Three UK blue-chip pension schemes with more than £80bn in assets have taken legal action against the government over a change to the calculation of inflation, which they say will leave millions of retirees with lower annual payouts.
Trustees of the Ford, BT and Marks and Spencer schemes said on Friday they were seeking a judicial review of the decision to reformulate the contentious retail price index inflation measure from 2030.
The move by the UK Statistics Authority, the independent regulator, in 2019 sought to change the calculation of RPI as early as 2025 because it accepted the measure had “shortcomings” that kept its level above the best-in-class measures of inflation.
In November last year, chancellor Rishi Sunak refused to let the UKSA change RPI before 2030, after which time, he argued, the law gave him no further role in the matter.
The UKSA then confirmed it would reformulate RPI using the methods it thinks are best for calculating inflation, aligning it with the consumer price index including housing costs (CPIH) from 2030.
The trustees are taking action on the grounds that UKSA, in their view, lacked the authority to reformulate RPI, and both the regulator and the Treasury failed to take into account the impact of the decision on legacy users of RPI, when they reached their decision.
In addition, the trustees argued the chancellor breached the terms of the contract agreed between himself and certain relevant gilt holders, not least by failing to consult on a replacement index “in light of what is just and equitable having regard to the interests of the relevant gilt holders”.
The three pension schemes, which together represent nearly 450,000 members and £83bn in assets, said the change would leave millions of pensioners with defined benefit pensions worse off as their annual increases would switch from RPI to the typically lower CPIH.
“It is estimated that over 10m pensioners, through no fault of their own, will be poorer in retirement either from lower payments or lower transfer values as a result of the effective replacement of RPI with CPIH,” the schemes said in a statement.
“Women will suffer the most from this change as they typically live longer.”
The schemes said the reform would also “significantly” reduce the value of RPI-linked assets held by schemes to meet pension promises to members, thereby putting more pressure on sponsoring employers to fill funding holes, as the scheme’s assets shrink in value.
“The decision to pursue action has not been taken lightly, but the schemes believe that a judicial review is necessary to protect scheme members and scheme assets from the detrimental effects of this decision,” they said.
The decision to in effect reformulate RPI to make it equivalent to CPIH from 2030 came after a consultation by the Treasury and UKSA last year, which sought views on the timing of potential changes to the RPI methodology.
The response to the consultation confirmed that the government would not be offering any compensation to the holders of new style index-linked gilts issued from 2002.
Last year the Office for Budget Responsibility, the independent fiscal watchdog, estimated that scrapping RPI would save the UK taxpayer £2bn a year in interest payments on the £450bn of index-linked gilts that have been issued.
If the case was successful, it would strike a blow at the heart of the UKSA’s ability to modify the calculation of statistics to keep them as accurate as possible.
Its desire to reformulate RPI stemmed from a 2010 change in the way clothing prices were collected which artificially increased the measure because of an interaction between an outdated mathematical formula used in its calculation and prices, which were more variable after the change.
The Treasury and UKSA did not immediately respond to requests for comment.