British Airways' Pensions Saga Is Flying Under The Radar
Pension lawyers are different from normal people. Whilst most of the world is talking about British Airways in terms of an IT problem that grounded airplanes over the bank holiday weekend, pension lawyers have been discussing the ongoing legal battle between British Airways and the trustees of the Airways Pension Scheme (APS) about how it the APS should be run.
The latest episode in this saga was the judgment handed down by Justice Paul Morgan in the case of British Airways PLC v Airways Pension Scheme Trustee Limited on May 19, 2017. It had been, as Justice Morgan noted, “a lengthy and expensive trial, preceded no doubt by lengthy and expensive preparation”. An appeal is already underway. The case was not the first dispute relating to the APS ‚Äî in 2001 the case of Stevens v Bell was heard by Justice David Lloyd Jones concerning the use of pension scheme surplus. That case was also appealed to the Court of Appeal the following year.
What makes litigation so attractive for the APS is the way it has been established. Originally a public sector scheme, powers were held largely between the relevant minister and the trustees. Ahead of privatization, the minister’s powers were removed. This included, crucially, the power to effectively veto amendments to the APS.
Most pension schemes include a power to amend its terms, usually requiring the agreement of the employer and the trustees, but sometimes a unilateral power in the hands of the employer. It is almost unheard of for the power to sit solely in the hands of the trustees ‚Äî the employer has to fund the scheme, which exists to provide benefits to its employees, so why should the power to change the scheme be in someone else’s hands?
In the light of this, the structure of the APS is possibly unique ‚Äî the trustees can change the terms, and the employer has to pay for this. The end result has been a pension scheme where the trustees have wide ranging powers, and the employer has become increasingly concerned about how those might be used.
The root cause of this particular challenge was George Osborne’s first budget as Chancellor of the Exchequer in June 2010, when he announced that increases to public sector pensions, and the statutory minimum increases to private sector pensions would be based on the consumer prices index (CPI) rather than the retail prices index (RPI) going forward. This did not universally move pension schemes from RPI to the lower increases of CPI ‚Äî it depended on the drafting of pension schemes ‚Äî and there have been a number of cases before the courts in which trustees have been trying to assess which index applies to them.
There was no such uncertainty for the APS. It was clear CPI applied, but this in itself upset several trustees, who felt that members would suffer from lower benefits, because of a political change that had been made. As a result, the trustees amended the APS rules so that they could, at their discretion, award higher increases than CPI, and on certain occasions then did so.
British Airways was clearly very unhappy about these changes. The company was (like pretty much everyone else with a defined benefit pension scheme) making deficit repair contributions and had agreed not to pay any dividends for the time being. In those circumstances, increasing benefits did not seem to be an appropriate decision to BA who definitely would not have agreed to this if they had had a voice.
As a result, BA issued proceedings. The claim was long subject to amendment, but in essence it argued that the trustees did not have the power to amend the APS as they had, and that in exercising their discretion they had done so improperly.
The first part of the argument is of great interest to trust lawyers, and possibly less to everyone else, focusing as it does on the scope of a power to amend and the purpose of the trust. As with many issues on the breadth of pension scheme powers, the court held that the powers were those written and that, if it was intended that the trustees could not use their amendment power to increase member benefits, then that restriction would have been written into the trust. Effectively, the trust was written to give these wide powers to the trustees, and British Airways were just going to have to live with it.
The second limb of BA’s case was much more fascinating. As Justice Morgan noted, it is a very high bar to argue that the exercise of a discretion was so improper as to be able to be set aside ‚Äî for this, the exercise must be a breach of the trustees’ duty. However, BA noted a very large number of grounds on which they argued the improper behavior of the trustees.
The facts of the case make addictive reading for the prurient, substantially more interesting than tourists being stuck in airports, and may explain pension lawyers’ fixation with the case. At certain moments, it feels like a plot from the Good Wife, Ally McBeal or LA Law (depending on your vintage) ‚Äî trustees resigning because other trustees do not agree to high enough increases, trustees repeatedly accusing their own advisers of bias for not agreeing with their analysis, campaigns, press conferences, blogs and elections of member nominated trustees standing on a platform of restoring RPI. You can imagine Alicia, Ally or Arnie with their head in their hands trying to manage the situation.
It is of course to the credit of those involved that the demands to amend the rules to reinstate RPI were eventually compromised into a discretion to increase, which had been relatively sparingly used to date. However, BA remained concerned about the precedent set and the risk of future increases over which they had no control.
The drama of the case meant that decisions were not easy to defend. Trustees must consider all relevant and no irrelevant factors, and it is hard to argue that they have done so in the light of the circumstances referenced above ‚Äî how can a trustee who has been elected on a platform of making a specific change show that he or she, once asked to make a decision, has at that later time considered all relevant factors. How can a trustee who is dismissive of advice as soon as he or she hears it, show that that advice and those factors have been taken into account?
In the end, the saving grace for the trustees was that they needed to prove nothing of the sort. The burden of proof was on BA to show that they had not considered those factors, and it was the very compromise that had been engineered that made that difficult to show. Even where the evidence pointed to trustees who had come to the role with their minds made up that they would amend the rules to move the increase back to RPI, the fact that they did not do that (apparently because they could not get the requisite two thirds majority to do so) and instead amended the rules to allow a discretion that they did not always use, showed that there had been some thinking after the event.
In addition, there was a good deal of evidence as to the advice that the trustees received. Careful and detailed minutes showed that the trustees had been advised by experts. The written evidence that they had that information in front of them means that, in the absence of overwhelming evidence in the other direction, it is hard not to conclude that they took the advice into account.
The court found absolutely in favor of the trustees. The amendment power had been properly used. The decisions of the trustees had involved compromise and thought, and had followed much advice as to the relevant factors to take into account (and the irrelevant ones to be ignored). In the absence of witness evidence from trustees admitting that they did not take the relevant factors into account (and no irrelevant ones) the court was bound to find that the decision had been properly made.
So, what does this case tell us? The immediate lessons are that it really pays to take advice, and to properly minute your process on reaching a decision. The longer term ones are that it is not an advisable design to leave the power to direct scheme benefits in the hands of someone who does not have to pay for it, and perhaps that the impact of changes in the inflation index should be carefully considered. Most importantly of all, what we should take away from the case is that wherever there is a high profile news story, somewhere in the background, there may be a more entertaining one about pensions.
Rosalind Connor, Partner
This article was published in Law360
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