The Court of Appeal has ruled in favour of British Airways in respect of the Airways Pension Scheme Trustees’ (the Trustees) decision to award a discretionary increase which would cost the employer approximately £12 million. For further information about the facts, please see our previous blog.
As a quick reminder, the Trustees of the Airways Pension Scheme (the Scheme) granted themselves a unilateral power to award discretionary increases. This power was introduced by way of amendment and then exercised in November 2013. The High Court previously ruled in favour of the Trustees.
What were the issues?
The two issues to be decided on appeal were:
- whether the Trustees validly exercised their unilateral power of amendment when introducing the discretionary increase power (the Increase Power); and
- whether the Increase Power was validly exercised.
What was the outcome?
British Airways’ argument that the Trustees exercised their power to award discretionary increases focused on whether the Trustees stepped outside of their legitimate role and took it upon themselves to assume the role of “paymaster”. The Court (by majority) accepted British Airways’ argument that the amendment power was never intended to be used to allow the Trustees to unilaterally impose discretionary increases and that the Trustees acted outside of the power of amendment when introducing the Increase Power.
British Airways argued that the purpose of the Trustees’ powers is to deliver the benefits due and not set the benefits in which employees are entitled. The Court agreed with British Airways commenting that the Trustees’ function is to “manage and administer the scheme; not to design it.” The Court further commented that the design of the benefit structure does not fall within the management or the administration of the Scheme.
The Court distinguished the present case from previous cases where similar issues were considered on the basis that in the previous cases, either the schemes in question had surpluses and the trustees were doing no more than managing the assets that had already been entrusted to them or, they involved trustees granting themselves powers to better secure the existing benefits rather than improving benefits. The Court noted that managing and administering the Scheme permits the Trustees to deal with assets which already form part of the scheme or to require additional contributions to be made in order to secure the benefits already promised under the rules. However, this does not mean that trustees can do “whatever they like” providing that their aim is to provide pensions.
The outcome of the ruling not only means that the discretionary increases to members’ benefits will not go ahead, but also that the introduction of the Increase Power was void. This judgment may lead to pension scheme trustees being more cautious when exercising wide ranging discretionary powers especially where the employer is opposed to the use of such powers. Trustees may now be more likely to take the employer’s wishes into consideration for fear of reprisal. After the judgment was handed down, the Trustees successfully applied to the Court for leave to appeal to the Supreme Court.
This blog post was written by paralegal Patricia Bailey. For further information please contact:
Michael Collins, partner, Pensions
T: 0121 234 0236