What is the purpose of a pension scheme?

Defined benefit (DB) pension schemes often have a power of amendment vested in the trustees, the employer, or both, allowing them to revise the rules and amend future benefit entitlements.

But is there a purpose to this power, or a limit on the reasons for which it should be used?

This is a question at the core of the upcoming Court of Appeal hearing over whether the Airways Pension Scheme's (APS) granting of a 0.2% discretionary increase to members' benefits in the 2013/14 year was permissible.

British Airways' (BA's) argument states the power of amendment used to grant the trustees the power to award discretionary increases was used for an improper purpose: that is, it should be used to deliver the benefit structure set by the employer, but in this case, it was allegedly used to rewrite that and dictate the employer's remuneration strategies.

Put simply, BA argues that if the purpose of the power is not to apply an employers' remuneration strategy, but for trustees to exercise their own judgment on what remuneration should be, trustees assume the role of negotiator for benefit changes.

Current purpose

Under current trust laws, pension trustees are only entitled to use a power for the purpose for which the trust was set up. However, this purpose may be altered by amendment, as long as those amendments do not have an ulterior purpose to the overall purpose of the scheme. At least, that is the position arrived at in 1986 in an infamous case involving Courage Group.

However, despite the reliance on purpose in this case and various hearings over the last 30 years, it appears no-one has quite got to the bottom of what the purpose of a pension scheme is. Is there a general one-size-fits-all purpose, or does it depend on each individual scheme?

Arc Pensions Law partner Rosalind Connor says previous cases have not given this principle enough scrutiny.

"There is a fundamental issue about this argument that if you are exercising a power you have under a pension scheme, you have to do it for the purpose for which it was established," she says. "Lots of cases talk about that but very few - or none, I would say - give us a really accurate or a really detailed analysis that, in a pensions context, what is that purpose?

"A lot of schemes are much exercised about what's written in their trust deed about the purpose for which the scheme was set up, but there are surely some fundamental questions that are there."

Implications

Wedlake Bell partner Clive Weber says: "What the court ultimately says about how trustees should act vis-à-vis employers may have wider implications."

But what are these wider implications?

Weber says that if the Court of Appeal does not believe the power was exercised contrary to the scheme's purposes, this will give trustees greater discretion to amend other parts of the scheme rules, which could reasonably be interpreted as changing the employer's remuneration strategy.

This could include elements such as the accrual rate, normal retirement date and indexation, without the employer's consent, at least where the power is unilateral.

"This would be the logical implication if the court supports the trustees' here," Weber continues, before adding that trustees would still have to meet other duties in doing so.

"However, every exercise of an amendment power by trustees remains subject to the trustees' general fiduciary duty. So, if an amendment by trustees is so extreme such that no body of trustees could properly have reached the same conclusion, this will not be a valid exercise of the trustees' fiduciary power."

Indeed, this was at the crux of the High Court case; the judgment relied on trustees having received and listened to appropriate advice or, in legalistic terms, taking into account relevant considerations while ignoring irrelevant considerations.

Bilateral powers

However, while the unilateral trustee power in this case makes this case somewhat unusual and it appears trustees can amend the scheme however they like without any employer consent, the Court of Appeal ruling would also have implications for schemes with bilateral powers.

The argument at the heart of this debate is that trustee actions still need to be within the purposes of the scheme and, therefore, the conclusion will inform all DB schemes, even where the power is bilateral.

Regardless of the outcome, Connor argues the ruling will show trustees what they need to look for.

"Even if we've got something that is specific to the BA scheme, we'll be able to see how the court got to that place," she says. "If the court says, 'in these circumstances, the purpose must mean x because the scheme was established at this time and these powers were talking about this thing at that time', we will know what we need to go and look for in our scheme, and that's what's really helpful here."

The case, which hits the Court of Appeal on 1 May and will last for three days, is ramping up to answer an existential question for DB schemes. Whatever the judgment, trustees and employers will find some clarity.

• Tweet  
• Facebook  
• LinkedIn  
• Send to  

• Topics
• Law and Regulation
• Defined Benefit
• Court of Appeal
• British Airways
• Airways Pension Scheme
• APS
• ARC Pensions Law
• Rosalind Connor
• Wedlake Bell
• Clive Weber
• TT