Switching inflation-linking to the Consumer Prices Index could slash 15% from pension values.
The government has won a major legal challenge brought by unions trying to prevent changes to how public-sector pensions are increased in line with the rising cost of living.
Government 2, Unions 0
In the Court of Appeal, the Master of the Rolls handed down his ruling that the government had the right to switch the inflation-proofing of public-sector pensions from the Retail Prices Index (RPI, which includes mortgage interest, council tax and other housing costs) to the Consumer Prices Index (CPI).
Historically, the CPI measure of inflation has lagged behind the RPI. Hence, lifting future pensions in line with the CPI means payouts will increase more slowly. For example, in the year to February 2012, the CPI increased by 3.4%, 0.3 percentage points lower than the 3.7% rise in the RPI.
In order to protect their members' pensions, six unions representing NHS workers, teachers, police, fire-fighters and other public-sector employees opposed the switch to CPI. In December, the High Court ruled in favour of the government, so these unions appealed to the Court of Appeal, which also turned down their arguments.
What's more, the Court of Appeal judges refused to give the unions permission to appeal to the Supreme Court. However, these unions can directly approach the Supreme Court for permission to appeal this latest verdict.
A £7.5 billion-a-year saving
Chancellor George Osborne first proposed the switch from RPI to CPI in his post-election Budget in June 2010. The first CPI-linked uplift came last April, when public-sector pensions rose by 3.1%, instead of the 4.6% hike in the RPI.
Thanks to this move, plus other changes to public-sector pensions, the government expects to save £7.5 billion a year by 2014/15. However, while the government today emerged the winner, millions of present and retired NHS workers, teachers, civil servants and local-government employees are the losers.
According to the unions, the CPI has historically been 1.2 percentage points lower than the RPI. As a result, they calculate that this will lower public-sector pension values by an average of 15%.
No doubt the six unions which lost their case today will appeal directly to the Supreme Court. What's more, they are likely to call yet more strikes to protest this change to inflation-proofing.
However, it is my view that the government should stand firm on these and other alterations to public-sector pensions. Without such modifications, these largely unfunded pension schemes would become increasingly less sustainable and affordable.
Finally, while most private-sector pension schemes increase pensions in line with the RPI, they remain much, much less generous than their public-sector equivalents. Nevertheless, cost-cutting companies may also decide to curb future pension payouts by following the government in moving to CPI-based uplifts.
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