In our May 2017 update, we reported on the High Court decision that the trustees of the Airways Pension Scheme (the Scheme) had exercised validly the scheme's power of amendment to introduce a new power allowing them to pay additional discretionary pension increases. The subsequent exercise of the discretionary increase power providing a 0.2 per cent increase for 2013 was also valid and effective.
Under the Scheme rules, pension increases were calculated by reference to annual pension increase review orders (PIROs) issued by the Treasury (in line with increases to public-sector pensions). Historically, the PIROs used the retail prices index (RPI) as a measure of inflation. However, in 2010 the Government announced that it would switch to the consumer prices index (CPI) as the increase basis from April 2011. Consequently, CPI pension increases automatically applied to the Scheme from April 2011. The trustees considered what they should do in response to this change, as Scheme members held expectations of RPI increases.
Amendment to introduce discretionary increase power
In February 2011, the trustees voted unanimously to exercise their unilateral power of amendment to introduce a discretionary power, exercisable by a two-thirds majority of the trustees, to grant a discretionary pension increase (in addition to that awarded in the annual PIRO) (the 2011 decision). Any discretionary increase was also subject to the trustees taking professional advice.
A deed of amendment to introduce the discretionary increase power was executed in March 2011.
Exercise of the discretionary increase power
The new discretionary pension increase power was not exercised until February 2013, when the trustees voted unanimously to award an increase of 50 per cent of the gap between RPI and CPI for 2013 (0.2 per cent). The trustees’ minutes recorded that the additional 0.2 per cent would be paid after completion of the actuarial valuation. The amount of the increase would be reviewed, and a payment date fixed, once the valuation had been finalised (the February 2013 decision).
In June 2013, the trustees confirmed the February 2013 decision to grant a 0.2 per cent discretionary increase. However, it was unclear whether the trustees had made an effective decision as to when that increase would take effect (the June 2013 decision).
In November 2013, the trustees considered the matter afresh and voted by a majority to grant a discretionary increase of 0.2 per cent with effect from December 1, 2013 (the November 2013 decision).
British Airways plc (BA), the scheme's principal employer, issued proceedings against the trustees challenging the 2011 decision and the February, June and November 2013 decisions. The case was heard before Morgan J in a 7-week trial between October-December 2016. BA’s initial allegations that the trustees’ decisions were perverse and irrational and that the professional advisers had acted inappropriately were either dropped or given little weight by the end of the trial.
Morgan J dismissed BA’s claim almost entirely, with the exception of the challenge to the June 2013 decision, which was held to be invalid due to the failure to agree an effective date for the increase. The High Court held that the trustees' decision to amend the rules to introduce a discretionary increase power was a valid exercise of their power. The 2011 decision and the November 2013 decision were both valid and effective. The conclusion was that the members were entitled to a discretionary increase of 0.2 per cent with effect from December 1, 2013.
BA to appeal High Court decision
Further to the High Court’s decision, Morgan J has granted BA:
- permission to appeal two technical aspects of the May 2017 judgment:
- the meaning of “benevolent or compassionate” in the trust deed and the conclusion that the trustees’ decisions were within the scope of the amendment power and the discretionary increase power; and
- in exercising the amendment power and/or the discretionary increase power, the trustees did not act inconsistently with the purposes of the Scheme or otherwise for an improper purpose; and
- an injunction preventing the trustees from paying the discretionary increase until the appeal is determined. If BA’s appeal fails, BA is to pay affected members interest on the discretionary increase at 2 per cent above base rate from May 25, 2017, to the date of decision by the Court of Appeal.
Whilst the case is inevitably confined to its facts, the High Court judgment provides a useful reminder of the Court’s approach to the interpretation of a pension scheme’s rules and the factors trustees must consider when exercising their discretionary powers. The case also highlights the importance of a thorough decision-making process and the need for those decisions to be accurately recorded in the meeting minutes.
The judgment confirms that the Court will not seek to infer an employer consent requirement where the scheme rules contain a power for the trustees to amend unilaterally. Equally, where trustees undertake a detailed and thorough decision-making process, taking into account all relevant and excluding irrelevant factors, it will be difficult for employers (or members) to challenge those decisions.
As for the appeal, Morgan J was sympathetic to the members’ position and recognised that many of them were likely to die before the appeal was concluded. He also recognised that the trustees’ discretionary decision on whether or not to pay the increase while the appeal is pending will not be easy. The Judge noted that in granting the injunction and requiring BA to compensate members in the event of failure of the appeal, the Court was taking a difficult decision out of the trustees’ hands, whilst eventually granting members some compensation for the delay in payment.
Morgan J accepted that BA had a “real” prospect of success on appeal, although he remained of the view that the appeal would ultimately fail. He noted that had he not granted permission to appeal, BA would have sought permission to appeal directly from the Court of Appeal, causing a further delay of perhaps six months. Even with permission, it seems likely that the CA’s heavy caseload will mean that an appeal decision could take longer than 18 months.