RPI or CPI for pension increases? This is a hot topic for defined benefit pension schemes. Although legislative changes could be on the horizon following the recent Green Paper published earlier this year, many schemes are currently stuck with RPI in their rules. This is a significant cost for employers of such schemes, particularly when some schemes use CPI to calculate pension increases. Although many would think that this issue was the crux of the case between BA and the trustees of the Airways Pension Scheme (the APS), the recent judgment from the High Court is a reminder to employers and others (such as members) that courts are not willing to overturn trustee decisions unless there is clear evidence that trustees did not act properly – for example, if they have failed to act for a proper purpose, or it can be shown that they have failed to consider relevant factors, or that they have taken irrelevant factors into account. The High Court decision isn’t the end of the matter as last week BA was granted leave to appeal.
Unusually, the power of amendment in the APS is held solely by the trustees. There is no requirement for BA’s consent. BA challenged the introduction of a new power allowing the trustees to award additional discretionary pension increases and the subsequent exercise of that power to grant a discretionary increase of 0.2% (half the gap between RPI and CPI) in 2013. Mr Justice Morgan found in favour of the trustees and held that the decisions to introduce the new power to grant discretionary increases and to exercise that power were validly made. They were made for a proper purpose because they were not contrary to the purposes of the scheme and did not exceed the scope of each power.
The court also dismissed BA’s argument (on the basis of statements made during trustee elections) that some of the trustees had pre-determined their position on these decisions, rather than actively and genuinely engaging in the decision making process. Relying on the trustee minutes and evidence from some of the trustees, the court found that the trustees had considered all relevant factors and had disregarded irrelevant factors in making their decisions. Although the court held that BA’s position was a relevant consideration for the trustees, the High Court dismissed BA’s argument that any amendment which indirectly or directly increases benefits requires BA’s consent (at least while the scheme is in deficit).
Trustees who make decisions that adversely impact on the funding of a scheme without obtaining the employer’s approval will need to carefully consider all relevant circumstances, including the employer’s position. Otherwise, employers may seek to challenge those decisions. Trustees will need to be able to justify their decisions and the exercise of any discretion and so the case highlights the importance of trustees taking full advice (legal, actuarial and covenant) and keeping trustee minutes. Employers should engage with trustees to make their position clear when trustees are making decisions that impact them, but unless scheme rules specify otherwise, courts look to be reluctant to imply a requirement that trustees obtain employer consent for their decisions. Last week, BA was granted leave to appeal on the grounds that the discretionary increase was “benevolent” and therefore contrary to the purpose of the scheme as set out in the scheme rules. Given the cost implication of the 0.2% increase (an additional £12 million and potentially more if increases are given in future years), it’s unsurprising that BA wanted to appeal the High Court decision. Trustees and employers interested in this case will have to another 18 months for further updates as it’s unlikely that the Court of Appeal will hear the case before then.
British Airways PLC v Airways Pension Scheme Trustee Limited [2017] EWHC 1191 (Ch)
