High Court throws out RPI/CPIH judicial review case
13th September, 2022
On 1 September 2022, the High Court handed down judgment in the case of BT Pension Scheme Trustees v UK Statistics Authority. The well reported action concerned a claim for judicial review by the trustees of the BT Pension Scheme, Ford Pension Schemes and Marks & Spencer Pension Scheme against:
- the decision of the UK Statistics Authority (UKSA) in February 2019 to align the Retail Prices Index (RPI) with the Consumer Prices Index including owner occupiers’ housing (CPIH) by bringing into the RPI the methods and data sources of the CPIH (the RPI decision)
- the decision of the Chancellor of the Exchequer in March 2020 to withhold his consent under section 21(3) of the Statistics and Registration Service Act 2007 (SRSA 2007) to the RPI decision being implemented before 2030, and
- the decision of the Chancellor in March 2020 that the government would not pay compensation to the holders of UK index-linked gilts because of the UKSA’s decision to align the RPI with the CPIH from 2030.
In short, the claim was dismissed but, that said, the decision contains useful background and insights around measures of price inflation used for pensions indexation.
In a bit more detail, the claimants relied upon the following grounds of challenge:
- The UKSA’s RPI decision falls outside the scope of its power to amend the RPI.
- The UKSA failed to take into account the impact of its RPI decision on the holders of RPI index-linked gilts and bonds and persons entitled to index-linked pensions (legacy users), or wrongly decided that it was not entitled to take that impact into account. Consequently, the UKSA also failed to comply with its Public Sector Equality Duty (PSED). Also, in making his compensation decision, the Chancellor failed to have regard to the interests of legacy users and to comply with the PSED.
- The UKSA failed to consult the public on its RPI decision and to take into account their views when that proposal was at a “formative stage”. Also, the Chancellor failed to consult with legacy users on the issue of compensation and to take into account properly their representations on compensation.
The claimants also brought a private law claim in the event of the court deciding that the RPI decision is lawful. They submitted that the effect of implementing the RPI decision in 2030 will be that the RPI will cease to be published and so the ‘cessation clause’ in gilts issued from 2005 onwards will be triggered. The Chancellor would, therefore, be obliged to select a replacement index for the RPI. The Chancellor submitted that the clause will not be triggered because, once the RPI decision is implemented, the RPI will still continue to be published.
The claimants failed on all grounds –
- The court rejected ground 1 holding that: as a matter of law, the UKSA has the power to amend the RPI by bringing the methods and data sources of the CPIH into the RPI. That power includes the making of “fundamental changes” to the coverage or basic calculation of the RPI. The court also rejected the claimants’ argument that the UKSA’s RPI decision was simply an attempt to circumvent the need to repeal s. 21 of the SRSA so that the RPI need no longer be produced.
- The court rejected both of the claimants’ contentions under ground 2 holding that: it is common ground that, because the RPI is used in so many different situations, the effect of leaving the RPI as it is, or changing it in accordance with the RPI decision, produces winners and losers in many parts of society and the economy. On the claimants’ second point, the Chancellor received ample briefing from his officials on the effects of the RPI decision on legacy users and the PSED. That was taken into account in his decision that compensation should not be provided out of the public purse.
- The court consequently rejected both of the claimants’ contentions under ground 3. In respect of the claimants’ second point, the court decided that they failed to demonstrate any legal basis for their assertion that the Chancellor was legally obliged to consult on whether compensation should be paid to legacy users.
Finally, in relation to the ‘cessation clause’, the court explained why the RPI will not cease to be published when the RPI decision is implemented from 2030. Accordingly, there will be a declaration that that decision will not cause the cessation clause in index-linked gilts issued from 2005 to be triggered.
It is reported that the schemes involved are now considering the judgment, including whether to seek permission to appeal. As things stand, the reform of RPI will go ahead as planned and HM Treasury has already updated its consultation outcome for the consultation on reform to the RPI methodology.
What does it all mean for pension scheme sponsors, members and trustees?
Well, that depends.
- For members who have benefits linked to CPI or do not receive increases, there will be no change. However, where members have all or part of their benefits either in deferment or payment linked to RPI then they will see a change in how their pension increases in future (from 2030).
Many members may feel like this is a reduction in their pension promise and telling member that the current calculation in RPI is overstated, due to an error in the formula, will provide little comfort!
- For pension scheme sponsors the impact will also depend on what measure of inflation is used when calculating pension increases and how much inflation hedging is in place.
Most assets that hedge inflation are hedging RPI as there are very limited assets that are linked to CPI.
In the same way that there has been a ‘lottery’ in whether pension scheme increases are linked to RPI or CPI under scheme rules, there will be a lottery in the impact of the change to the calculation to RPI for scheme sponsors.
- Trustees will be tasked with explaining the impact to members where their pension increases are affected and liaising with sponsors on the funding impact of any change on the pension scheme.
When CPIH replaces RPI, will some trustees feel moved to ask for discretionary increases or for changes to be made to scheme benefits to compensate pensioners?