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British Airways plc v Airways Pension Scheme Trustee Ltd

Thursday 5 July 2018

The Court of Appeal has this week given judgment in British Airways plc v Airways Pension Scheme Trustee Ltd, allowing BA’s appeal from the judgment of Mr Justice Morgan. The majority of the Court of Appeal (Lewison and Peter Jackson LJJ) has made clear that the role of pension scheme trustees is simply to administer the employer’s scheme, and not to take on the role of “paymaster”, deciding what benefits pensioners should receive.

Facts

The Airways Pension Scheme (APS) was established in 1948, and closed to new members in 1984, but remained open for accrual by existing members. It was (until the recent appointment of a corporate trustee) managed by 12 individual trustees, 6 appointed by BA and 6 elected by members and pensioners. In recent years the scheme has had a substantial deficit – at 31 March 2012 this amounted to £680 million on the technical provisions basis, and £1.5 billion on the solvency basis – and BA had been paying £55 million each year in deficit repair contributions.

Under the rules of APS, pensions are increased each year automatically in accordance with the Pensions Increase (Review) Orders made by the Treasury to set increases for public sector pensions. These had for some years always been set increases in line with the Retail Prices Index (RPI). In 2010 the Chancellor of the Exchequer announced that the Orders would thereafter be set in line with the Consumer Price Index (CPI), which is usually (though not invariably) lower than RPI.

APS pensioners were vocal in their concern that CPI pension increases would not provide adequate inflation-proofing. In response, the Trustees voted in 2011 to use their power of amendment – which, unusually, did not require the consent of BA as an employer – to amend the rules to confer on themselves a power to grant discretionary pension increases. In 2013 they made use of that power for the first time, voting to award a discretionary increase for 2013 of 0.2%, on the basis that this was half the gap between CPI and RPI for that year. The Trustees’ aspiration was ultimately to return to paying full RPI increases.

BA challenged these decisions, and although unsuccessful before Mr Justice Morgan [2017] EWHC 1191 (Ch), was given permission to appeal on the grounds that (i) the 2013 discretionary increase breached the prohibition in clause 2 of the Scheme trust deed on making “benevolent or compassionate” payments, and (ii) that the Trustees, by arrogating to themselves the role of setting the amount of the pensions to be paid, had acted for an improper purpose.

Benevolent and compassionate

The Court of Appeal did not consider that the 2013 discretionary increase payment was “benevolent or compassionate”. Although Patten LJ considered that the Trustees’ motivation for awarding the discretion increase “may include an element of generosity”, this did not make it “benevolent” so as to fall foul of clause 2. Instead, Patten LJ considered that the relevant distinction was between “the provision of pension benefits on retirement in accordance with the provisions of the scheme and purely gratuitous payments of a benevolent or compassionate kind which are not pension payments” [82]. Lewison and Peter Jackson LJJ agreed with Patten LJ on this point.

Proper purposes

However, the majority of the Court of Appeal (Lewison and Peter Jackson LJJ, Patten LJ dissenting) accepted BA’s argument that although the Trustees’ exercise of the amendment power was intra vires as a matter of construction [84], [113] it was nevertheless invalid as the purported exercise of a power for an improper purpose.

Both Lewison and Peter Jackson LJJ focused on the terms of the APS trust deed, and in particular clause 4 which provides that the Trustees “shall manage and administer the Scheme and shall have power to perform all acts incidental or conducive to such management and administration…” [101]. Both judges in the majority thought that this indicated that (per Lewison LJ) “the function of the trustees is to manage and administer the scheme; not to design it” [102].  They also drew attention to other provisions of the deed and rules under which the Trustees did not have the unilateral power to alter benefits.

Although the Trustees had a unilateral power of amendment, the majority concluded that (per Peter Jackson LJ) “there is 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” [121]. Indeed, in Peter Jackson LJ’s view, the Trustees’ purported amendment of the rules to confer the discretionary increase power “resulted in a scheme with a different overall purpose, in which the trustees effectively added the role of paymaster to their existing responsibilities as managers and administrators”.

The Court of Appeal had been referred to earlier cases in which trustees of pension schemes had used a power of amendment to augment benefits or to increase the contributions payable by employers. But Lewison LJ accepted BA’s argument that those cases were either concerned with augmentation from surplus (e.g. Patten J’s decision in Law Debenture Trust Corp Plc v Lonrho Africa Trade & Finance Ltd [2003] Pens LR 13) where the “trustees are doing no more than managing assets that have already been entrusted to them.” [92], or they entailed increasing employer contributions in order to fund the payment of benefits already promised – not to increase those benefits (e.g. PNPF Trust Co Ltd v Taylor [2010] Pens LR 261; Stena Line Ltd v Merchant Navy Ratings Pension Fund Trustee Ltd [2010] Pens LR 411) [88]-[89].

The majority, therefore, considered that the Trustees’ purported exercise of the amendment power in 2011 to introduce the discretionary increase power was invalid and ineffective as an exercise for an improper purpose. With no valid discretionary increase power, there could be no valid discretionary increase in 2013.

Michael Tennet QC, Sebastian Allen and Michael Ashdown acted for British Airways plc. Jonathan Hilliard QC acted for the Airways Pension Scheme Trustee Ltd.