The High Court has today dismissed on all substantive counts the action brought by British Airways against the trustees of the Airways Pension Scheme alleging that changes to the rules of the scheme, and the granting of discretionary increases to members' benefits, were invalid or improper and/or an abuse of the trustees' powers under the scheme.

Whilst based on the specific provisions of the Airways Pension Scheme the eagerly-anticipated judgment, which follows a highly-contentious seven-week hearing that commenced over six months ago, provides useful clarity for trustees generally as to the scope of their powers and the manner in which they may properly go about their decision-making processes.

Background – the Airways Pension Scheme

The provisions of the Airways Pension Scheme ("APS") require members' benefits to be uprated on an annual basis in line with the Pension Increase Review Orders used for public sector schemes, reflecting the origin of the scheme as a vehicle for providing retirement benefits for those in the public sector. This particular requirement has been in the scheme continuously since 1973, in spite of the fact that (following the privatisation exercises undertaken by the Thatcher Government) the only participating employers since the late 1980s have been private sector ones. The scheme is also a particularly generous one in that, unlike most private sector schemes, there is no 5% cap to the uprating in any one year.

The rules of the APS provide that its main object is the provision of pension benefits on retirement. They go on to say that the scheme is not, however, a benevolent scheme and that no benevolent or compassionate payments can be made from it. Whilst the power of amendment is one that can generally be exercised by the trustees alone, one of the provisos to it prevents any change that would have the effect of changing the scheme's purpose.

Background – the shift from RPI to CPI, and the trustees' actions

During 2010 the Government announced that, for future years, the uprating of members' benefits from public sector pension schemes (or, more accurately, from any scheme which relied on Pension Increase Review Orders for their inflation-proofing) would be by reference to increases in the Consumer Prices Index rather than the Retail Prices Index. The APS trustees' concerns about this change were driven by an industry-wide view that increases in the CPI can generally be expected to be lower than those in the RPI. The level of inflation-proofing provided to the benefits of APS members would, as a consequence, be diminished. Some of the trustees wished to counteract this change by going so far as hard-coding into the scheme, via an amendment to its rules, a requirement to provide future years' uprating by reference to increases in the RPI.

A lesser (but ultimately no less contentious) provision was ultimately introduced into the rules of the APS, giving the trustees the ability – but not requiring them – to provide discretionary uprating of members' benefits in future years, by (in essence) such amount as they may determine. At various future junctures the trustees used this power to uprate members' benefits, over-and-above the CPI-based inflation-proofing required by the scheme's rules, either explicitly to 'bridge' some of the gap between CPI and RPI, or simply by requiring that a specific additional percentage increase to members' benefits be given.

British Airways' challenge

British Airways initially appeared not to object to the change in the rules. Subsequently, however, the airline sought to challenge the trustees' actions, initially in respect of the introduction of the power to grant discretionary increases, and subsequently as regards their use of that power. The judgment given this morning is the outcome of that challenge.

The court's decision

In all but one respect the Court found in favour of the trustees; and the ground on which it did uphold British Airways' challenge, was something of a technicality.

In a little more detail, the judge ruled as follows.

  • The introduction of the power to make discretionary increases to members' benefits was not a breach of the scheme's power of amendment, or an abuse of the trustees' powers, and nor did it involve any element of unlawful 'pre-determination' by the trustees or any particular group of them.

  • The subsequent exercise of that discretionary power by the trustees did not involve the making of a benevolent or compassionate payment, and nor were the decisions improperly made by the trustees (either because they failed to take into account all relevant factors and ignore all irrelevant ones, or alternatively because despite having taken all proper considerations into account they had come to a decision that was perverse in all the circumstances).

The judge did however decline to hold that the very first discretionary increase granted by the trustees after the introduction of the power was lawful and proper, on the basis that as an effective date had not been specified for the increases in question the exercise of the discretion could not stand.

Comment

The decision appears to provide welcome clarity as to the propriety of the APS trustees' actions (and, more widely, some guidance for trustees generally about decision-making rights and wrongs). It brings to a close, at least for now, a long-running and highly-charged dispute that was heavily reported in the press and perhaps did not show the pensions industry, or the employer and the trustees involved, in the most favourable light. It is almost inevitable however that it will be appealed, and that the lessons potentially to be learned from it may not be clarified for some considerable time yet.