Unsuccessful challenge to change from RPI to CPI in public sector pensions

December 5th, 2011 by Jane McCafferty

R (ota) The Staff Side of the Police Negotiating Board and others v The Secretary of State for Work and Pensions and others

A Divisional Court of three judges (Elias LJ, McCombe and Sales JJ) has by a majority rejected the judicial review challenge brought by a number of public sector in R (ota) The Staff Side of the Police Negotiating Board and others v The Secretary of State for Work and Pensions and others [2011] EWHC 3175 (Admin).

Nigel Giffin QC acted for a number of the public sector trade unions. Clive Sheldon QC and Amy Rogers acted for the Government defendants.

The decision under challenge

The challenge was to the Government’s decision to change the basis upon which public service pensions are adjusted to take account of inflation. Such adjustments had been made in line with the Retail Price Index (“RPI”). From April 2011 they are to be made in accordance with the Consumer Price Index (“CPI”). Some of the schemes fix pensions by reference to an employee’s final salary and newer schemes fix it by reference to the average salary over the employee’s career. In both cases the change affects the value of pensions in payment, and in the case of career average schemes, it also affects the way in which the career average is calculated.

It was common ground that the move to CPI has had, and will have, a detrimental effect on pensioners because although there may be some years where CPI will yield a higher increase than RPI, the overall picture is that RPI is typically in the region of 0.75-1% higher than CPI. It has been estimated that the change from RPI to CPI may, through the compounding effect over time, reduce the value of benefits to pension scheme members by as much as 15% on average. The change will affect both pension income and the lump sum which pensioners may take by commuting part of their pension as soon as they retire.

The four grounds of challenge

The public sector unions argued that the decision to change from RPI to CPI was unlawful on the following four grounds: –

(1) the statutory provision for uprating did not permit the use of CPI (CPI uses a ‘geometric mean’ for part of its calculation; RPI uses only the ‘arithmetic mean’);

(2) the financial savings to be made from the switch to CPI was an irrelevant consideration to the statutory scheme for uprating;

(3) the decision was made in contravention of substantive and procedural legitimate expectations of members of public sector pension schemes, and in breach of Article 1 Protocol 1 rights; and

(4) there had been a failure to have due regard to the gender equality duty under the Sex Discrimination Act 1975 (“SDA”).

The Divisional Court dismissed all of the grounds of challenge. McCombe J dissented on the irrelevant considerations ground point.

(1) CPI method was not ultra vires the statutory language

The unions challenged the whole exercise by arguing that the CPI is not an index which the Secretary of State was entitled to adopt in compliance with the obligation under section 150(1) and (2) of the Social Security Administration Act 1992. It was submitted that the obligation under the statute is to compare prices directly. The effect of adopting CPI, because it uses the geometric mean, is that the comparison is not simply as between prices but also takes account – albeit at a low level within the aggregation process (namely, within each category of goods and services in the basket) – of consumer reaction to the increase in price.

The Court rejected this ground of challenge. The Court did not accept that the weighting based on use of the geometric mean involved in the CPI methodology was at odds with Parliament’s intention. It held that the obligation is to make a comparison of the general level of prices and that is what is being done; like is being compared with like. The Court held –

Moreover, in fact all the items in each category of product in the basket are being valued: the price of each item in the category at the beginning of the relevant period is compared with its price at the end to identify the rate of change in price for that item – no item is treated as dropping out of the category in that period, nor is any item added to it. The use of the geometric mean does not affect this; it just means that the rate of change in price of each item is not weighted equally. If it appears to the Secretary of State that this is a proper way to ensure that pensions retain their value, without pensioners receiving either too much or too little, we can see no reason why he should not adopt that index.”

(2) Saving money was not an irrelevant consideration

As to the second ground, the Court was divided.

The unions submitted that the statutory obligation was to determine what as a matter of fact is the increase in the general level of prices over the year. The Secretary of State was said to have “put the economic cart before the statutory horse” in using the need to make savings as the dominant factor in choosing the methodology.

The majority (Elias LJ and Sales J) rejected this ground of challenge, holding that the Secretary of State can perfectly properly say that there are at least two indices which significant bodies of experts say properly measure the change in the general level of prices and will protect the purchasing power of benefits and pensions, and that he accepts that either index will achieve that objective. Once that decision is reached, he can lend his support to one rather than the other for any rational reason. Further, even if the even if the Secretary of State was wrong to have regard to economic considerations when deciding which of the two available indices to adopt, the majority was satisfied that to the high standard required he would have chosen CPI in any event.

McCombe J however dissented on this ground of challenge alone, holding that in identifying the best methodology the Minister is only entitled to have regard to the express purpose identified in section 150(1). “It was not lawful for the Minister to search out the means of measuring price movements with the express purpose of procuring savings. It is not a correct exercise to search out generally acceptable methods of estimation and to make the selection guided by exterior considerations such as a desire to make savings.” McCombe J also dissented on the question of whether, absent irrelevant considerations, the same decision would have been made at the time (on the issue of lawfulness) or today (on the issue of relief). For these reasons, McCombe J would have granted the application for judicial review and quashed the orders.

(3) No legitimate expectation that RPI would remain in use

The unions’ challenge based on legitimate expectations failed on the facts. The Court found that there was never any promise or assurance given, or any practice adopted amounting to any such promise or assurance, which was “clear, unambiguous and devoid of relevant qualification” that RPI would be the index of review in perpetuity.

However, of potentially wider interest was the Court’s obiter remarks about what the consequences would have been had there been a legitimate expectation.

First, the Court saw “considerable force” in the unions’ submission that, if there was in fact a legitimate expectation in law, it was not a proper compliance with the Government’s legal obligation simply to have some regard to the fact that others believed that the expectation existed. Where a legitimate expectation exists, it must be properly and fully taken into account. The Court held that –

The weight given to a promise generating a legitimate expectation would naturally be expected to be greater than the weight, if any, given to the fact that the Government recognises that some may think (wrongly, in the Government’s view) that there was a promise.

Secondly, the Court rejected the unions’ argument that, if a legitimate expectation existed, they were denied the right to be consulted before their substantive expectations based on such promises were defeated. This also failed on the facts. The Court held that, if there had been an obligation to consult, it would have been satisfied by the process of debate with the unions which did in fact occur before the orders were made.

(4) No failure to have due regard to the public sector gender equality duty

The primary challenge was based on the fact that the Secretary of State himself never had regard to the equality impact assessment; only the Chancellor did so. The Court held that the Secretary of State may rely on workings and a review of effects carried out within his department to satisfy the “due regard” requirement, without having personally to read an impact assessment, so long as the task has been assigned to officials at an appropriate level of seniority or expertise. Equally, a Minister may rely on a relevant equality assessment carried out by another Government department as well or better placed than his own to undertake the task, particularly where that other department has policy responsibility in relation to the effects under review.

The Government submitted that the public sector gender equality duty was simply not engaged by the making of the orders under challenge for two reasons.

First, because the making and laying before Parliament of the statutory instrument which effected the change from RPI to CPI were acts connected with “proceedings in Parliament” and therefore were exempt by section 76A(4)(a) SDA.

The Court gave only provisional views on this issue as it had not heard full argument but expressed a view to assist in future cases or on any appeal from its judgment. The Court concluded that, if it were necessary to do so, it would have been minded to find that the exemption in section 76A (4) (a) applied so that the making of the orders under challenge were not subject to the gender quality duty.

Secondly, the Secretary of State submitted that, because section 21A SDA excludes various acts of public bodies concerned with the making of legislation from liability for discrimination, the public sector equality duty in section 76A was also disapplied in these circumstances. The Court rejected this submission holding that there was nothing intrinsically inconsistent with requiring the Secretary of State to have to comply with the “due regard” duty in section 76A(1) when considering the potential impact of subordinate legislation whilst at the same time not being subject to the non-discrimination duty himself when making the legislation. The scope of that duty may be restricted because section 76A(1)(a) requires the Secretary of State to have regard to the elimination of unlawful discrimination, but section 21A prevents the legislative proposals from being unlawful. But that does not mean that the duty is wholly disapplied.

However, interesting as the Court’s analysis of the exemptions to the gender equality duty under the SDA was, it will be of limited practical application to future challenges. This is because there is no general exemption for proceedings in Parliament in the Equality Act 2010. As the Court held, “for the future, the difficult arguments with which we are engaged in this case will not arise and the courts will not have to trace the potentially awkward dividing line between different types of subordinate legislation when determining the application of section 76A.”

Permission to appeal

The Court granted permission to appeal on the first ground of challenge, whether the statutory language permitted the use of the CPI.

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