04 Sep 2018

In the recent Court of Appeal judgment for British Airways PLC v Airways Pension Scheme Trustee Limited [2018] EWCA Civ 1533, the Court considered whether an additional discretionary pension increase introduced by the Trustees of the Airways Pension Scheme (APS) should be allowed. The Court of Appeal, in allowing the appeal, held that the Trustees acted outside their powers, a decision that would mean that British Airways PLC (BA) would not have to pay an additional £12 million in pension increases. However, the matter is not yet settled as the Trustees have been granted leave to appeal the decision to the Supreme Court.

Background

The rules of the APS provide that pension increases are granted by reference to the Pensions Increase (Review) Orders as prescribed by HM Treasury. Traditionally, annual increases in a pension scheme up until 2011 were based on the Retail Prices Index (RPI). This is calculated by reference to a basket of goods and services, designed to measure increases in expenditure of an average household in the UK. However, in 2011 the Government replaced RPI as the measure of inflation in public sector pension schemes with the Consumer Prices Index (CPI). CPI tends to produce a lower rate of inflation than RPI, in part because RPI also includes housing costs. In various previous cases, the courts have held that the change from RPI to CPI can lawfully be made in these circumstances, and it was accepted by the parties in this case that BA was entitled to pay increases on the CPI basis going forward. 

However, the Trustees of the APS took steps to mitigate any potential financial loss to members as a result of the change to CPI by amending the APS in order to grant themselves the ability to award discretionary pension increases. This created a number of issues for both the High Court and subsequently the Court of Appeal to consider.

The appeal concerned two principal issues:

  1. Whether the Trustees of the APS validly exercised their power of amendment when they conferred on themselves a power to review and, at their discretion, increase the annual rate of pension payable under the APS Rules.
  2. Assuming the changes to the Rules were validly made, whether the power created by amending the APS Rules was validly exercised in November 2013 when it was used to grant an additional pension increase of 0.2% over and above the increase stipulated by the application of CPI.

The steps taken by the Trustees

On 3 February 2011, the Trustees resolved, subject to consultation with BA, to insert a power into Rule 15 of the APS Rules that would: "permit discretionary pension increases on top of those granted by the Annual Review Orders, on a two-thirds majority basis, and that the use of the power would be reviewed on at least an annual basis and take account of relevant professional advice." This was confirmed at a further meeting of the Trustees held on 1 March 2011. The express aim of this amendment was to give the Trustees the ability to pay increases to members at a level that exceeded CPI, in order to mitigate (or partially mitigate) the impact of the change from increases paid by reference to RPI, which was a level of increase to which at least some of the Trustees considered members to have a legitimate expectation.

Subsequently, on 28 February 2013, the Trustees agreed in principle to exercise the Rule 15 power so as to award an additional increase of 0.2% over CPI (0.2% in this case being 50% of the difference between RPI and CPI over the relevant period), and this decision was ratified by the Trustees in November 2013.

The validity of the amendment that granted the trustees power to pay discretionary increases 

The Court of Appeal held that the amendment involved the Trustees exercising their powers for an improper purpose. 

Lord Justice Lewison stated in his judgment that "the function of the trustees is to manage and administer the scheme; not to design it." He went on to say "I do not agree that, in effect, the trustees can do whatever they like so long as their ultimate purpose is to provide pensions." In a similar vein Lord Justice Peter Jackson in his judgment stated "there is nothing to suggest that the power of amendment was intended to give the trustees the right to remodel the balance of powers between themselves and the employer." 

However, it should be noted that Lord Justice Patten dissented on this point, finding that the amendments did not breach the proper purpose rule as there is no general principle, either in this particular scheme or otherwise, to the effect that a trustee's otherwise unlimited power to amend the scheme is nevertheless restricted by a requirement that there should be no alteration to the benefit structure which would cost the employer more money than it was prepared to agree to pay. He also noted that, in essence, the 0.2% discretionary payment attempted put the members benefits back into line with how they were previously under RPI, stating "it [the 0.2% increase] did not confer on the members of the scheme a benefit that was different in kind to what they had always enjoyed."

Was the power created by the amendment validly exercised?

BA challenged the exercise of the power as carried out for an improper purpose and unlawful either because the Trustees had taken into account irrelevant factors or failed to take into account relevant factors when exercising the discretion or alternatively because the decision was in all the circumstances perverse or irrational. All of these issues turned on whether the exercise of the power resulted in the making of "benevolent or compassionate payments" to members of the APS in the form of the additional pension increases.

The three judges were unanimous that the form of the additional pension increases was not benevolent or compassionate, and therefore was not invalid under this head. Lord Justice Patten stated "the fact that the motivation for a general increase in the pensions payable may include an element of generosity does not make the payment a benevolent one." 

Our comment

The Court of Appeal's judgment provides some clarity as to how trustees may exercise their powers and highlights that trustees should not go beyond the powers conferred on them. However, the case raised some complex and controversial issues, as demonstrated by the fact that the Court of Appeal was unable to reach a unanimous decision. On 12 September 2018 the Trustees issued an announcement stating that they have decided to continue the appeal and anticipate that the case will be heard by the Supreme Court in the second half of 2019. Trustees and scheme employers will wish to monitor this case closely.