Trade unions lose Court of Appeal challenge over pensions inflation index switch

The Court of Appeal has rejected a challenge by trade unions to the Government’s decision to change the way it increases public sector pensions to take account of inflation.

In 2011 the Government said it would adjust public service pensions by reference to the Consumer Price Index rather than the Retail Price Index as previously was the case.

The CPI and the RPI are different in a number of ways. For example, the RPI uses an arithmetic mean to combine prices within each category of product, while for 70% of products the CPI uses a geometric mean.

The unions and individuals challenging the decision put forward two grounds:

• The CPI was not a permissible index for the Government to use for up-rating. This was on the basis that it did not measure whether the pensions “have retained their value in relation to the general level of prices” as set out in s. 150 of the Pensions (Increase) Act 1971. Counsel for the claimants argued that CPI did not measure what the Act required; and
• When opting for CPI, the Government had been influenced by the fact that it would deliver a significantly lower increase in public sector pensions and so benefit the national economy.

The Government successfully defended the case in the High Court, although one of the three judges found in favour of the claimants on the second ground.

In FDA, Prospect & others v Secretary of State for Work & Pensions & HM Treasury [2012] EWCA Civ 332 the Court of Appeal has now unanimously dismissed the challenge.

The judges – the Master of the Rolls, the Vice-President of the Court of Appeal Civil Division and Lord Justice Sullivan – concluded that CPI was a proper index to use for adjusting pensions under the 1971 Act.

Giving the judgment of the court, Lord Neuberger said: “Section 150(1) leaves it to the Secretary of State to select the method by which he estimates whether, and if so to what extent, certain benefits and pensions have lost ‘their value in relation to the general level of prices obtaining in Great Britain’ during a particular year.

“The obvious way, or at least an obvious way, of making such an estimate is the use of an official, professionally compiled index, whose function is to measure the extent to which prices of consumer goods and services have increased in sterling terms over the period in question, and CPI is such an index.”

Provided that the Secretary of State acted rationally and took all appropriate (and no inappropriate) matters into account, it was a matter for him which such index he chose, the Master of the Rolls said.

On the second ground, the Court gave two reasons for rejecting the claimants’ arguments. Lord Neuberger said the Secretary of State was not precluded from taking into account the effect of his selection on the national economy, “although it can only play a relatively attenuated role in limited circumstances”.

The judge said that three requirements would normally have to be met before the Secretary of State could invoke the benefit to the national exchequer:

“(i) there would, in the Secretary of State’s view have to be little to choose between the indices in terms of reliability and aptness,

(ii) the benefit to the national exchequer of choosing the less good index would have to be significant, and

(iii) the need to benefit the national exchequer, in terms of the national economy and demands on the public purse, would have to be clear.”

The Court of Appeal also ruled that even if the effect of the selection of the national economy was not a legitimate factor, the Government would have still reached the same conclusion and used CPI.

Evidence put forward by the Government had concluded that the various differences between CPI and RPI – plus the fact that the CPI was less volatile and used by the Bank of England as well as in other countries – meant that CPI was a more appropriate index.

The Court of Appeal refused the claimants’ permission to appeal to the Supreme Court.