Trustees of the BT, Ford and Marks and Spencer pension schemes — which represent nearly 450,000 members and £83bn of assets — joined forces and filed for judicial review against the government’s plans, and permission to proceed was granted in December last year.
Industry experts have predicted that more than 10mn pensioners could stand to lose out, in the form of lower payments or lower transfer values, should the RPI be officially superseded by the CPIH, because the latter tends to produce a lower account of inflation. For example, in July 2022, RPI inflation was 12.3 per cent, while CPIH was 8.8 per cent.
Proponents of the switch argue that the CPIH, which uses a geometric mean to aggregate price changes as opposed to the arithmetic mean deployed for the RPI, better accounts for the substitution between goods and services when relative price changes.
The RPI was removed as a national statistic in 2013, the Office for National Statistics having deemed it “a very poor measure of general inflation, at times greatly overestimating and at other times underestimating changes in prices and how these prices are experienced”.
But opponents have argued that, besides the deleterious effects it would have on members’ financial position, the change would also reduce the value of RPI-linked assets held to meet schemes’ promises to members, thus weakening funding positions and placing more pressure on sponsoring employers.
Complaints were raised back in 2020 when the government announced it would press ahead with the change, albeit pushing back the date from 2025 to 2030. According to some industry commentators, the effect would be to transfer around £100bn from index-linked gilt holders to the government, and to warn of the “steady erosion” of pensioner incomes.
Case fails on every ground
In deciding the case, Justice Holgate noted that the “flaws in the methodology” of RPI were responsible for it, typically, running 1 per cent higher than CPIH, and that the UK Statistics Authority had already decided to downgrade it to the status of “legacy index” — and only retaining it as such because of its presence in commercial contracts.
“About 10.5mn people in the UK have private sector DB pensions, a majority of which are linked to the RPI. It is said that they will receive reduced payments amounting to 4-9 per cent of their lifetime benefits. On average women are expected to experience a greater reduction because of their longer lifespan,” he explained.
The trustees of the claimant schemes based their case on three principal arguments: first, that the UKSA’s RPI decision fell outside its power to amend RPI; second, that it failed to account for the impact its decision would have on RPI-linked gilts, bonds and index-linked pensions, thus failing its duties under the Equality Act 2010; and third, that the chancellor failed to account for the same in deciding not to award compensation.
They also asked the court to clarify whether, if the decision to amend the index goes ahead, it would trigger a cessation clause in gilts issued from 2005 — a suggestion the then-chancellor rejected on the grounds that the RPI would continue to be published, albeit as a “legacy index”.
In his judgment, the judge rejected the trustees’ claims on each of the three grounds. He said the court had found that the UKSA did have the power to align the RPI and the CPIH, and that parliament placed no restrictions on its ability to do so when it invested the body with the power to make such amendments.
Regarding the second ground, he said that parliament had not required that the UKSA weigh up the “winners and losers” as a result of any change it chose to make, it being “concerned with promoting and safeguarding the quality of official statistics”.
“Parliament has not authorised the UKSA to evaluate and balance such competing interests, or the policy issues to which they give rise. In relation to the RPI, the UKSA is essentially concerned with its statistical quality and its fitness to be used as a measure of consumer price inflation. Decisions on whether to use an index such as the RPI in a commercial or social context are for others,” he explained.
The judge also found that the chancellor had received “ample briefing” on the effects of the proposed change, and that these had been accounted for in reaching the decision not to award compensation.
Of the third ground, he noted that the trustees had accepted that their complaint that the UKSA had failed to properly consult on the change would have to fail if they did not succeed in their argument from the second ground, which they did not.
“They cannot complain about a failure by the UKSA to consult on the RPI decision, given that in substance their complaint relates to matters falling outside the UKSA’s statutory functions,” the judge wrote in his summary.
He also held that the claimants had failed to show any legal basis for the assertion that the chancellor was legally obliged to consult on the question of compensation.
“In any event, even if it is assumed for the sake of argument that consultation on this aspect should have taken place, the complaint would still fail. Consultees did make extensive representations on the subject and they were fully taken into account by the chancellor,” the judge explained.
“The claimants have not suggested that the consultation carried out prevented any additional point on compensation being made by consultees to the chancellor.”
Finally, he provided the requested clarification on the cessation clause in gilts issued since 2005, the court having decided — with the chancellor — that the fact that the RPI will continue to be published means the clause would not be triggered.
Industry ‘disappointed’
Insight Investment’s head of solution design Jos Vermeulen said: “We are disappointed that the government will be allowed to push ahead with their plans for RPI reform.
“Insight and a broad range of market participants highlighted significant concerns about the proposals during the government’s 2020 consultation.
"It was of no surprise that three UK DB pension funds felt they had no choice but to challenge the government’s decision, which will result in a transfer of wealth in the region of £100bn from index-linked gilt holders (largely pension funds) to the government.”
Vermeulen reiterated that the decision would “reduce pension transfer values and lifetime incomes by 10 per cent to 15 per cent or more”.
“With inflation surging, many pensioners are already struggling and RPI reform represents an additional and entirely unnecessary blow,” he noted.
Benjamin Mercer is senior reporter at Pensions Expert, FTAdviser's sister publication
