02/12 Pension switch ruled lawful by High Court

Matt Wrack, General Secretary of the Fire Brigades Union says "this measure is about putting more money in George Osborne's coffers"
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.
The decision affects the value of 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.
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.
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%.
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.

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The union will seek to exhaust all possible legal remedies”
Chris KeatesNASUWT
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 £6bn by 2014.
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."

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