UK pensions Speedbrief: British Airways plc v Airways Pension Scheme Trustee Limited – RPI or not RPI

• United Kingdom

• Litigation and dispute management
• Pensions

19-05-2017

Summary

The High Court judgment in British Airways plc v Airways Pension Scheme Trustee Limited – in which Eversheds Sutherland acted for the trustees - has now been handed down. The case, brought by the sponsoring employer, British Airways plc (“BA”), concludes that the trustees acted appropriately in (i) unilaterally introducing a new power into the rules which required them to consider annually whether to award a discretionary pension increase in addition to that provided by the rules; and (ii) exercising that power to award a discretionary pension increase (“DI”) to members in 2013.

Although the case is fact specific, it serves as a useful reminder of the approach the Court will take when construing trust deeds and rules, the factors that trustees should consider when exercising their powers and the extent to which a sponsoring employer’s interests and the funding position of the scheme should be taken into account by trustees when exercising their discretionary powers.

Background

The Airways Pension Scheme (“APS”) was established in 1948 and originally related to employment in the public sector.

Rule 15 of APS states that the annual rate of pensions under the scheme are to be adjusted upwards in accordance with annual Pension Increase Review Orders (“PIRO”s). Historically these were by reference to RPI until June 2010 when the Government announced that in order to reduce the budget deficit, in future PIROs would be determined by reference to CPI.

The generally expected effect of this change was – and remains – lower future levels of pension increases. The trustees considered what, if anything, they should do in response to this change given their members’ long held expectations of RPI increases. It was the trustees’ subsequent decisions which were the subject of BA’s claim.

Key facts

In March 2011, the trustees unanimously exercised their unilateral power of amendment under Clause 18 of APS to amend Rule 15 so that it required the trustees to consider annually whether to award a DI in addition to the increases directed by the PIRO (“2011 Decision”). Any DI was subject to the trustees taking professional advice and required a vote in favour by 2/3rds of the trustees.

Clause 18 provides that the trustees have a unilateral power to amend the scheme “in any way”, subject to four provisos. One of these is that no amendment will be valid if it would have the effect of changing the purposes of the scheme. When the scheme was established any proposed amendment had to be approved by the Minister of Civil Aviation but this requirement was removed when BA was privatised in 1987.

No DIs were actually awarded until February 2013. At that point, the trustees unanimously agreed – subject to reviewing the position in June - to grant a DI for that year of 50% of the gap between RPI and CPI for 2013, amounting to an increase of 0.2% (“February Decision”). The February Decision was confirmed on 26 June 2013 but the decision did not definitely confirm the effective date of the increase pending further consultation with BA (“June Decision”). On 19 November 2013, following further objections from BA, the trustees reconsidered the matter afresh and voted to grant a DI of 0.2% for that year with effect from 1 December 2013 (“November Decision”).

BA subsequently issued proceedings against the trustees challenging the 2011 Decision and the February, June and November Decisions.

BA’s Claim

The case was heard before Morgan J in a 7 week trial between October-December 2016. BA’s challenges were very wide ranging and moved throughout the course of the proceedings and trial. Initial allegations that the trustees' decisions were perverse and irrational and that the professional advisers had acted inappropriately were either dropped or given little weight by the end of the trial.

Decision

Morgan J dismissed BA’s claim in its entirety (save for the challenge to the June Decision), holding that the 2011 Decision and November 2013 Decision were both valid and effective. The June Decision was invalid as the trustees had not agreed an effective date for the DI. The conclusion was that affected members are therefore entitled to a DI for 2013 of 0.2% with effect from 1 December 2013.

Comment

Whilst creating no new law, the judgment is a useful recap of fundamental trust law principles particularly in relation to pension schemes and trustee decisions as follows:

0. The scope (and purpose) of a power is a matter of construction of the trust deed and rules. The principles to be applied are set out in Barnardo’s v Buckinghamshire [2016] EWCA Civ 1064 (a case in which Eversheds Sutherland also acted) and Stevens v Bell [2002] PLR 247 (a case also involving APS).
0. The purpose of a pension scheme is normally to be considered at a high level of generality as per Pilots National Pension Fund v Taylor [2009] EWHC 1693 (Ch). The purposes of a scheme should not be defined in terms of specific powers so as to provide for what is to happen in specific circumstances such as when a scheme is in surplus or deficit, particularly when these can be an “evanescent thing depending on the fluctuations of volatile markets”. In the case of APS, the purpose of the scheme is to deliver the pension benefits as they are defined from time to time by the scheme including the trustees' unilateral power under clause 18 and the amended rule 15.
0. The amendment power in Clause 18 was to be construed so that it had the same meaning and effect as it originally had in 1948 minus the requirement for the Minister’s consent. It was not appropriate to use a general concept such as the purpose of the scheme (set out in Clause 2, the main object clause) to imply a requirement for BA’s consent.
0. The amendment power in Clause 18 was subject to, and could not be used to change, the purpose of the scheme as set out in Clause 2. Clause 2 made it clear that the purposes of the APS did not extend to it being “in any sense” a benevolent scheme for “benevolent or compassionate payments”. The amended Rule 15 remained subject to Clause 2 and was therefore not outside the scope of the amendment power.
0. Following the decisions in Pitt v Holt [2013] 2 AC 108 and Edge v Pensions Ombudsman [2000] Ch 602, a decision by trustees to exercise a fiduciary power is not voidable unless made in breach of their duty as trustees. In exercising a discretionary power, trustees must have regard to all relevant considerations and no irrelevant considerations, and must not act perversely or irrationally. The weight to be given to one factor as against another is for the trustees. The Court will not express a view on the merits of decisions taken by the trustees.
0. The duty of trustees to act in the best financial interests of members is limited to the exercise of investment powers. Otherwise, in accordance with the decision in Merchant Navy Ratings Pensions Fund Trustees Ltd v Stena Line Ltd [2015] PLR 239, the trustees’ duty is to decide what is the purpose of the trust and any particular power.
0. The position of the sponsoring employer, and the funding position of the scheme, are “highly relevant” factors when trustees are exercising their powers. But this is not the same thing as saying that the sponsoring employer has a veto over the exercise of those powers, nor that there is a hard and fast rule that schemes in deficit cannot pay DIs.
0. In order for a decision to award a payment to be effective, trustees must clearly identify the effective date or a formula by which an effective date will emerge on the happening of specified events.

Whilst the case is inevitably confined to its facts, the judgment does serve as a useful reminder as to the Court’s approach to the interpretation of a pension scheme’s governing documentation and the factors to be considered by trustees when exercising their discretionary powers. The case also reiterates that the Court will not seek to infer an employer consent requirement by the back door where the scheme rules contain a unilateral power to amend in the hands of trustees. Equally, where trustees undertake a detailed and thorough decision making process, taking into account all relevant and excluding irrelevant factors, it will be difficult for employers (or members) to challenge those decisions.

A copy of the full judgment will become available through the following link shortly: http://www.bailii.org/.