The Court of Appeal has held that the BBC was entitled to cap at 1% the part of a 2% pay increase that would be categorised as "pensionable salary" for the purposes of calculating an individual's final salary pension entitlement.

Background

The Court of Appeal's judgment is the latest (and possibly final) instalment in a long-running saga arising from cost-cutting actions taken by the BBC in 2010. At that time, the BBC was faced with a multi-million pound deficit in relation to its pension scheme, which it considered unsustainable. It therefore took advice, consulted with its workforce, the scheme trustee and the relevant unions, and subsequently put the following options to members in December 2010:

  • remain in the final salary section of the scheme and accept a 2% pay rise subject to a cap whereby only 1% of the pay rise would count as "Basic Salary" under the Scheme rules and therefore be taken into account when calculating final pensionable salary (the Cap);
  • remain in the final salary section of the scheme but receive no pay rise at all; or
  • accept the 2% pay rise but move to either a career average section of the scheme or a new defined contribution scheme.

One such member was Mr Bradbury, a clarinettist in the BBC Philharmonic Orchestra, who brought a complaint about the options offered to him, and about the process that the BBC had gone through in order to come up with its proposals. Whilst pursuing that complaint about the BBC's conduct, he elected to accept the 2% pay rise and join the career average section of the scheme, reserving his right to claim damages if his complaint was upheld.

In 2012, the Pensions Ombudsman dismissed Mr Bradbury's initial complaint. His appeal to the High Court was heard by Mr Justice Warren, who held that the matter should be referred back to the Pensions Ombudsman to consider the application of the implied duty of good faith to the issues raised. Mr Bradbury's complaint was again dismissed, so he appealed once more to the High Court and, having been unsuccessful there, on to the Court of Appeal.

Judgment

The Court of Appeal, in a unanimous judgment, held as follows:

  • On a proper construction of the language used in the trust deed and the relevant rules, the BBC could decide whether an increase in pay (or how much of the increase) counted as Basic Salary. Mr Bradbury had no contractual right to a pay rise and no right to a link between pay and pension, and because the Cap applied only to the increase in Mr Bradbury's pay, it did not amount to an attempt to reduce Mr Bradbury's Basic Salary.
  • The Cap did not breach section 91 of the Pensions Act 1995, which provides that a person may not surrender an entitlement to a pension or a right to a future pension. Mr Bradbury had an existing right to a future pension calculated in accordance with the rules, but no "right", whether accrued, subsisting or otherwise, to any future increase in salary or Pensionable Salary.
  • As the Cap was not a breach of section 91 and/or contrary to the scheme rules, the question of whether it was nevertheless binding and effective by application of the principle articulated in South West Trains v Wightman [1998] Pens LR 113 (SWT) (which held that a pension trustee must give effect to a contractual arrangement agreed between the employer and employee outside the pension scheme) did not arise for consideration.
  • Mr Bradbury's legal team submitted that, even if there had been no breach of section 91 or of the scheme rules, nevertheless the BBC had breached the implied duty of trust and confidence either: (i) by the process through which it had decided to propose the Cap; (ii) because the Cap singled out a class of employees for less favourable treatment; or (iii) due to the BBC's collateral purpose of achieving a more agile workforce by making the Scheme less attractive for long-serving and underperforming staff. The Court of Appeal held that the correct test for whether there had been any breach of the implied duty involved an assessment of irrationality and perversity, and that in this case, there was no such breach. Mr Bradbury's allegations of discrimination and collateral purpose went nowhere.

Our comment

The BBC will welcome this decision, which should also offer some comfort to other employers who have previously taken, or must in future take, difficult decisions in relation to cutting costs in pension schemes.

Although the question did not arise to be considered in this case, the implication of the Court of Appeal's findings is that had the BBC decided that no part of a future pay increase should count as Basic Salary, that would also have been acceptable under the rules and the legislation, although an attempt to retrospectively re-characterise a previously-granted pay increase as not counting towards Basic Salary would not be permissible.

The BBC's conduct had to be assessed against the reality of the background that the BBC was faced with a multi-billion pound deficit in the scheme and where the trustees, the unions and the BBC all agreed that something had to be done. It may also be relevant that the final salary scheme in this case remained open to existing members, albeit with the Cap in place, such that the Court of Appeal felt able to refer to the possibility of more extreme actions potentially being necessary if this approach was not held to be legitimate; employers who have closed their final salary pension schemes to future accrual but maintained a salary link will not be in a position to rely on this argument, although they may be able to refer to the possibility that pay rises might not be available to any employees in the future where pension costs are sufficiently problematic.

It remains to be seen whether this judgment marks the end of the saga, or whether there will be a further appeal to the Supreme Court.