Unions representing millions of workers have lost their Court of Appeal battle against a Government decision to change the way public sector pension increases are calculated.
Three appeal judges yesterday refused to overturn a High Court 2-1 majority ruling last December which backed the Government’s approach.
The case relates to Work and Pensions Secretary Iain Duncan Smith’s decision to use the consumer price index (CPI) instead of the, normally faster-rising, retail price index (RPI) to measure price increases influencing pension upgrades.
The unions say the CPI route will see the value of pensions cut by up to 20 per cent over a normal retirement, costing every affected worker thousands of pounds.
They accused the Government of unlawfully attempting to reduce pension costs in the battle to cut the UK’s financial deficit.
Their appeal was dismissed by Master of the Rolls Lord Neuberger, sitting with Lord Justice Maurice Kay and Lord Justice Sullivan.
The judges unanimously ruled the Government decision valid, dismissing the union argument that it was unlawful because the “driving force” behind it was the national economy.
The unions are now considering whether to attempt to take their case to the Supreme Court, the highest court in the land.
The change from RPI to CPI is expected to save almost £6bn a year by 2014.
Lord Neuberger said: “The Government clearly believed that the state of the national economy was grave, and that any savings which could properly be made should be made – and made as soon as possible.”
The judge also said: “Provided that the Secretary of State acts rationally and takes all appropriate – and no inappropriate – matters into account, it is a matter for him which index he chooses.”
The Pensions Secretary “must seek to identify a rational basis for making his estimate, and one which he honestly believes achieves the aim of the section, namely to assess the decline in the purchasing power of benefits and pensions and other payments”.
But that did not rule out him taking into account the wider consequences and the effect on the national economy, as long as he acted proportionately.
The judge said it was “unsurprising to suggest that the wider public economic interest can have a proportionate and limited bearing on an annual decision which will cost the national exchequer many hundreds of millions of pounds in most years”.
The driving force behind the selection of CPI rather than the RPI was the need to fill the “black hole” in the finances of the Department for Work and Pensions created by the decision to uprate certain social security benefits by 1.5 per cent in 2010 and concerns about the future effect on the national economy, said the judge.
However, CPI was also selected “not merely because of the wider economic consequences, but also because it was believed to be an inherently more satisfactory index than RPI for uprating purposes”, said the judge.
The fact that it was the effect on the economy that initially drove choosing CPI did not alter the fact that it “was considered on its merits to be an appropriate index”.
The judge added: “It seems to me that the decision to use CPI as the index by reference to which the 2011 uprating should be effected would certainly have been made by the Secretary of State even if he had to put out of his mind any consideration of the benefit to the national economy of that decision.”
Later the unions, which were ordered to pay the Government’s costs, accused it of reneging on assurances by successive governments that RPI would apply.