British Airways win before the Court of Appeal
Trustee decision over discretionary increases is invalid
The Court of Appeal has today handed down judgment in the British Airways case on discretionary increases. The Court, allowing BA’s appeal, found by a two-one majority that the Trustees of the Airways Pension Scheme acted for an improper purpose in unilaterally amending the Scheme Rules to give themselves the power to grant discretionary increases.
The case originally arose from the Government’s announcement in 2010 that it would be using CPI instead of RPI for Pension Increase (Review) Orders (“PIRO”). As pension increases in the Airways Pension Scheme (“APS”) rules were by reference to PIRO, the change automatically flowed through to APS. This change was objected to by many members, leading to hundreds of IDRP and Ombudsman complaints; an “anti-CPI” campaign led by the Association of British Airways Pensioners; a mass meeting of members; and the resignation of three member-nominated trustees in 2011.
In 2011, the Trustees considered amending the APS rules to ‘hardwire’ RPI, but instead decided to exercise their unilateral power of amendment to introduce a discretionary increase power. This power required the Trustees to consider annually whether to grant above PIRO increases, and for two thirds of Trustees to vote in favour of a discretionary increase for it to be awarded.
No increase was granted in 2011 or 2012, but in 2013 the Trustees voted to grant an increase of 50% of the difference between RPI and CPI, amounting to 0.2%, despite BA’s strong opposition to the decision. At its actuarial valuation as at 31 March 2012, APS had a deficit on a technical provisions basis of £680m.
High Court decision
In December 2013, BA issued proceedings to challenge both the amendment of the APS rules by the Trustees to introduce the discretionary increase power, and the exercise of that power in 2013. This was on the basis that:
- the amendment was outside the scope and purpose of the amendment power; and
- in exercising the power, the MNTs had not genuinely exercised their discretion as they were ‘pre-determined’, and the Trustees as a whole had not taken into account all relevant factors and disregarded all irrelevant factors.
The High Court found in the Trustees’ favour in May 2017 but granted permission for BA to appeal over whether the amendment was outside the scope and purpose of the amendment power.
Court of Appeal decision
The Court of Appeal has decided that the amendment to introduce the discretionary increase power:
- was within the scope of the express wording of the amendment power; but
- was invalid as it was made for an improper purpose.
In reaching its decision on purpose, the Court reviewed the provisions of the APS Trust Deed and Rules, including a clause which described the function of the Trustees as being to ‘manage and administer the Scheme’.
In allowing the appeal, Lewison LJ considered that particular importance should be placed on the constitutional functions given to the Trustees in the Trust Deed. In light of this, the function of the APS Trustees was to manage and administer the Scheme, not to design it. The design of the benefit structure did not fall within the management or administration of the Scheme and altering the constitutional balance can amount to a breach of the proper purpose principle.
He accepted that managing and administering APS entitles the Trustees to deal with assets which already form part of the scheme and to require additional contributions to secure the benefits promised under the Rules. However, designing the benefits was not the Trustees’ constitutional function under the APS Trust Deed and Rules.
Peter Jackson LJ also allowed the appeal, although for slightly different reasons to Lewison LJ. His judgment was that the purpose of APS was not simply to provide pensions, but also the machinery whereby pensions are provided. Although this should be considered at a fairly high level of generality, this “did not require the view to be so broad as to be essentially uninformative”.
Like Lewison LJ, Peter Jackson LJ considered the description of the Trustees’ role in the APS Trust Deed and Rules of managing and administering the Scheme was of clear significance. His view was that there was nothing to suggest that the power of amendment was intended to give the Trustees the right to remodel the balance of powers between themselves and the employer. They had effectively added the role of ‘paymaster’ to their responsibilities as managers and administrators.
Although there were safeguards to ensure proper trustee-like behaviour in relation to amendments, such as the taking of advice, Peter Jackson LJ considered the question was “not whether the brakes are working but whether the journey itself is permitted”. He also noted that although it was said that this deployment of the proper purposes rule “would be novel, even unprecedented” in his view it was “the actions of the trustees that are novel, not the application of the rule”. The true purpose of the APS amendment power was to make those changes required by the exigencies of commercial life, not to permit the Trustees to impose discretionary increases on BA.
The Court therefore set aside the amendment of the Trust Deed and Rules to include a discretionary increase power.
For more information, please speak to your usual Linklaters contact.