Recent British Airways Court case did not take off but appeal will fly

Do the rules of your pension scheme ensure that the Trustees have to seek your consent before making changes to the rules?

Unfortunately for British Airways (BA), their rules did not, which, following a lengthy seven week court battle, has resulted in them being unable to block its Trustees decision to award a discretionary increase to the pension in 2013.

What happened and when?

June 2010 – Government announces a plan to move public sector schemes from RPI to CPI. This affected the Airways Pension Scheme (APS) due its link to pension review orders.

March 2011 – Trustees amend the scheme rules to allow them to grant discretionary increases.

April 2011 – APS is moved to CPI. Later that year in July 2011 the Trustees held an AGM where members of the scheme voiced their concerns at the indexation change to CPI. (as this would generally result in lower pension increases for members).

October 2011 – Scheme actuary presents a test for discretionary increases, which will likely be passed in 2012

December 2011 – A deterioration in the funding position means the test will now fail

March 2012 – Trustees vote against awarding a discretionary increase

August 2012 – Trustees are presented with a new methodology for granting increases. This test is later adopted by Trustees

February 2013 – Trustees unanimously agree to award an increase, but set no amount

June 2013 – Trustees agree a 0.2% increase for implementation in September. The 2012 valuation is agreed, including RPI assumptions

The Arguments

It was the position of BA that the Trustees of the APS had acted improperly, outside of their powers, and had taken irrelevant considerations into account when they decided to grant a 0.2% increase to pensioners who were members of its defined benefit (DB) schemes.

The APS has 26,000 members and in 2011 BA challenged a move by the Trustees to change the retirement plan’s rules to give them power to make discretionary payments to pensioners, in addition to the standard annual inflation rises.

The Trustees then went on to make a further decision to award a 0.2% discretionary payment in December 2013, amounting to a potential additional liability of £12 million with the potential for the total costs to spiral to £384 million (BA’s figures) if the discretionary payments were made over consecutive years. As the funder of the pension scheme, BA would be on the hook for any shortfall.

The Court has ruled that the Trustees actions were valid and in line with what the Rules of the APS allows them to do. It is of note, that the APS is very unusual in giving Trustees power to change scheme rules without BA, as the sponsoring employer, agreement, allowing the Trustees to award discretionary increases. Therefore, this ruling is unlikely to open the door to more discretionary payments being made by Trustees. However, it may be a good time for companies to review their scheme rules, particularly in respect of Trustees seeking employer consent, to ensure the necessary protections for companies regarding scheme amendments are in place.

It is noted that the High Court have granted BA permission to apply to appeal to the Court of Appeal, a move that could extend the litigation for at least eighteen months. BA has also been granted an injunction to block the Trustees from paying the 0.2% increase until the appeal has been heard. However, if BA is unsuccessful at the appeal, BA will be required to pay damages to individual members of the 0.2% plus 2% interest above base rate.