The Airways Pension Scheme (APS) trustees' decision to grant a discretionary increase would have very little effect on the security of members' benefits, an expert actuary has argued in the High Court.
Giving independent evidence on behalf of British Airways (BA), Punter Southall co-founder Jonathan Punter said the £12m cost of the proposed increase would have "minimal" effect on the security of member benefits in an insolvency situation.
The comments were made on the final day of evidence in a trial where BA is contesting the APS' trustees award of a 0.2% discretionary increase - above the Consumer Price Index (CPI) - in the 2013/2014 financial year. The decision was made after the scheme was converted from the Retail Price Index (RPI).
Questioned on 30 November, Punter said the amount of the increase was relatively small compared to the scheme as a whole, which had around £6bn of liabilities.
"An increase does reduce the scheme's assets," he said. "The amounts are relatively small. In relation to the liabilities of the scheme, they are small.
"If BA went insolvent the day after the award was granted, it would have little impact because discretionary increases in the recent past are not necessarily accounted for.
"It will be minimal. The increase itself would have little effect."
Punter also suggested that the broad principles used in the Affordable Margins Test (AMT) - a framework used to calculate the potential level of discretionary increases - were irreconcilable. The AMT required trustees to consider factors such as benefit security, de-risking and consistency of discretionary increase payments.
"It's the balance of the discretionary framework with the results of the AMT," he continued. "I don't think it's possible to balance the issues of effectively the security - which was principle number one - and the other principles that came through.
"They are competing principles. The security principle competes against the use of funds for discretionary increases."
Punter was immediately followed by the trustee board's independent actuarial expert, Barnett Waddingham actuarial consultant Gordon Pollock, who argued the scheme used an overly prudent discount rate following the 2012 valuation.
He referred to a buy-in with Rothesay Life in 2012, which insured 20% of the APS liabilities. The 2012 valuation agreed a discount rate of gilts plus 0.4%, but with the buy-in taken into account, Pollock said it was closer to gilts plus 0.32%.
"This is at the cautious end of a discount rate for a scheme of this size and maturity," Pollock said. "This is more prudent, notwithstanding the specific characteristics of the scheme."
Pollock also suggested the APS trustees' cautious approach to the framework and discretionary increases in 2011 was understandable given the financial industry was still reeling from the 2008 financial crisis. He argued trustees may not have wanted to assume RPI payments ahead of the 2012 valuation - the first valuation following the scheme's conversion to CPI.
"I think back in 2009, 2010 and 2011, we were still very mindful of the financial crisis and, in some senses, more cautious," he said. "While the fund basis allowed for RPI increases, because it was RPI in 2009, I think it was not altogether certain what the funding allowance would be in 2012."
He added actuarial advice may have differed between 2011 and 2013 because of the financial crisis, and concerns over the short-term potential for the employer covenant.
"The circumstances are quite different [in 2013]," he continued. "I would not compare this in that sense. If I'd been an actuary [for the scheme], I would have been slightly nervous of taking full account for [recovery plan contributions] because that assumption could change."
However, Pollock dismissed suggestions that the advice given by scheme actuary Michael Pardoe - a consulting actuary at Willis Towers Watson - was not prudent.
"The AMT is a more complex and full methodology," he said. "It doesn't just look at the current funding position; it looks at the position using a range of assumptions, more prudent than the technical provisions."
"There are non-actuarial aspects like BA's covenant. The AMT… produced an increase that was supportable in the long term but also allowed for a calculator of de-risking. It was calculated on a prudent basis.
Pollock repeated Pardoe's phrase that a discretionary increase would be "reasonable and prudent", arguing the actuarial elements of the AMT framework could also be described in the same way.
The High Court has now concluded its witness cross-examinations, and has adjourned to prepare for closing statements, which are due to begin on 5 December. The case is scheduled to conclude on 9 December with a judgement expected in 2017.
The government is looking for a new administrator to service the Royal Mail Statutory Pension (RMSPS) Scheme, the UK's sixth largest public sector pension fund.
A government proposal to limit the right to transfer pension funds amid increasing scam activity has been welcomed by the industry.
Airways Pension Scheme (APS) trustees did not have the authority to make an amendment to the scheme rules, a lawyer for British Airways (BA) has told the High Court.
The government has launched a consultation on banning pensions cold calling and limiting the right to transfer after a rise in scams since the pension freedoms.