Amendments to its pension scheme rules which would have cost British Airways £12 million in increased pension payments were not permissible according to a recent decision of the Court of Appeal. The Trustees of the Airways Pensions Scheme (APS) had sought to give themselves the power to increase pension payments in the scheme rules. But the Court of Appeal ruled that the Trustees had acted for an improper purpose when amending the APS to include the ability to provide discretionary increases to pension payments.

It is unlikely to be the end of the story though as the Trustees are considering an appeal to the Supreme Court. APS members have been reported to be pushing for the Trustees to go ahead with the appeal – stating that it would a breach of trust not to appeal - and a meeting of members has been called to discuss the case.

Background

Under the rules of the APS, pensions were reviewed on an annual basis in accordance to the Treasury’s Pensions Increase Review. Increases were based on the Retail Price Index (RPI), but in 2010 the Government changed the basis for calculating increases to public sector pensions to the Consumer Price Index (CPI). This changed also applied to APS as its increases were based on public sector increases.

The Trustees used their unilateral power of amendment to insert a power to grant discretionary increases above those required by the scheme rules. In 2013, the APS Trustees used this power to set an additional 0.2% increase in pension payments to compensate for the difference between RPI and CPI.

The High Court Decision

British Airways issued proceedings in December 2013 to dispute the amendment of the rules by the Trustees, arguing that such an amendment was outside of the scope and purpose of the amendment power of the Trustees.

The High Court found in favour of the Trustees: they had acted lawfully when amending the APS and had taken into account all relevant factors (and ignored irrelevant ones) when deciding to grant increases under the new power. The increases to pensions would have cost British Airways £12 million and the decision was appealed.

Court of Appeal decision

The appeal focussed on whether the amendment to the APS to introduce the power to give increases was within the scope of the Trustees' powers and whether the decision to grant the increases had been an exercise of a power for an improper purpose. British Airways accepted the High Court's decision on the process the Trustees had gone through when deciding whether to grant the increases.

British Airways first argued that the payments made by APS were of a "benevolent or compassionate" nature. The Rules of the APS expressly stated that "it is not in any sense a benevolent scheme and no benevolent or compassionate payments can be made therefrom". The Court of Appeal unanimously rejected this point. Lord Justice Patten acknowledged that the actions of the APS may have entailed "an element of generosity", but benevolent payments were of a purely gratuitous nature. As a pension payment had been earned it could not be a benevolent payment.

However, by a majority, the Court of Appeal accepted that the purported exercise of the power of amendment to introduce the possibility of increases had been an exercise of a power for an improper purpose. Looking at the rules of the APS as a whole, the Court of Appeal concluded that the Trustees' role was to carry out the management and administration of the APS. It was not the Trustees' role to design the scheme and there was 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.

Clyde & Co comment

The APS is unusual in that the power of amendment rested solely with the Trustees, but this decision supports the view that pensions are part of an employer's remuneration policy. The Court of Appeal was also clearly influenced by the deficit in the APS and also the overall structure of the Rules and the balance of power between employer and trustees. But where trustees have a discretion over giving increases, they may take comfort from the fact that the decision making process of the APS Trustees – in deciding whether to give increases – was unchallenged.

British Airways Plc v Airways Pension Scheme Trustee Limited [2018] EWCA Civ 1533

Date of judgement: 5 July 2018