James Phillips explores what the win for the trustees in the British Airways trial means for other pension schemes.
After three and a half arduous years, British Airways (BA) pensioners will be celebrating a landmark High Court judgment allowing trustees to award a 0.2% discretionary increase.
The grant, made in 2013, was subject to a seven-week battle towards the end of last year, where BA argued Airways Pension Scheme (APS) trustees did not have the power to award additional benefits to pensioners, especially while the scheme was in deficit.
The trial saw the APS trustees defend the events leading to their decision to give members the top-up while BA attempted to cast doubt on the schemes' advisers and the mind-set of the trustees.
However, Justice Morgan, publishing his judgment on 19 May, rebuked almost all of BA's arguments, allowing the increase to go ahead, with the trustees losing on just one somewhat immaterial matter.
Although the judgment was led by the facts of the case, it does provide some guidelines for trustees' conduct when making such decisions.
Crucial to the trial was the reliance on documents, some dating back as long as 70 years ago, with the court being shown minutes of meeting after meeting.
The emphasis on this evidence is indicative of the importance of record-keeping and, particularly with the meeting minutes, the need to ensure notes are accurate and truly represent decisions made and/or actions taken.
CMS head of pensions Mark Grant says this evidence was crucial for the trustees' case, and so going forward trustees should pay huge attention to accuracy.
"There was a huge amount of evidence and, in the end, the judge concluded that he'd put far more weight to the minutes in terms of precisely what was decided rather than people's varied recollections," he argues. "Getting your minutes full and accurate, and producing them in a timely manner, is clearly important."
The court also scrutinised the language used by trustees in private e-mail correspondence with each other, interpreting the use of words and suggested tone.
Taylor Wessing partner Mark Smith adds that it is important trustees treat all written communication as potential evidence of their conduct.
"One of the dangers of email is that sometimes people don't treat it as formal correspondence but yet it is every bit as much evidence of what you were doing and saying at the time as a letter or a meeting note," he states. "That's why care has to be taken whenever you put something down in writing."
Specifically, the company sought to individually criticise member-nominated trustees (MNTs) for the process in which they came to their decision to award an increase. A number of MNTs took to the stand, along with employer-nominated trustees (ENTs).
However, it was the MNTs who BA accused of having a pre-determined mind-set, particularly as some of them had stood for election on a platform of restoring RPI to the scheme.
The judge in the trial also rejected this view, and noted how the end position for the scheme was different to the starting point of these trustees.
Arc Pensions Law partner Rosalind Connor says this shows that a compromise position demonstrates that trustees took into account other factors and that standing for a particular issue does not necessarily put you in a dangerous, and potentially unjustifiable, place.
"This sounds like you then improperly exercised your discretion, but what the court said here, firstly, is that it is still quite a challenge to make the leap that just because someone says they were going to do something, it doesn't then mean the trustees necessarily acted in that way," she argues.
"But, in this case, they compromised. Therefore, you can't say they were just doing the thing they were voted in on without thinking about it, because they clearly thought about it and ended up somewhere different."
Role of advisers
The trial spent a considerable amount of time exploring how the APS trustees and their advisers interacted with each other, the advice that was given, and the evolution of that advice through the years.
BA spent much of its time questioning the relationship between the trustees and their actuary, Michael Pardoe of Willis Towers Watson, and alleged the trustees had put an undue pressure on him to change his advice, with the actuary then bowing to that pressure.
However, the judge in this case rejected these allegations, and gave a somewhat impassioned defence of Pardoe, stating: "I wish to record my assessment of Mr Pardoe which I was able to form having heard him cross-examined for four days. I found Mr Pardoe to be an actuary of outstanding ability who behaved entirely appropriately at every stage during a long and difficult process of deliberation by the trustees in this case."
This assessment does demonstrate that, although trustees must listen to and consider the advice they are given, this advice doesn't necessarily need to be followed.
CMS' Grant says the case reaffirms the courts' view that it won't unpick trustee actions just because they've not followed their advisers' views.
"All professionals have to be prepared to have their advice scrutinised and criticised and here, fortunately, an adviser was shown to have acted in an entirely proper way," he states. "It's not uncommon for professionals to have their approach attacked, particularly where employers are seeking to challenge the actions of the trustees, because they have very limited avenues to do that.
"This case shows the court is going to be very slow to pick faults in the advisory process."
Connor adds trustees should be more comfortable in applying different weights to different factors.
"If you have a decision to make as a board of trustees, you have to take into account the right things and not things that are irrelevant," she states. "The trustees here just gave things different weights from the weights that were given by those advisers.
"You can disagree with your adviser and be fine, as long as you have taken into account what they have said and you haven't been taking into accounts things you shouldn't. This judgment should give trustees a lot of courage that they don't have to agree with their advisers."
The judgment will now go to appeal after a subsequent hearing saw the judge agree to give BA permission to ask the Court of Appeal to review the case once more.
The new case will focus on "construction" elements, such as whether the payment is "benevolent" and if it is contrary to the purposes of the scheme.
"In one sense, the move by BA to appeal this decision is very understandable," Connor says. "They are saddled with a scheme where the trustees alone can amend the rules, and the present judgment gives them very limited ability to challenge this, which could give rise to much larger increases to benefits.
"On the other hand, the decision at first instance was quite emphatic, and the judge did comment that the trial was ‘lengthy and expensive', obviously with some disapproval that all this time had been taken - BA risks more of the same commentary at the Court of Appeal."
The lengthy BA trial has no lasting or significant impact for the industry, in terms of creating new principles, but it has demonstrated the wider importance of trustee conduct.
While trustees should feel confident to challenge their advisers and, perhaps, go against their guidance, one over-riding theme of this case was to make sure the process is well-documented.
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