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British Airways Pension Scheme Trustees brought down to earth

09/07/2018

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United Kingdom

Last Thursday saw the end to the latest round in the long-running and sometimes heated pensions increase dispute between British Airways and the trustees of its Airways Pension Scheme.  By a 2:1 majority, reversing the High Court's decision, the Court of Appeal decided that by amending the scheme to give themselves a power to award discretionary pension increases, the trustees had exercised their powers improperly.  Given the divided opinion of the court, a return match at the Supreme Court is a distinct possibility.

What was the case about?

In 2011, following a Government decision to switch statutory pension increases from being based on RPI to CPI, the scheme trustees used their sole power of amendment to give themselves a power to review and provide discretionary increases to pensions.  Two years later, with the RPI exceeding the CPI, they awarded an additional pension increase.  With the scheme being in deficit BA would have to fund the increase and it challenged the validity of the amendment and the trustees' use of their new power to provide extra increases.  Central to the case was whether the trustees had used their power of amendment for an improper purpose.  This is a slightly different legal issue to acting outside the scope of a power, as even if, as a matter of interpretation of a scheme's rules, an action is within the scope of a power, the court can hold the exercise of the power invalid, if it considers the exercise as being for improper purposes.

What did the court decide?

The majority of the court decided that the trustees had used their power of amendment improperly, by   changing the balance of powers between them and BA.  They had effectively re-designed the scheme's benefits when the scheme was in deficit and where BA would have to provide extra funding for the re-designed benefits which was inconsistent with the trustees' constitutional function.  The trustees' actions were characterised as an attempt to change their role from that of managers and administrators to that of paymaster.  One of the judges held that the purpose of the power of amendment was to "make those changes which may be required by the exigencies of commercial life."

The dissenting judge concluded that he could not construct any purpose-based limitations on the trustees' powers.  In his view, the main purpose of the scheme, of providing pension benefits, was stated clearly in the scheme's rules and the trustees' amendment of the scheme was for furthering that purpose.  He was particularly mindful that the amendment was intended for the purpose of partly re-instating RPI-based pension increases to which members would have been entitled had the Government not decided to switch to CPI.  The judge was also critical of the "exigencies of commercial life" purpose test, saying that this would leave the trustees completely uncertain as to how they could exercise their powers.

What are the take-away points?

As this case shows, what is and is not a proper exercise of a power can be a difficult question and even the most learned judges can take different views.

The key point from this case is that trustees cannot assume that a sole power for them to amend their scheme, which is cast in wide terms and with few or no specific restrictions, enables them amend the scheme in any way they wish.  It will be important to consider more generally the purposes for which the power of amendment was intended in light of the structure and terms of the scheme and especially the trustees' and employers' powers.  An amendment which does not have employer support and which would materially alter these powers or a scheme's structure and design may be invalid on the ground the amendment power was not intended for these purposes.  The circumstances in which the amendment is being made will also be important.  For example, an amendment to enhance benefits funded from a scheme surplus is more likely to be valid than one where employers will have to fund the enhancement through additional contributions.

Trustees who have a sole power to amend their scheme and who are considering exercising it in a manner not supported by the scheme's employers should proceed with extreme caution!