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Price inflation – which index?

Price inflation – which index?

The Government has switched from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) for calculating revaluation and pension increases for public services schemes. Various trade unions challenged the switch. Judgement in the judicial review proceedings was given by the High Court in December 2011.[1]

This article considers two issues: (1) Is the High Court’s dismissal of the union claims the end of the road for the union challenge? (2) If not, what are the implications for private sector schemes?

End of the road?

The trade union challenge was on four grounds namely:

1. The obligation under the public services scheme legislation is to calculate the increase in prices directly; the CPI does not (it was claimed) achieve this as CPI makes significant use of the ‘geometric’ method as opposed to the ‘arithmetic’ method of calculating increases;

2. The Government’s decision was based on improper and hence illegal considerations; it was claimed the legislation requires the Secretary of State to use the most suitable index whereas the evidence showed the Secretary of State was heavily influenced by the cost saving CPI would achieve for the public purse;

3. Arguments based on legitimate expectations of continuing RPI; and

4. Arguments based on (alleged) breach of the Equality Act 2010.

The High Court rejected all four grounds, albeit one of the three judges supported ground (2).

Leave to appeal on grounds (1) and (2) has been given and the appeals have been lodged as we understand it. Therefore, although the Government has won the battle it has not won the war. No date has been set for the hearing of the appeals.

The Court, in deciding in favour of the Government on ground (1), said that each “index has its supporters and critics among the technical community of statisticians and economists” and that both “the CPI and RPI are readily available to the Secretary of State as possible measures to establish without undue difficulty the increase in the general level of prices”.

So, the union challenge is down but because leave to appeal has been given, it is not out.

On ground (2) the dissenting judge said that the legislation required the Minister to use an index which was an appropriate method, and the Minister should do so “without regard to extraneous considerations. Potential savings to the public purse are outside the exercise enjoined by the statute”.

Relevance for private sector schemes?

The phrase “general level of prices” appears both in the public service pension schemes legislation (section 150(1) Social Security Administration Act 1992) and in the private sector legislation (Schedule 3, Pension Schemes Act 1993).

Both sets of legislation include the words “where it appears to the Secretary of State” that the “general level of prices…”

Although the precise wording of the public and private sector statutory provisions differ, it is likely that if the courts eventually decide that CPI cannot be used as the measure of the general level of prices for public service pension schemes, the same would apply to those private sector schemes where increases are governed by statute. That is why private sector schemes should keep an eye on the judicial review proceedings.

For any readers who wish to understand the intricacies of the ‘geometric’ as opposed to the ‘arithmetic’ method of calculating indices, there is a useful explanation in the High Court’s judgement (this assumes the Court itself has properly understood the methodologies!). Please contact us if you wish to see the Court’s comments.

Clive Weber


[1] The High Court decision in R (Staff Side of the Police Negotiating Board and others) v Secretary of State for Work and Pensions and another [2011] EWHC 3175 (Admin) is available at http://lgl.kn/aab88.

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