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The Return of Inflation and Maintenance Orders

Behavioural economists have a joke: “Consider a turkey that is fed every day”.

“Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests,’ as a politician would say”[1]. The point of greatest confidence for the turkey, when he is most sure of the friendly intentions of the humans who feed him, is the day before Christmas.

In short, we are all creatures of habit.

We base our decisions on recent experience and we are not very good at taking into account unexpected risk. Or, to put it a different way, we have all become so used to things like low inflation and house price rises that recent events have come as a terrible jolt to our twenty-first century lives: a European war, a 30 year high for inflation, unprecedented rises in fuel costs.

Financial remedy orders and indexation

More specifically, for at least a decade, one of the less interesting details of most financial remedy settlements has been the question of whether maintenance should be indexed. The discussion normally happens after the big issues have been resolved (capital settlement, amount and duration of maintenance, pension sharing), and you’re left with a handful of seemingly minor details. “And my client wants indexation”, which will either be met with grudging acceptance (‘my client’s only going to be paying an 2% pa so no biggie’), or dropped in the face diehard resistance (‘well, my client was only going to receive an extra 2% or so pa so no biggie’).

And now, in the famous words of Harold Macmillan, “Events, dear boy, events”.

Orders with indexation

The first point is for those in receipt of a periodical payments order with indexation, make sure you do the calculation properly and annually. Happily, following the standardisation of drafting, most such orders are now reasonably clear (at least to lawyers), in that there should be reference to an annual date, when the maintenance will be increased by the difference between the retail price index (RPI) or consumer price index (CPI) between 3 and 15 months beforehand.

The difference between the RPI and CPI is that the RPI includes mortgage interest payments, so is affected by house prices and interest rates. Historically, the RPI has been higher than the CPI because of house price inflation, although this may change as the 2021 spike in house prices subsides. The reason why orders refer to 3-15 months is that it takes time for inflation figures to be collated and published. Which is bad news because the current reported rise of 7% reflects changes before the impact of the Ukrainian war and the dramatic rise in fuel prices.

The easiest way to calculate indexation is to use a resource such as AAG Cloud. For those without a subscription, the applicable CPI/ RPI rates can be obtained from the ONS (https://www.ons.gov.uk/economy/inflationandpriceindices).

If annual increases have been missed (as is often the case) it may not be easy to pursue these through enforcement given the requirement of leave to pursue arrears that built up more than 12 months before the application date (s.32(2) MCA).

Orders without indexation

What to do where a maintenance order excludes indexation and the client is now facing steep increase of housing expenses?

An application could be made to vary, on the basis that the rise in the costs of living amounts has increased the recipient’s needs, amounting to a change of circumstance under s.31(7). The understandable reluctance to pursuing this course is (a) cost, (b) delay. However, it’s worth bearing in mind that an application to vary the quantum of maintenance would (presumptively) proceed as a fast track application (FPR 9.9B(3)(c)), which could in theory be resolved at the first hearing. (Not that I’ve ever seen that done).

It might be hoped that in many cases a sensible way forward might be agreed outside court.

Conclusion

The first, obvious point, is that it is difficult to see why anyone would settle a maintenance order without indexation (unless acting for the payer). With inflation at 7% and rising, the real benefit of any sums received stand to erode considerable without indexation by reference to CPI or RPI.

Perhaps what the recent news takes us back to, as financial remedy lawyers, is the fact that we are just as much creatures of habit as the Christmas turkeys. We are as influenced by what is now called ‘lived experience’ as our clients and we are not very good at taking into account unexpected events.

Alexander Chandler QC

13 April 2022


[1] Taken from Nassim Taleb, “Black Swan”

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