, unlike RPI, is supposed to mimic the behaviour of shoppers who supposedly substitute cheaper goods for more expensive ones as prices rises.
This so-called formula effect is by far the biggest source of the differences between CPI and RPI.
The fact of using one formula instead of the other also has the convenient effect of saving the government billions of pounds.
Lord Hutton's independent report on public service pensions, whose final report was published earlier this year, calculated that the unfunded public pension schemes (a definition that included all but the local government scheme) would save £1.8bn a year in cash payments by 2015-16 due to the move to CPI.
However, that saving will be much greater if the OBR's forecast of a wider divergence between the two inflation measures proves to be true.
If state benefits and tax credits - also affected by the policy - are included in the calculations, then the average annual government saving could be £10.6bn by 2015-16, according to the 2011 Budget.
The annual increase in state pension is based on a different calculation - namely, whichever is highest of average earnings, CPI, or 2.5%.
Government lawyers argued that ministers are entitled to consider the CPI to be "a more appropriate measure of changes in the general level of prices".
The trade unions' lawyers had argued that the government had acted beyond its powers granted by the Social Security Administration Act.
"While the High Court's split ruling is disappointing, the unions are pleased that their main argument, that the chancellor was motivated by deficit reduction when he made the switch, was accepted," said a spokesman for law firm Thompsons Solicitors, which acted for six unions.
"It is encouraging that one judge agreed that this was illegal. We have instructions to lodge an appeal urgently on behalf of the unions."
NASUWT general secretary Chris Keates said: "The union pledged at the outset to leave no stone unturned to protect the interests of teachers and will, therefore, seek to exhaust all possible legal remedies."
Two groups, mainly consisting of unions, launched the legal action. The Fire Brigades Union, NASUWT, Prison Officers Association, Public and Commercial Services union, Unison and Unite make up one group, while the other consists of Prospect, the FDA, GMB, Police Federation, National Association of Retired Police Officers and the Civil Service Pensioners' Alliance.
The judges agreed to allow the National Union of Teachers, Association of Principal Fire Officers and National Federation of Occupational Pensioners to join the challenge.