The Court of Appeal’s recent ruling in BBC v Christina Burns has the ability to prevent pension schemes that are still open to accrual from changing members’ future service benefits.  It could also cast doubt on the validity of other schemes’ historical rule amendments (including, in particular, closures to accrual – perhaps undertaken many years ago).  It’s a further illustration of the drafting lottery that affects pension schemes; and how old-fashioned or woolly language in pension deeds can disrupt employers who want to move their workforce onto a more modern-day remuneration strategy.

The BBC is one of a diminishing group of employers that still has a defined benefit pension scheme which is open to future accrual. It was closed to new members a while ago – new hires, by contrast, join a significantly less-expensive defined contribution arrangement.  The BBC wanted to reduce the level of future service benefits earned by the DB scheme’s members as part of an overall cost-cutting exercise.  The scheme’s amendment power contained a prohibition, however, on alterations which substantially prejudice the “interests” of affected members.  Unusually, too, it didn’t put any kind of time limit on that restriction, by (for example) linking it in some way to the past.

The meaning of the word “interests” wasn’t clear, and so the BBC asked the court.  Did it, in particular, mean past service rights only; or did it include the future pensions that members might earn, if they remained employed with the BBC?  Last year the High Court said that it was the latter – the scheme’s rules prevent changes to benefits that members haven’t even earned yet.  The Court of Appeal has now confirmed the High Court’s ruling.  Meaning, in essence, that a single word in an 80 year-old trust deed was enough to prevent the BBC doing what many employers have already done, and closing its DB scheme to future accrual by way of an amendment to the scheme rules.

So what does this mean, both for the BBC itself and more generally?

Under the particular rules of its scheme, the BBC has various potential ways forward – future service changes can still be implemented if members consent, or if suitable alternative benefits are provided in their place.  More widely, though, other employers and their schemes could also be impacted.  In theory at least, the Court of Appeal’s ruling applies to the BBC scheme only.  It’s eminently possible, however, that other schemes have a similar restriction (or ‘fetter’) in their amendment power – in which case the ruling would flow through to them.  And those schemes might wish to make changes to future benefits, or may even have done so – perhaps even closing to accrual entirely – already.

Every pension scheme is different.  Particularly amongst older schemes which pre-date the proliferation of computer technology, there can be subtle differences between the precise wording of any two schemes’ rules.  Trustees of schemes which have a similar fetter to the BBC’s in their amendment power, and which have already made changes to member benefits, should therefore be thinking about whether there is any risk of those historical changes not having been validly made.

Similarly, employers with open schemes who are contemplating future service changes should always consider the precise terms of the scheme’s amendment power very carefully.  Older schemes in particular may contain language that doesn’t really have a clear modern-day meaning.  Fetters such as “accrued” and “secured” are already known from previous court cases to be problematic.  Restrictions on prejudicing members’ “interests” are now another red flag that changes to a scheme’s future service benefits may not be lawfully possible.

Kris’ article was originally published in Pensions Expert, here. A similar article was also published in Actuarial Post, here.