Bradbury v BBC1
The High Court reaffirms the use of binding agreements between an employer and employee outside the pension scheme as a legitimate way of capping pensionable pay without the need for a rule amendment. The Court also interpreted the extent of an employer power in the BBC Rules in the light of legislative restrictions on amendments.
Mr Bradbury was a member of the BBCs defined benefit pension scheme. Faced with an increased funding deficit, the BBC and the trustees agreed changes to the scheme’s benefit structure. To the extent necessary, rule amendments were made by deed to accommodate the changes. Members of the final salary section were then given three choices: (1) remain in the final salary section but with future pay awards capped at 1% for scheme purposes (known as ‘capping pensionable pay’); (2) opt out of the final salary section and join the new career average section (in which case future pay awards remained uncapped for scheme purposes); or (3) opt out of the scheme altogether and join the BBC’s defined contribution plan.
The deed did not deal with the capping of pensionable pay. Instead, quite separate from the scheme and the trustees, the BBC made pay awards for members of the final salary section subject to the condition that they were capped at 1% for pensionable pay purposes. If that condition was not accepted by an individual member, no pay award would be given (or no award would be given in excess of 1%).
When Mr Bradbury was offered a pay award on that basis he complained to the Pensions Ombudsman. He argued that the capping of pensionable pay in this way was effectively a scheme amendment, requiring member consultation, trustee agreement and a formal rule amendment. When the Pensions Ombudsman did not uphold Mr Bradbury’s complaint he appealed to the High Court.
Capping pensionable pay outside the scheme rules – it can still be done
Following established case law, the BBC argued that it could structure pay awards so as to cap the pensionable pay used for calculating pension benefits under the scheme, without needing to amend the scheme rules.
The Court agreed, confirming that an agreement by an active member of the final salary section to accept a pay rise from the BBC on the basis that only part of it was to be pensionable, would be binding on the member concerned and therefore on the trustees when calculating pension benefits under the scheme. However the Court went on to say that this agreement was subject to the question of breach of the implied duties of trust and confidence in the employment relationship.
Breach of implied duties of good faith and/or trust and confidence?
Mr Bradbury claimed before the Court that the BBC was in breach of its implied duties of good faith and/or trust and confidence as an employer in seeking to cap pay awards for scheme purposes.
Although the Court did not rule on this issue (it was not part of the original claim), Mr Justice Warren made the point that employers can take their own interests into account in dealing with pension arrangements, provided that they balance this against scheme amendments damaging the relationship of trust and confidence between the employer and its employees. A decision in a pensions context which was irrational or perverse might offend the obligation of good faith and in that situation, members’ interests and expectations might be of relevance. The Court acknowledged that there were arguments for both sides on the issue of implied duties.
Don’t forget Section 91
Section 91 provides that agreements with members which seek to assign, commute or surrender a member’s entitlement under an occupational pension scheme are unenforceable. Consequently, Mr Bradbury claimed that it would be illegal to agree to the cap on pensionable pay, but the Court disagreed.
In reaching its conclusion, the Court provided some useful insights into the operation of section 91 and in particular what was meant by “the right to future pension”. Essentially, a member has a present right to a pension but the actual amount of that pension depends on a number of factors including pay increases and periods of future service. Here, the member’s right to a future pension continued. All that happened was the pension that a member would ultimately receive would be based on capped rather than uncapped pensionable pay. As employees have no right to a pay rise, awarding a capped pay rise for pension purposes does not result in a surrender of a right that would cause a breach of section 91.
Interpreting the extent of a power under existing Rules
Whilst much of the commentary in the press on this case has been about capping pensionable pay, the case also raised an interesting question about how far the interpretation of the extent of a power under the Rules could be pushed.
BBC’s position was that it had a wide discretion to determine what was meant by a Member’s basic salary under the scheme rules. This was crucial, as basic salary was used to calculate pensionable pay.
Until 2000 there was no definition of basic salary in the rules. It was simply used in the calculation of pensionable pay, undefined. In June 2000 a rule amendment was introduced so that “basic salary” became “Basic Salary” in the definition of pensionable pay. “Basic Salary” was newly defined as “the amount determined by the BBC as being an Employee’s basic salary and wages”.
The Court said that it could understand the value of including this new power in the Rules if it was restricted to allowing the BBC to decide, in cases of doubt, whether a particular element of an employee’s remuneration is basic salary or some other element of pay. However, the BBC believed the power went further than that, giving it the power to determine the level of ‘Basic Salary’ each year. The Court used, as an example of the extent of this argument, a basic salary of £40,000, in one year being determined by the BBC in the next year to be £35,000.
If it was correct that the 2000 amendment gave the BBC such a wide power, the Court’s view was that the original amendment fell foul of the restrictions in section 67 of the Pensions Act 1995. As a reminder, section 67 prevents (in the absence of members’ consents) amendments which affect or could potentially affect a member’s accrued rights. The Court therefore held that the BBC did not have a wide discretion under the scheme rules to determine what was or was not “Basic Salary”.
This is a useful case in confirming that pensionable pay can be capped outside the scheme through an agreement between the employer and the employer. If also highlights that employers and trustees need to be mindful of the restrictions imposed by section 67 when interpreting and giving effect to Rule amendments.