Currently, inflation proofing only applies to UK pensioners who live in the European Economic Area or in 15 other countries.
A group of 13 pensioners living in countries including Australia and Canada were demanding the UK Government change its pensions policy.
They claim the rules unfairly discriminate against them, and nearly half a million other expatriate UK pensioners, in breach of the European Convention on Human Rights.
The European Court of Human Rights rejected an appeal from the group of pensioners by an 11 to 6 majority. The decision has saved the Government at least £500m a year.
The appeal was the latest stage in a long-running legal challenge.