Whilst it doesn’t sound great to be nearly drowned to most of us, after a moment’s reflection we would all choose that option over being nearly saved. Similarly, the judgment in Bradbury v BBC in the Court of Appeal, delivered on 28th July 2017, is something of a slow burn but on reflection provides relief and consolation for sponsoring employers and trustees in the always challenging area of defined benefit pension liability management.
The history of the case – the Pension Ombudsman and the High Court find in favour of the trustees and sponsoring employer in their attempts to cap future pensionable salary and the Court of Appeal upholds their decisions – is perhaps a little convoluted but the final resting place is fairly straightforward. A good exercise in capping future pensionable pay can withstand arguments about the finer points of interpretation of scheme rules, the prohibition on assigning pension benefits and the duty of good faith.
What were Mr Bradbury’s arguments?
Interpreting the scheme rules
A fairly standard definition of “basic salary” was found to be capable of operating so that a scheme member’s future pay rises would not form part of basic salary in the future. This is a common means of restricting increases in the amounts which would otherwise count as pensionable pay and is no small relief for liability management purposes.
The prohibition on assigning pension benefits
The statutory prohibition on assignment of pension benefits (contained in section 91 of the Pensions Act 1995) presupposes that benefits have arisen in the first place. Capping future basic salary prevents benefits accruing on the capped element so the statutory prohibition is irrelevant. Where benefits do not arise they cannot be assigned so the prohibition does not operate and the argument raised by Mr Bradbury failed.
The employer’s duty of good faith
The argument that the employer had acted in breach of the implied duty of good faith in capping future pensionable salary was also rejected. It was a relevant consideration in this regard to be satisfied that the employer’s actions were not irrational or perverse and / or without reasonable and proper cause. This is helpful because it gives weight to the employer’s commercial challenge in finding the resources needed to support the pension scheme and contribute to the reduction of a defined benefit pension scheme deficit. This is a considerable source of relief and consolation for sponsoring employers. Evidence about the substantial size and scale of a pension scheme deficit and the need to manage liabilities in order to be able to afford to make deficit repair contributions in the future will be sensibly considered by the courts.
Overall the Bradbury v BBC case is a bit of a slow burn, but the conclusion is undoubtedly a source of relief and consolation for sponsoring employers seeking to support defined benefit pension scheme deficit by means of a range of solutions including pension scheme liability management.
This blog post was written by Patrick Kennedy. For further information, please contact:
Patrick Kennedy, partner, Pensions
T: 0161 836 7788