British Airways’ Pensions

23 / 10 / 2017

British Airways’ pension arrangements are in the news yet again. After much-publicised High Court proceedings over indexation of pension increases under the Airways Pension Scheme (essentially relating to the trustee’s power to grant increases in excess of CPI), British Airways has made two announcements in quick succession regarding the future (or lack, thereof) of the New Airways Pension Scheme (the “NAPS”).

What has BA announced?
• The NAPS is to be closed to further accrual; and
• the 17,000 active members of the NAPS will be shifted into a new company-wide retirement arrangement as part of a fl exible benefi ts package which would allow members to take the money as cash rather than see it paid into the pension scheme as an employer contribution.

The background to these proposals is that the NAPS had a funding defi cit of £3.7bn when it was assessed in March, despite BA pouring £3.5bn into the scheme since 2003. A number of high profile employers have closed their schemes to future accrual, including BMW, the Post Office and Honeywell to name just a few.

It is proposed that all new employees will become members of the new company-wide arrangement (rather than the existing defined contribution retirement plan which has been used for new joiners since NAPS was closed to new members in 2003). The key concern, in relation to new employees, will inevitably be the potential impact on BA’s ability to attract and retain suitable staff , after all, it is well known for having generous pension arrangements!

But what about the existing 17,000 members of NAPS? How can BA implement such a drastic change? Many trustee boards across the country have faced similar requests and/or instructions from the sponsoring employers of expensive final salary schemes. Before deciding to make such a decision an employer should consider all suitable alternatives, for example reducing accrual rates or increasing member contributions. However, in extreme cases such as the NAPS, where the funding deficit, compared to the size of the company, is said to be the largest in the country, it may be that there simply are no suitable alternatives to closing to accrual.

The manner in which each employer approaches these cost-saving measures will diff er, but there are two key ways of achieving such a change:

• trustee agreement; or
• variation of an employee’s employment contract.

Trustee agreement is the more common approach and trustees faced with such a request must carefully consider their fiduciary duties in light of advice from their professional advisers. Trustees are encouraged to take a facilitative approach, and whilst they may wish to consider (and potentially enter discussions concerning) the impact that closing a scheme to accrual may have on members’ benefits (for example, an active member who becomes a deferred member as a result of a closure exercise may be entitled to less generous benefits – a prime example of this is illhealth benefits on retiring from active service) they should not attempt to frustrate the employer’s proper commercial goals.

Factors which the parties will need to take into
account include:

The power of amendment in the scheme’s governing documents – it is essential that the wording is reviewed carefully as any amendment which falls foul of the amendment power could be invalid. In particular parties should look out for “Courage” style wording, which would prevent the fi nal salary link being severed;
Listed change consultation – Regulations prescribe that employers must consult affected employees when certain amendments (including the closure of a scheme to new members or to cease future accrual) are proposed. The Regulations prescribe that the consultation must last for a minimum of 60 days where the employer has 50 or more employees. Critically those 50 employees do not need to be members of the scheme in question. A decision to implement the change should not be made until the end of the consultation and trustees should obtain comfort from the employer that it has complied with its statutory consultation duties before agreeing to implement any such amendment;
Employment contract wording – existing employment contracts should be reviewed to check whether members have any contractual entitlements which relate to pensions (for example, but not limited to, whether they have a contractual entitlement to a specifi ed scheme). It may be that employment contracts need to be varied as part of such an exercise, this would need to be factored into the project plan at an early stage;
Employer’s duty of good faith – employers should particularly focus on ensuring they do not breach their contractual duty of ‘trust and confidence’ owed to their employees or their duty of good faith in relation to changes to their occupational pension scheme such as in this case the NAPS; fortunately employers now have detailed guidance on the legal requirements, courtesy of the Court of Appeal’s landmark decision in IBM v Dalgleish on 3 August 2017 – timely indeed!; and
Union Involvement – Unions have a different job to scheme trustees, and often fight to improve pension provisions for future service (for example by demanding a higher rate of employer contribution to a defi ned contribution scheme). Unite and GMB have vocally criticised BA’s recent proposals, this highlights that consultation with unions can be a demanding task and one which should be managed carefully during closure exercises.