Unions in pension legal challenge

24 October 2011 Last updated at 19:00 ET

The outcome of the hearing will affect the pensions of millions of public employees and pensioners

The government’s policy of raising public sector pensions in line with the consumer prices index instead of the retail prices index is going to be challenged in the High Court.

On Tuesday, six trade unions start a judicial review.

They believe the policy, announced in June 2010 and aimed at cutting the budget deficit, involved an improper use of ministerial discretion.

The Treasury was unavailable for comment.

An independent report published earlier this year found the move to CPI may eventually cut the value of public sector schemes by 20%.

Len McCluskey, the general secretary of the Unite union, said: “Our legal challenge against the coalition government is hugely significant for workers in both the public and private sectors.”

“Public sector workers face an opportunistic attack on their pensions by this government, but many workers in the private sector have also been affected,” he added.

Dave Prentis, general secretary of Unison, said: “The switch [was] nothing but 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 added.

In addition to Unite and Unison, the legal action is being supported by the Fire Brigades Union (FBU), the Public and Commercial Services Union (PCS), the Prison Officers Association (POA) and the NASUWT teachers’ union.

‘Appropriate’ measure

The change will reduce pension increases for millions of public sector scheme members – current staff, pensioners and former employees who are waiting to draw a pension.

The policy came into effect in April this year, when RPI (as of September 2010, the benchmark month) was 4.6% but CPI was 3.1%.

Next April, public sector pensions will rise by this September’s CPI rate of 5.2%, compared with the RPI rate of 5.6%.

The new policy was announced in the 2010 Budget as an explicit measure to cut the government’s spending deficit.

Chancellor George Osborne described CPI as a “more appropriate” measure of inflation – for state benefits and tax credits as well as public sector pensions – which would save the government money by producing smaller increases each year.

“It excludes the majority of housing costs faced by homeowners and differences in calculation mean it may be considered a better representation of the way consumers change their consumption patterns in response to price changes,” the 2010 Budget document explained.

Inflation gap

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 by the move to CPI.

That saving would continue to grow indefinitely, as CPI increases will usually lag behind RPI ones.

In the past the gap between the two measures has averaged about 0.75 percentage points each year.

But the Office for Budget Responsibility (OBR) has forecast that from now on the gap will widen to 1.2 percentage points.

Lord Hutton calculated that if the 0.75 percentage point gap remained, then by 2060 the pensions being paid would have been cut by 20%.

The change to inflation proofing has also had a knock-on effect on some employees in the private sector, where schemes such as those for BA and BT incorporate whatever is the government’s preferred inflation measure into their own rules.

Grievances

The law governing the issue in the public sector is the 1992 Social Security Administration Act.

It says that in order to compensate for inflation, public sector pensions and other state benefits should be revalued “in relation to the general level of prices obtaining in Great Britain estimated in such manner as the Secretary of State thinks fit”.

The unions will argue that this wide power has been misused as it does not exist for the purpose of cutting a general government spending deficit.

They will also argue that last year’s decision rides roughshod over previous pension agreements which were struck in the belief that RPI would always apply.

And they will also argue that the move to CPI means individuals who transferred previous pensions into their public sector schemes, or who bought added years of pension contributions, will no longer receive what they paid for.

The hearing takes place at the High Court in London and is expected to last for three days.

Other disputes

The case is just one of several battle grounds between the government and unions over pensions.

Many public sector unions are currently balloting their members for a strike on 30 November against planned increases in pension contributions from next April.

And, following the recommendations of Lord Hutton, negotiations are under way over the wholesale introduction of new, less generous, career average pension schemes for all public sector employees – including current staff – from 2015-16.

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