The High Court recently ruled on an application from British Airways challenging the actions of the pension scheme’s trustees regarding the payment of pension increases.
Historically any attempt by the scheme’s trustees to exercise the power of amendment was subject to ratification by the Treasury. However, following privatisation of BA in 1987, the requirement for Treasury ratification lapsed and the Trustees were left with a unilateral power to amend the schemes rules subject to at least two-thirds of the trustees agreeing to any such amendment.
The Scheme is well known in the industry for being a mature scheme with a significant funding deficit, indeed:
- by 2015, 92% of its members were pensioners; and
- the 31 March 2012 triennial valuation exposed a £1.538bn funding deficit on the buy-out basis.
Steps had been taken to manage the significant liabilities, including closing the scheme to future accrual in 1984 and putting in place a hefty recovery plan which required annual deficit repair contributions of £55m each year until 2023, an agreement whereby “spare cash” would by syphoned off into the scheme and a share pledge which could potentially result in a payment into the scheme of up to £215bn. No doubt these financial commitments were of concern to BA.
The Trustees, however, had additional concerns. When the statutory basis for revaluing and increasing pensions moved from RPI to CPI in 2011 the default position for the BA scheme (as a result of provisions in its scheme rules) was to follow suite. The Trustees were dismayed at the impact this would have on members’ benefits, but did not have discretion, under the Rules, to apply a different index. The Trustees, no doubt after much deliberation and lengthy discussions with their advisers, decided to amend the Scheme Rules to:
- introduce a duty for the Trustees to review the Scheme’s increases annually; and
- give themselves the power to award additional discretionary increases on top of the statutory-based increases required under the Scheme Rules.
Importantly, the power to apply additional discretionary increases mirrored the requirement under the amendment power, thus requiring the agreement of at least two thirds of the trustee board before the power to award additional increases could be exercised. (i.e. unanimity of the trustee board was not required).
In 2012 the Trustees decided to exercise their new power to pay discretionary increases and a further increase, which had the effect of topping-up Member’s pension increases so that they were broadly halfway between RPI and CPI, was granted.
BA was, not surprisingly, horrified by this decision. Despite taking steps to manage the enormous liabilities of the scheme, including those listed above, they had subjected employees to pay-freezes. They were now faced with further growth of the scheme’s liabilities as a result of the trustees’ actions. This resulted in the High Court challenge. BA claimed that the Trustees:
- had not validly amended the Rules to introduce the power to pay discretionary pay increases; and
- even if such amendment had been made validly, the exercise of the power had been made invalidly.
BA made a number of arguments to support their case, including the argument that applying higher pension increases against the will of BA was an improper purpose and that, in effect, the trustees were setting higher levels of pay for staff than BA, as their employer, had provided for. BA suggested that, whilst the Scheme’s amendment power did not require employer consent, the trustees should have sought BA’s consent before amending the rules and awarding a discretionary pension increase. BA also tried to argue that the trustees’ exercise of power fell foul of provisions in the trust deed which stated the scheme would not pay benevolent or compassionate payments.
The High Court concluded in favour of the trustees, stating that there was no implied requirement for the employer’s consent to be obtained before making such amendment or indeed when awarding a discretionary increase under that new power. The trustees had exercised their powers properly.
Here it was found that the Trustees had followed the requirement established in Pitt v Holt, to consider all relevant considerations and not to consider any irrelevant considerations. There is certainly scope for employers to successfully argue that trustees have been unreasonable when amending scheme rules or exercising discretionary powers if indeed the trustees have acted unreasonably. In this case, however, despite the circumstances of the scheme, it would appear that the exercise of power by the trustees had not been unreasonable.
This case is an excellent illustration of the important of good drafting. Prior to privatization the trustees did not have a unilateral power to amend the scheme’s rules. One can’t help feeling that if the full consequences of privatisation had been considered the power of amendment may have been altered to ensure the trustees did not have carte blanche in respect of scheme amendments. Whilst few trustee boards have a unilateral amendment power this case is of particular interest in relation to the proper purpose which is likely to have much broader application in relation to exercise of trustee powers.
BA are appealing this judgement so we look forward to the next instalment in the Court of Appeal and we understand that an injunction has been obtained to prohibit the Trustees paying the discretionary increases in the meantime.