Our Knowledge

07.Jun.2017

BA High Court case: Trustee’s introduction and exercise of discretionary increase power

The High Court has issued its judgement in the case of British Airways plc v Airways Pension Scheme Trustee Limited. This case centres on the introduction and exercise of a discretionary increase power under the rules of the Airways Pension Scheme (the Scheme), of which British Airways plc (BA) was the Principal Employer.

Background
Prior to the privatisation of BA, it was a public sector scheme and some of the provisions of the Scheme continued to reflect this even after privatisation. For example, annual pension increases under the Scheme were to be in line with public pension increases. In 2010, the Government switched from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) as the basis for public pension increases and this switch applied automatically to pension increases under the Scheme. CPI is typically lower than RPI and it was estimated that this change would result in a substantial reduction in BA’s overall pension liabilities.

Following the switch, the trustees of the Scheme considered what could be done in order to best protect members against inflation. In February 2011, the trustees unanimously agreed to introduce a discretionary power, to be exercised by a two-thirds majority of trustees, to grant a discretionary pension increase above that provided under the rules. This power was introduced using the trustees’ unilateral power of amendment, which allowed rule amendments to be made by a two-thirds majority of trustees without the need for employer consent or approval.  

The amendment power allowed the trustees to amend the Scheme “in any way” provided that this did not alter the purposes of the Scheme. The purpose of the Scheme was stated to be the provision of pension benefits on retirement, and the rules of the Scheme included an explicit statement that it was not a benevolent scheme and that no benevolent or compassionate payments could be made.

Following a number of trustee meetings and an actuarial valuation, the trustees unanimously agreed in November 2013 to award an additional increase of 0.2% with effect from 1 December 2013.

BA was unhappy with this decision and issued court proceedings against the trustees of the Scheme.

Arguments
BA argued that both the introduction and exercise of the trustees’ discretionary power was invalid.  

In terms of the introduction of the power in 2011, BA argued that this fell outside the scope of the trustees’ amendment power in that it altered the purpose of the Scheme by permitting benevolent or compassionate payments.  

Further, BA argued that the exercise of that power by the trustees in 2013 was invalid as it had been exercised for an improper purpose based on inappropriate considerations and it was not a genuine exercise of discretion.

In response, the trustees argued that the universal nature of the increase being applied meant that this could not be considered a benevolent or compassionate payment as it was not intended to take account of individual circumstances. The trustees also asserted that their exercise of the discretion was effective and valid.

Judgement
The Court agreed with the trustees that both the introduction and exercise of the power to introduce pension increases was valid.

The discretion to increase pensions did not provide any express power for the trustees to make a benevolent or compassionate payment and so any exercise of this discretion by the trustees would need to comply with the pre-existing purposes of the Scheme. As the discretion had to be exercised in accordance with the Scheme’s purposes, the introduction of such discretion could not be said to conflict with the Scheme’s purposes. The Court also rejected some additional arguments made by BA as regards the amendment power, including the suggestion that the consent of BA would be required for any amendment which would allow an increase in pension benefits.

In terms of the exercise of the discretion, BA’s principal claim was that the member-nominated trustees had worked towards a pre-determined result and failed to truly exercise discretion in awarding the pension increase. The Court assessed the conduct of the member-nominated trustees and concluded that each of them had given due consideration to the issues at hand and adopted a suitable approach. The Court also rejected BA’s argument that the trustees had failed to take full account of BA’s views or the financial position of the Scheme in reaching their decision.

Following publication of the High Court’s decision, BA has confirmed that it will seek to appeal.

Comment
Although interesting, it is clear that the facts of this case will not be common to most pension schemes. Nevertheless, it re-iterates some key universal principles relating to the interpretation of scheme documentation, the exercise of trustee discretion and the importance of good record-keeping.