Indexation of UK Pensions rejection by European Court of Human Rights

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There’s something odd about this announcement being made late on 16 March; the day before St Patrick’s Day. But no, the President of the European Court of Human Rights is not from Ireland (although being French he may sympathise).

For those not aware, some background. Those folk in Australia who are entitled to receive and who commence to receive a basic state pension from the UK will continue to receive the same dollar amount year on year. That is, their pension will not be indexed. In other words, the ‘real’ dollar value of their UK pension will reduce each year, as inflation eats away at the purchasing power of the pension income.

This is the same situation for those residing in Canada and South Africa; all Commonwealth countries. Expatriate UK citizens now living in other parts of the world, and in countries that have a reciprocal agreement with the UK, receive index-linked pensions. Clearly then, the real value of the UK pension received by those in Australia, Canada and South Africa decreases over time. This has been disputed for many years (eight years by the specific parties to this case) and was in fact one of the main motivators for Australia terminating the reciprocal agreement with the UK on 1 March 2001[1].

The case was brought before the European Court of human rights on the basis of discrimination. The court found there to be none. Without getting into the specifics of those who brought this action to the European Court of human rights, there are a few specific points worth mentioning:

  1.    The decision was by majority; 11 votes to 6
  2.    the decision has saved at least £500 million per year for the UK government
  3.    the decision included the remark “the applicants did not contribute to the UK economy, in particular, they pay no UK tax to offset the cost of any increase in the pension”
  4.    “Judges at the European Court of Human Rights declared national insurance contributions did not have an “exclusive link” to retirement pensions”[2]

So, six of the 17 judges voted believed there to be (at least some form of) discrimination against those expatriate UK citizens now living in Australia, Canada and South Africa. The decision was not unanimous.

In terms of expatriate UK citizens that I have dealt with, the fourth point above, made by the court is fundamentally incorrect. Voluntary Class three national insurance contributions are paid specifically to increase entitlements to the basic state pension. In fact, in a table contained within documents issued by the Department for work and pensions it is clearly stated that each year of additional contributions that are made entitles the pensioner to either 2% or 3% more of the basic state pension. If that is not a direct and explicit link I do not know what is!

It is worth mentioning that for those I’ve communicated directly with in terms of their UK entitlements, this risk has always been expressed. The calculations that we’ve performed lead us to conclude that it is still worth making contributions to increase the basic state pension due to the calculated return and the guarantee result. A high inflationary environment will inevitably have an impact though.

 Finally, one cannot help wondering if the decision by the UK government to vigourously defend their position has more to do with money than anything else. £500 million per year is a significant sum, and one that would only increase, obviously in line with inflation, but also increase commensurate with those that choose to leave the UK and live in Australia, Canada or South Africa.

Apparently, Moody’s have recently remarked that the UK is close to losing its AAA credit rating.

Maybe we should just be happy being here!

Simon Tomkinson

19 March 2010


[1] “Australia terminated its agreement with the UK because the UK government refused to change its policy of not indexing pensions in Australia, even though it does index pensions paid in some other countries with which it has agreements. The Australian government made considerable efforts over the last decade (1991 to 2001) to get the UK to renegotiate the agreement to address the indexation problem but the UK has refused all our efforts” (taken from the website of the Australian government Department of families, housing, community services and indigenous affairs)

[2] BBC News website

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