Reacting to the decision, Paul Noon, general secretary, said: "The High Court may have found that the government had the right to do this but it does not represent justice for the millions of pensioners who will see their income slashed as a result."
Prospect and seven other unions and pensioner organisations had challenged the government's decision to switch the index for increasing pensions from the retail prices index (RPI) to the consumer prices index (CPI), which is generally lower. The change was announced in the June 2010 Budget without prior consultation and took effect from April 2011.
Long term, the Office for Budget Responsibility estimates that CPI will be 1.4 per cent lower than RPI. Compounded over many years of retirement, that will result in average losses of between 15 and 25 per cent of the total value of members' pensions.
The Department for Work and Pensions calculates that this will reduce the value of pensions accrued in the private sector (including those of many Prospect members in BT, BAE, Serco and other schemes) by over £70bn. The impact on state benefits and public service pensions will be even higher.
Prospect argued that in deciding to switch to CPI the government had put its desire to cut the deficit ahead of its duty to consider changes in the general level of prices.
While all three judges agreed that this was the case, two found the government was within its rights to do so. One judge found the government's actions unlawful and was minded to quash the decision.
The majority ruling means that pensions and benefits linked to the government's order will increase by 5.2 rather than 5.6 per cent from April 2012.
Many other pensions in the private sector remain linked to RPI. However, where the increase is subject to a cap of 5 per cent, this figure will apply next April rather than the September RPI of 5.6 per cent, as few employers are exercising discretion to grant increases above 5 per cent.