A victory for trustees in a landmark High Court battle would result in employers being scared to agree to recovery plans, the lawyer for British Airways (BA) has argued.
Concluding BA's statements on 9 December, Michael Tennet QC said a ruling in favour of the Airways Pension Scheme (APS) trustees would have wide-ranging consequences for the pensions industry.
The comments were made on the final day of court proceedings where BA is contesting the APS trustees' decision to award a 0.2% increase - above the Consumer Price Index (CPI) - in the 2013/14 financial year. The move was made after the scheme was moved from the Retail Price Index (RPI).
In their affordable margins test (AMT) - part of a wider discretionary increase framework - APS trustees took account for £55m a year recovery plan contributions and a £250m contingent payment due in 2019 to justify increases.
Providing final remarks in the case, Tennet said the trustees had not provided an adequate explanation for their arguments.
"The whole pensions industry will be looking at this case in terms of what is and what is not acceptable," he said. "That is the case for the unilateral powers and bilateral powers.
"If it is going to be suggested that there is some benefits setting power for trustees, it is beholden on [the trustees] to explain exactly how it works and how the principles in this case cohere with the purpose of a pension scheme.
"Where is this going to leave trustees in terms of how they go about exercising their powers? Where are the limitations?"
Tennet added companies would be worried about how recovery plan contributions might be used by trustees.
"We find it extremely odd that trustees with these powers would view themselves as having a responsibility to spend the recovery plan," he continued. "That's not how the system works.
"No employer will dare having a recovery plan because, on this analysis, the trustees will be entitled to spend it. It may be their duty to spend. That simply cannot be the result."
The APS trustees also failed to properly consider the potential for the various payments to be blocked by BA, its sister scheme, the New Airways Pension Scheme (NAPS), or The Pensions Regulator (TPR), Tennet argued.
"The trustees didn't fully understand the ability of NAPS trustees to block the £250m and therefore the potential availability of that sum when assessing the affordability of the discretionary increase at that stage," he continued.
"It was the trustees' failure and breach of duty. The trustees had effectively decided to press ahead without listening to what BA had to say on the point. Because they rushed forward with the decision, they left themselves misinformed.
"The evidence is very clear that the trustees misunderstood that BA was not legally obliged to pay the recovery plan, including an allowance for discretionary increases. They misunderstood that the regulator could stop a recovery plan taking effect.
"It was far from reasonable to proceed in this way."
The case concluded on 9 December after seven weeks of debate. A judgement is not expected any earlier than February 2017.
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