1. The Staff Side of the Police Negotiating Board and Others (First Claimants) v 1. Valerie Piper and Others (Second Claimants) Secretary of State for Work and Defendants Pensions & Hm Treasury & Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Elias,Mr Justice McCombe |
| Judgment Date | 02 December 2011 |
| Neutral Citation | [2011] EWHC 3175 (Admin) |
| Docket Number | Case No: CO/3570/2011 |
| Court | Queen's Bench Division (Administrative Court) |
| Date | 02 December 2011 |
[2011] EWHC 3175 (Admin)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Elias
Mr Justice Mccombe
Mr Justice Sales
Case No: CO/3570/2011
And Case No: CO/4082/2011
The Queen on the application of
and
Mr Michael Beloff QC and Mr Martin Westgate QC (instructed by Messrs Russell, Jones & Walker) for the First Claimants Mr Nigel Giffin QC and Mr Nicholas Randall (instructed by Messrs Thompsons) for the Second Claimants Mr James Eadie QC, Mr Clive Sheldon QC and Ms Amy Rogers (instructed by The Treasury Solicitor) for the Defendants
Approved Judgment
Hearing dates: 25, 26, 27 October 2011
This is the judgment of the court, to which all members have contributed. There is a difference between us on one issue – issue (2) (irrelevant consideration / improper purpose), discussed below. In relation to that issue, McCombe J dissents and explains his reasons for doing so in a separate judgment which follows.
The Government has altered the basis upon which public service pensions are adjusted to take account of inflation. Hitherto the adjustments were 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. The question in this application is whether the decision to change the index, and the statutory orders implementing that decision, were lawfully taken and made.
There are two separate applications for Judicial Review. In the Piper case the claimants are Mrs Piper, a civil servant, and six trade unions representing staff belonging to a variety of public sector schemes, all established under statute. These are pension schemes covering the civil service, firefighters, teachers, the NHS and local Government. These are all public service pension schemes within the meaning of section 1 of the Pension Schemes Act 1993 and, as a consequence of legislative provisions which we discuss below, they are schemes affected by the change in policy.
The second claim is brought by the Staff Side of the Police Negotiating Board and various other bodies, including a number of trade unions, the FDA, the GMB, the NUT and the Association of Principal Fire Officers. Some of these bodies were joined at the start of the hearing.
Background.
Although the court was inundated with documents relating to the decision under challenge, the essential facts are not in dispute and can be relatively shortly stated.
Until the implementation of the recent decision the uplift in pensions was measured by reference to the RPI. 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.
RPI and CPI.
Both RPI and CPI measure the change in the level of prices; contrary to the submission of the Claimants, neither is a cost of living index. RPI in its current form dates back to the 1950s. CPI was introduced in 1996. It is an index which is governed by EU regulations and was designed to create an internationally recognised inflation measure which enables inflation levels across different European countries to be compared. CPI was adopted by the Bank of England as the headline measure for price inflation on 10 December 2003. If the Bank of England's targeted inflation measure exceeds a certain level then it is obliged to make a report to the Chancellor.
The statistics which are used to determine both the RPI and the CPI are produced by the Office of National Statistics ("ONS") which is an independent public body responsible for producing a range of national statistics. It is an executive office of the UK Statistics Authority, which now has statutory status and reports directly to Parliament.
There are a number of similarities in the ways in which RPI and CPI are determined. They are both calculated by reference to representative goods and services. Each year the ONS identifies what might be conceived as a "shopping basket" of around 700 representative goods and services on which consumers typically spend their money. The items will be changed each year so as to ensure that they reflect changes in the pattern of consumer spending. It is the movement in the price of these goods which is used to measure the relevant price changes. Prices are obtained from many outlets although there is a system of validation to ensure that what are termed "outliers", that is apparently rogue prices which appear wholly atypical, are excluded from the calculations. An overall inflation rate is worked out by a process of, first, aggregating particular items into defined categories of products and calculating an inflation rate within each category, and then by weighting those categories and the inflation rates within them so as to produce a single overall figure for inflation.
There are three principal differences between the two indices. First, they are weighted differently in that they reflect different population bases. The population base used in calculating the RPI is narrower than that which is used for determining the CPI. The CPI includes all UK private households and foreign visitors to the UK. In contrast, the RPI excludes a number of households including those households where income is in the top 4%. It also excludes pension households mainly dependent on state benefits, which constitute some 20% of pension households. The CPI excludes none of these.
Second, there are certain differences in the goods and services which fill the relevant baskets. So, for example, university accommodation fees are included in CPI but not RPI, and CPI does not include direct taxes such as TV licences, road tax, or council tax. CPI also excludes a number of housing costs, such as mortgage interest payments, building insurance, and depreciation.
Third, the basis for aggregation of rates of increase in the prices of items in the basket is different as between the two indices. The RPI uses an arithmetic mean to combine prices within each category of product at the first stage of aggregation whereas the CPI uses that for only around 30% of the categories. For the remaining 70% it uses an alternative method known as the "geometric mean". It has been estimated that this difference in methodology accounts for about 5/8ths of the average difference between the two indices since 1997.
The fundamental difference between the two means of aggregation is that adopting a geometric mean implies the substitution by consumers of products in a particular category within the year under review whereas the arithmetic mean does not. If, for example, there is an exceptional increase in price of a particular item in the basket, such as a particular variety of bread roll, the geometric mean assumes that some consumers will act rationally and switch to another cheaper type of bread roll. It only assumes substitution of products within each category at the lowest level of classification in constructing the index, and not more widely as between different categories. It does not assume that consumers will switch from bread to some other carbohydrate, such as pasta or rice, but only from one roll to another. The consequence of adopting the geometric mean is to dampen the effect of the more significant rates of price increase within each category because it gives them less weight when calculating the mean rate of price change than is given to other items in the same category of goods which have smaller rates of price change. By contrast, the arithmetic approach gives the same weight to the price increase rates for every item in the category. The use of the geometric mean produces a lower average price rise than the arithmetic mean would do.
The 30% of CPI goods which are subject to the arithmetic mean are those goods where the ONS has assessed that there will be few opportunities for consumers to switch to a substitute product. An assumption of substitution is made with respect to the other 70%. By contrast, the arithmetic mean makes no allowance for the possibility that substitution might take place with respect to any items in the basket.
There is some controversy both as to the extent to which substitution is possible or occurs in practice and as to whether it is in principle appropriate to allow for it at all. Nonetheless the desirability of incorporating this principle into the index is supported by a significant number of professional economists, who consider it a...
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