Out-Law News 2 min. read

Appeal court overturns BA pension scheme amendment


Trustees for the British Airways (BA) pension scheme acted for an improper purpose when they amended the scheme rules to award augmented benefits to retired members, the Court of Appeal has ruled.

The appeal court, by a majority of two judges to one, allowed BA's appeal against a High Court decision in favour of the trustees. The court ruled that the trustees' powers of amendment under the scheme rules were limited to amendments in line with their duty of "managing and administering" the scheme, and could not be used for "design of the benefits structure".

"The general power that is given to [the trustees] is limited to a power to do all acts which are either incidental or conducive to that management and administration," said Lord Justice Lewison.

"I do not consider that the design of the benefit structure falls within the purpose of the general power given to the trustees under [the scheme rules]. The design of the benefit structure is neither the management nor the administration of the scheme. In addition, even where a power is apparently unlimited, its use to alter the constitutional balance of an entity can amount to a breach of the proper purpose principle," he said.

The Airways Pension Scheme (APS) was established when BA was a public sector company. Its rules provided for an annual benefits increase in accordance with Pension Increase Review Orders (PIROs) made by the UK Treasury. These rules were not amended when BA was privatised in 1987.

In 2011, the trustees changed the scheme rules to allow for discretionary payments to members above the rate of inflation. Two years later, they awarded a payment of 0.2%, at a total cost to BA of £12 million. The payment was made in response to then-chancellor George Osborne's 2010 announcement that PIROs would now be made using the consumer price index (CPI) rate of inflation, rather than the retail price index (RPI). The rate of increase of the CPI is generally lower than that of the RPI, and the 2013 adjustment by the APS trustees accounted for 50% of the gap between CPI and RPI.

All three Court of Appeal judges agreed that the amendment was not prevented by clause two of the trust deed, which stated that the scheme was "not in any sense a benevolent scheme" from which "no benevolent or compassionate payments" could be made. The judges all found that the provision of benefits on retirement in accordance with the provisions of the scheme was different from purely gratuitous payments of a benevolent or compassionate kind.

The majority of the judges, however, found that the trustees had acted for an improper purpose when amending the scheme rules to allow for what Lord Justice Jackson described as "unilateral discretionary increases".

Lord Justice Jackson said that the trustees' management and administrative roles did not prevent them from making decisions that would have "financial repercussions" for BA as scheme employer.

"Indeed, almost all management and administration decisions will have some effect, however small, on the employer's liabilities," he said. "But 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."

"In my view, the amendment … resulted in a scheme with a different overall purpose, in which the trustees effectively added the role of paymaster to their existing responsibilities as managers and administrators," he said.

The trustees have been given permission to appeal the decision to the Supreme Court.

Pension disputes expert Hayley Goldstone of Pinsent Masons, the law firm behind Out-Law.com, said that the decision "draws a clear line for trustees".

"Trustees should be administering and managing scheme benefits in accordance with their rules, but not interfering with scheme design unless given express power to do so under scheme rules," she said. "This judgment could potentially restrict the role of trustees in defined benefit scheme closures, for example."

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