British Airways (BA) has agreed an out-of-court settlement with the trustee directors of the Airways Pension Scheme (the Scheme), ending a legal dispute that has been going on since 2013.
As a brief reminder, the dispute concerned the trustee’s use of a unilateral amendment power to award itself the ability to provide discretionary pension increases and its subsequent use of this power. There was provision to increase pensions under the Scheme rules but only in accordance with the Consumer Prices Index (CPI) from 2011. Prior to this increases had been awarded by reference to the Retail Prices Index (RPI). For further information about this case please see our previous blogs ‘A good day in Court for trustees’ and ‘In it for the long haul’.
The High Court
At the High Court the judge considered whether the trustee had:
- validly introduced a discretionary power to pay pension increases to the Scheme members using the unilateral power of amendment; and
- validly exercised the discretionary power it introduced.
The High Court ruled in favour of the trustee.
The Court of Appeal
BA appealed the decision of the High Court and by a majority decision in the Court of Appeal the High Court decision was overturned. The Court of Appeal accepted the argument put forward by BA that the amendment that introduced the discretionary power was made for an improper purpose.
Under the Scheme rules the trustee’s function was to “manage and administer the Scheme”. The Court of Appeal held that “there is nothing to suggest the power of amendment was intended to give the trustees the right to remodel the balance of powers”. The Court of Appeal held that the trustee had “added the role of paymaster” to its functions and that the power of amendment was never intended to permit the trustee to do so.
The trustee was subsequently given leave to appeal to the Supreme Court and the hearing was expected to take place later this year. Whilst the dispute has been ongoing no discretionary increases have been paid. It was confirmed however on 10 April that an out-of-court settlement agreement has been reached between the trustee and BA, subject to the approval of the High Court.
As part of the settlement, pensioners will receive a one-off lump sum for the period between 2013 to 2019, for which no discretionary increases were paid due to the litigation, and there will be certain increases to the rate of pensions for pensioners and deferred members to cover the same period. These will take effect this year. There will be a further discretionary increase in 2020 to the rate of pensions for pensioners and deferred pensions of 75% of the relevant gap between CPI and RPI. From April 2021, subject to affordability tests, it is intended the trustee will use its discretionary power to increase pensions so that the overall pension increase is in line with the annual increase in RPI. In return, BA will no longer have to pay cash sweep contributions and will not have to pay deficit reduction contributions unless the Scheme’s funding falls below 100%.
The trustee commented in relation to the proposed settlement that “the terms better serve the interests of the APS members than continuing with the appeal to the Supreme Court”. Given the settlement reached, the trustee directors may feel that their original exercise of the amendment power and the introduction of a discretionary increase power has been validated. However, one of the reasons for the settlement is likely to be the £4.4 billion insurance buy-in with Legal & General, which has secured more than half of the Scheme’s liabilities.
Whilst it is probably best for the parties that the case has settled and there is now certainty as to the position going forward, it is frustrating for the wider pensions community that the issues raised by the case will not be heard by the Supreme Court. This is particularly so given there was a dissenting view at the Court of Appeal. As a result, the settlement will now leave some uncertainty as to the extent of the powers of trustees and how they should be exercised, which could result in more cautious decision making in some circumstances.
This blog post was written by Pensions partner, Kate Lloyd.