Last week, the High Court dismissed the judicial review into a decision to replace the Retail Prices Index (RPI) brought by the trustees of the BT, Marks & Spencer and Ford UK pension funds – three of the largest pension funds in the UK.

The legal challenge arose following the decision by the UK Statistics Authority (UKSA) to align the existing RPI with the Consumer Prices Index including Housing Costs (CPIH) from 2030. The UKSA’s decision follows a general acceptance among statisticians that RPI is no longer an accurate measure of inflation; it often over and underestimates the true cost of rising prices for consumers.

In terms of the magnitude of this change, GAD’s recent blog confirmed the Association of British Insurers estimated the impact at around £96 billion, mostly affecting savers and companies that invest in government debt linked to inflation (known as index-linked gilts), and according to the Pensions Policy Institute, will be most keenly felt by members whose defined benefit pension increases are calculated using RPI. About 10.5 million people in the UK have private sector defined benefit pensions, the majority of which are still linked to the RPI. The Pensions Policy Institute estimated that the average reduction in lifetime income from a member’s RPI-linked pension could be as much as 5% for a woman, and 4% for a man (based on a 65 year old in 2020). Women will generally experience a greater lifetime reduction in overall pension benefit as, on average, they live longer than men.

The trustees for the three pension funds maintained that this change to the formula for calculating the RPI will result in those affected receiving reduced payments from their pensions, and sought to challenge the UKSA decision on three key grounds, set out below.

Powers of the UKSA

The first ground asserted that the UKSA’s RPI decision fell outside of the scope of its powers. The High Court rejected this first ground deciding that, as a matter of law, the UKSA had the power to amend RPI and make fundamental changes to how it is calculated and its wider application.

Consultation and obligations to consider impact of decision

The second and third grounds related to the Chancellor’s alleged failure to adequately consult with the public on the matter of compensation for legacy users of RPI and the UKSA’s alleged failure to consider the impact of its RPI decision on holders of RPI linked gilts and bonds and persons entitled to index-linked pensions. The High Court also rejected both of these grounds, deciding that:

  • the trustees 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 of the RPI. In any event, there was evidence to suggest that the consultees did make extensive representations on the subject and they were fully taken into account; and
  • the UKSA’s remit was concerned with evaluating the statistical quality of the RPI and its fitness for use as a measure of consumer price inflation. Parliament had not authorised the UKSA to evaluate and balance the competing interests of those in wider society or the economy.

Cessation clauses

Separately, the High Court also considered whether the cessation clause (the clause dealing with what would happen if the RPI ceased to be published) in gilts issued from 2005 onwards would be triggered if the RPI is changed. This would in turn trigger the contractual process for designating an alternative index and would potentially result in compensation for the gilt holders. Ultimately, the High Court maintained that those provisions would not be triggered because RPI will continue to be published, albeit in a different form.

Comment

The High Court’s decision will have a significant impact on index-linked gilt investors and other legacy users of RPI, so the trustees will now consider whether to seek permission to appeal the judgment. The decision has also provided clarity on the scope of the UKSA’s duties in respect of the other statistics within its remit, as well as broader principles for public decision-making that engages matters of economic policy.