British Airways (BA) took advantage of "accidental" drafting of the rules surrounding a £250m contingent payment in a bid to block discretionary increases for the Airways Pension Scheme (APS), a trustee has told the High Court.
Employer-nominated trustee (ENT) Alan Buchanan said payment of the £250m - promised to APS in the 2009 triennial valuation negotiations - required both APS and New Airways Pension Scheme (NAPS) to formally agree with the company how it would be paid.
The comment was made at a landmark trial where BA is contesting APS' decision to award a 0.2% discretionary increase - above the Consumer Price Index (CPI) - in the 2013/14 financial year. This was after the scheme was moved from the Retail Price Index (RPI).
The decision was premised on APS receiving the £250m in full. Trustees previously told the court that BA had guaranteed the scheme would receive the money if it was in deficit.
Giving evidence on 29 November, Buchanan said BA used this agreement requirement to divide the schemes, in the hope that APS would have to settle for less than the full £250m and would then reconsider its discretionary increase decision.
"There was an amount of sub-optimal drafting," he said. "The draft accidentally meant that NAPS trustees were required to facilitate [the payment]. Even if all of the money had been going to APS, it would have required the joint trustees' agreement.
"BA and its advisers happened [to look] upon it as a useful argument to divide the schemes. Now that the issue has been raised and the genie is out of the bottle, at some point APS and NAPS would have to discuss working together."
He recalled APS trustees had eventually agreed to cede its access to the company's cash sweep in order to get NAPS trustees to agree to allow the full £250m in 2019.
Buchanan also recalled how the trustees were aware The Pensions Regulator (TPR) was not happy with its decision in June 2013, but accepted TPR had no power to revoke the 2012 recovery plan agreement.
"I think we knew the regulator was not going to look favourably upon discretionary increases," he said. "The regulator had looked at the two schemes as if they were one and didn't want APS to have more money. In their view, it would be more helpful if it went to NAPS.
"I don't think it had the power in a technical sense but the regulator has a lot of soft power to make life difficult and uncomfortable for trustees. Trustees wanted to keep both the company and the regulator informed. I hesitate to say happy, but informed.
"It was intended to enter into dialogue with both but it was not thought that that would take long. It was not expected that the trustees would come out smiling and happy but the trustees had taken a decision."
Buchanan concluded his evidence on 29 November and was immediately followed by Punter Southall co-founder Jonathan Punter, who began providing independent expert actuarial advice on behalf of BA.
In his evidence, Punter called into question advice given by the APS scheme actuary Michael Pardoe, a consulting actuary at Willis Towers Watson. The court had previously heard Pardoe had described awarding a discretionary increase between 0.07% and 0.4% in 2013 as "reasonable and prudent" but Punter took exception to the phrase.
"I disagree with Mr Pardoe's statement of it being prudent to grant increases," he said. "The reasons for that are that the [APS] is a large scheme. It has a substantial deficit on both a solvency basis and the subsidiary funding objective.
"The Affordable Margins Test in itself relies heavily on the recovery and the contributions - the £55m a year and also the payment of the £250m in 2019. What I say there is that I don't think it's prudent to allow for all those contributions up front because there is a chance or there are reasons why those payments may not be paid or may not be paid in full.
"I cannot see how the recommendation of it being prudent is appropriate."
Punter particularly questioned how Pardoe could describe the AMT - the APS' framework for discretionary increases - as prudent when it included non-actuarial factors, which he could not adequately advise on.
"It is a question of degree of what the actuary is actually advising on," Punter continued. "Though the actuary can obviously give advice, whether they can say in an actuarial sense an overall framework is prudent, that's where I disagree."
Punter is due to conclude his expert evidence on 30 November, after which Barnett Waddingham actuarial consultant Gordon Pollock will take the stand to give independent evidence on behalf of the trustees.
The trial is due to conclude on 9 December.
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