UK - The High Court has rejected a claim from trade unions, declaring that the government’s decision to switch indexation for future public-sector pension increases from the retail prices index (RPI) to the consumer prices index (CPI) was lawful.

Several trade unions had challenged the fairness of the government’s decision to reduce public pension costs by using the RPI instead of the CPI to measure price increases. 

The High Court judgement said: “The use of RPI has in the past been merely current practice. Looked at objectively, it could not properly be asserted, therefore, that any promise of its continued use had to be assumed.”

However, the High Court gave permission to the unions to appeal to the Court of Appeal on some of the issues raised.

In March, the Hutton report calculated that the unfunded public pension schemes would save £1.8bn (€2.1bn) a year in cash payments by 2015-16 due to the move to the CPI.

In June, the government implemented the switch from the RPI to the CPI, arguing that it could save £10.6bn a year in payments, with pensions accounting for around £2bn of that sum.

In other news, consultancy Aon Hewitt claimed that turmoil in bond markets had led to the highest value ever being placed on pension scheme liabilities. 

The collective final salary pensions accounting deficit of FTSE 350 companies rose by 13.2%, from £53bn to £60bn, according to the Aon Hewitt 350 index.

In addition, the collective buyout deficit increased from £400bn to £435bn.
Kevin Wesbroom, managing principal, said: “The cost of pension scheme liabilities has rocketed by 30% since the start of the year. This is the largest increase in liabilities for almost 15 years and leaves the cost of pensions at the highest level we have ever seen.

“The reason for this is that yields are now the lowest we have experienced in recent history - in fact, yields on index-linked bonds, net of inflation, are now negative.

“That means these investments are guaranteed to fail to keep pace with index-linked liabilities.” 

Paul McGlone, principal and actuary at the consultancy, added: “The collapse in yields also means buyout and buy-in premiums have soared. 

“While schemes in specific circumstances are still using the buyout/buy-in market, for many schemes, the increases in liabilities have re-enforced the fact they are many years away from being able to secure their liabilities.”

However, Aon Hewitt conceded that other options were available for pension schemes, and expects now to see a greater emphasis on unfunded solutions such as longevity swaps or liability management exercises.