The Pensions Ombudsman has recently determined that an employer’s decision to cap increases to pensionable pay in a final salary pension scheme to 1% a year through a contractual arrangement with employees instead of by amending the scheme rules did not breach the implied duties of trust and confidence or good faith arising from the employees’ contracts of employment.
Mr Bradbury, an employee of the BBC, brought a complaint before the Pensions Ombudsman after the BBC sought to implement a 1% cap on the annual increase in pensionable pay by making future salary increases conditional on employees accepting a capped increased in pensionable pay. The Ombudsman dismissed Mr Bradbury’s complaint and he appealed to the High Court in England on the basis that the BBC’s approach was:
- inconsistent with the scheme’s rules;
- a breach of the inalienability provisions (section 91) of the Pensions Act 1995, which prevent members forfeiting pension rights; and
- a breach of the BBC’s implied duty of trust, confidence and good faith owed to its employees.
The Court held that the contractual approach to restricting increases in pensionable pay adopted by the BBC could be used to override the scheme rules and that there was no breach of section 91. The High Court was not required to consider Mr Bradbury’s argument regarding the BBC’s implied duty of trust, confidence and good faith owed to its employees and the issue was remitted to the Ombudsman to determine.
The Ombudsman published its determination on that point earlier this month. It confirms that the BBC’s approach was not a breach of its implied duties of trust and confidence or good faith owed to its employees. The Ombudsman noted that the BBC’s actions had to be viewed in the context of the substantial deficit in the scheme and its overall financial position. Its actions were not irrational or perverse, or steps that no reasonable employer would have taken in the same position. To amount to a breach of trust and confidence, the BBC’s conduct would need to have had a “pretty good chance” of destroying the relationship between the BBC and the employees.
The High Court decision in Bradbury provided helpful judicial endorsement of the contractual approach to achieving the amendment of scheme terms and benefits. While such an exercise inevitably involves a range of tricky legal issues, this recent determination of the Ombudsman will give further comfort to employers who have, or are considering, implementing a pensionable pay cap contractually.