Amendment powers: "interests" could include future service benefits

The Court of Appeal's decision in BBC v BBC Pension Trust Limited, is the latest in a long line of cases examining the wording of amendment powers, in order to assess whether or not a rule change impacting benefits or contributions, and indeed closing the scheme to accrual, was a valid amendment.

The High Court Case

The original High Court case was brought as a result of the BBC reviewing its costs in relation to the BBC Pension Scheme; the BBC asked the Court whether it might be possible – under the Scheme power of amendment – to change future service benefits and/or member contributions for Active Members. The answer to that question would then spawn other questions i.e. if the BBC could change future benefits, in what manner could it do so, and by what process.

The key part of the Scheme amendment power (Rule 19) which came under scrutiny was a restriction (or "fetter") on alterations or modifications in relation to Active Members “whose interests are certified by the Actuary to be affected thereby”. 

The BBC contended that, on a correct interpretation of the fetter, an Active Member’s “interests” extended no further than their past service rights. As such, future service benefits and/or member contributions for Active Members could be altered, provided that both the Trustee and the BBC agreed to the change. This would mean that, in principle, it would be open to the Trustee (with the consent of the BBC) to, for example:

• Vary the scheme so as to limit or modify the rate of future accrual under the scheme
• Modify for the future any link between pension and salary
• Increase the level of active members’ contributions
• Amend the rules without protecting the link to final salary (even in respect of past service) so far as it relates to future increases in salary.

However, the High Court preferred the arguments of the legal team representing the Active Members (the Representative Beneficiary), concluding that Rule 19 can only be used to change future service benefits and/or member contributions for Active Members where both the Trustee and the BBC agree the change and one of three conditions set out in Rule 19 has been satisfied. Those conditions are (essentially):

1. The Scheme Actuary confirms that Active Members will not be substantially worse off as a result of the proposed changes; or
2. If Active Members will be substantially worse off, the Scheme Actuary confirms that Active Members will be provided with suitable alternative benefits (which must be substantially equivalent to the benefits being replaced), or
3. The Active Members as a group have agreed to the proposed changes at a duly convened meeting of Active Members.

Given the implications of the High Court decision, the BBC appealed the judgment, and the Court of Appeal decision was handed down on 9 July 2024, following a hearing at the end of June 2024.

The Court of Appeal decision

In short, the BBC's appeal was dismissed. Lewison LJ (who gave the only judgment) held that the word “interests” was “a deliberately simple, broad and open-textured word” and that “unlike other examples of fetters on powers of amendment, it is not tied to “rights”; still less to rights that have “accrued” or been “secured”. Nor is it limited by reference to any particular cut-off date. Nor is there any limitation by reference to “past contributions” or “contributions already made”. 

Lewison LJ went on to say that: 

“…one of the most valuable interests that an Active Member has is the ability to continue to accrue benefits on particular terms as their length of pensionable service increases, even if they have no enforceable legal right under the scheme to continue in employment with the BBC”.

As a result, the fetter places a significant limit on the scope that BBC has to close the Scheme to future accrual or to alter the basis upon which benefits continue to accrue. The BBC has to go through one of the three routes set out above; a difficult task which will impact the degree of any cost-saving.

It is now for the BBC to consider its next steps, although it has already stated that it will not seek to appeal the decision any further.

How might your scheme be impacted?

Each case will turn on its own particular facts and it may be unlikely that any amendment power restriction will use the word “interests” alongside restrictions similar to those in the BBC Scheme’s power of amendment. However, trustees and employers should discuss this judgment with their legal advisers to establish whether it is likely to affect their own schemes.

If there is a similar restriction, it will impact your scheme regardless of whether you are:

1. Considering changes to benefits or scheme closure (it will be essential to consider the historic versions of the Rules, in case these previously contained a more restrictive provision)
2. In the process of conducting a bulk transfer exercise affecting defined benefits e.g. to a master trust or to by way of a merger (this issue should be covered in the due diligence, in case there is a risk that changes were made historically which might be invalid)
3. In the process of purchasing a bulk annuity policy (trustees should be checking the validity of historic amendments and correcting benefits, if necessary, before the annuity is purchased)
4. At the point of buying out the scheme benefits (trustees should be checking the quality of any employer indemnity, as the insurer will not cover any additional liability stemming from an invalid amendment).