British Airways: Court of Appeal defines the proper purpose of an occupational pension scheme and narrows the role of pension scheme trustees
14 / 09 / 2018
British Airways (“BA“) has successfully appealed against the BA pension scheme Trustees’ award of pensions increases. The Court of Appeal reversed the High Court decision in favour of the Trustees by a two to one majority. We discussed the High Court judgment in our June 2017 edition of Pensions Compass.
The BA litigation concerns the exercise of a unilateral power of amendment by the Trustees, in response to the scheme’s change from RPI to CPI-based increases in line with public sector schemes in 2010. This change was forced on the scheme because of the particular wording of the scheme rules which stemmed from the scheme’s public sector origins.
Under their unilateral powers, the Trustees introduced:
- a duty for the Trustees to review the scheme’s pension increases annually; and
- a unilateral power to award additional discretionary increases on top of the statutory-based increases required under the scheme rules.
The Trustees then awarded members a discretionary pension increase of approximately half the difference between RPI and CPI (0.2% in 2013).
The High Court held the Trustees had exercised their powers properly and had not acted unreasonably.
Appeal to the Court of Appeal
BA’s appeal concerned two particular aspects of the High Court judgment. It argued that:
- the introduction of the discretionary increase power was beyond the scope and contrary to the purpose of the scheme’s power of amendment; and
- the discretionary increase was a “benevolent or compassionate” payment and therefore prohibited by the scheme’s objects clause.
BA was unsuccessful on the second ground of appeal (the increase was not “benevolent or compassionate”), but the first ground was upheld by a majority of the three judges, with Lord Justice Patten dissenting. The two judges in the majority, Lord Justice Peter Jackson and Lord Justice Lewison, held that the Trustees had not acted in line with the “proper purposes” of the scheme, and therefore the Trustees’ amendment to introduce the discretionary increase power and subsequent award of discretionary pension increases were invalid.
The Trustees’ method of decision-making (an area of law which is the subject of much litigation) was in fact not called into question in the Court of Appeal. Lord Justice Patten noted that the High Court found the Trustees had balanced the interests of the employer against those of the employees or former employees and had taken the funding implications into account. This was not the subject of BA’s appeal.
Where the Trustees fell foul (according to the majority of the Court of Appeal) was in relation to whether the Trustees were acting beyond the purposes of the scheme and therefore not entitled to make those decisions in the first place.
Proper purposes: scope of the Trustees’ amendment power
The scheme’s power of amendment, exercisable only by the Trustees, contained a caveat that no amendment could be made which “would have the effect of changing the purposes of the scheme“. The Court of Appeal therefore had to consider whether the Trustees’ actions had changed the purposes of the scheme and breached this caveat. This involved first finding what the purposes of the scheme really were.
The scheme rules helpfully contained an objects clause which provided that the main object of the scheme was “to provide pension benefits on retirement… The scheme is not in any sense a benevolent scheme and no benevolent or compassionate payments can be made therefrom“. The Trustees argued that this objects clause set out the purpose of the scheme, and the discretionary increase power fell within these boundaries.
BA argued that the Court shouldn’t limit itself to looking at the scheme rules to discern the purpose, but should consider a wide variety of materials and factors, including the business context of occupational pension schemes and the funding level of the BA scheme. BA’s position was that the Trustees had taken on a role akin to a trade union to improve members’ benefits, going beyond their proper role to administer the scheme to fulfil the purpose of delivering promised benefits.
If the Trustees’ decisions were upheld, BA argued that it would be forced into paying additional contributions “not for the purpose of funding benefits already promised but for funding additional benefits decided upon by the Trustees“.
Lord Justice Jackson adopted a test drawn from the important 1997 High Court decision in the Courage case to determine the validity of the Trustee’s actions:
- Were the Trustees’ actions required “by the exigencies of commercial life“?
He found that they were not, and agreed with BA that the Trustees had effectively added the role of paymaster to their duties. However, it was central to this finding that the scheme was in deficit. Had the scheme been in surplus, the decision may well have been in favour of the Trustees.
Unusually, Lord Justice Patten’s dissenting judgment is the longest and most closely reasoned of the three judgments, taking up about two-thirds of the written decision. We understand that the Trustees have been granted permission to appeal to the Supreme Court and we can see plenty of scope for debate on both sides – indeed the judiciary itself is split.
It is very unusual for scheme trustees to have power to amend unilaterally. Nonetheless, the discussion in the Court of Appeal judgment of a scheme’s “proper purposes” is important to all occupational schemes. Even where powers are vested jointly in the employer and the trustees, trustees still need to take into account the “proper purposes” of the scheme in their decision making. We eagerly await the next instalment in the Supreme Court – probably next year!