British Airways loses High Court battle over discretionary increase

James Phillips
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British Airways loses High Court battle over discretionary increase

British Airways (BA) has lost a landmark trial to block its pension trustees' decision to award a discretionary increase in 2013.

In a seven week battle towards the end of last year, the trustees of the Airways Pension Scheme (APS) were taken to the High Court to defend a 0.2% discretionary increase - above the rate of the Consumer Prices Index (CPI) - to members in the 2013/14 year.

The decision had been made after the scheme was moved from the Retail Prices Index (RPI) in 2011 - as it was linked to the Treasury's Pension Increase Review Orders - and a recovery plan had also been agreed based on RPI in 2010, and then again in 2013.

BA alleged the APS trustees did not have the power to award an increase, especially while the scheme was in deficit, had ignored advice and put pressure on advisers to change recommendations, and given "gratuitous" and "unearned" benefits.

However, in his 164-page judgment, published today (19 May), Justice Morgan said the APS trustees had not made a "benevolent or compassionate payment", had not committed an abuse of power, and had regard "to all relevant considerations and to no irrelevant considerations".

The judge ruled on both the trustees' decision to amend the scheme rules - using clause 18 which allowed rules to be amended "in any way" unilaterally - to grant themselves a unilateral power to award discretionary increases in 2011, and the eventual decision to give out a 0.2% increase in 2013.

The judge agreed the deficit and BA's positions were factors that needed to be taken into account during a decision-making process, but said trustees had adequately considered these.

He wrote: "I accept that the existence of a deficit and the wishes of BA are relevant, even highly relevant considerations, for the trustees to take into account but the existence of a deficit and the absence of BA's consent do not mean that the exercise of the power must be for an impermissible purpose".

Justice Morgan disagreed with BA that both actions had been conducted improperly or were not allowed, thereby allowing the 0.2% increase to go ahead.

British Airways Pensions welcomed the decision and in a statement to members said: "We are naturally very pleased with the clarity brought by the court's decision. We welcome the confirmation from the court that we and our professional advisers acted appropriately in relation to those decisions."

In a statement to PP, BA said it was "considering its position" on whether to appeal, and added: "Given the risks that remain within the scheme we believe the deficit contributions should be applied to improve funding and reduce risks, not improve benefits. There are 26,000 members in this pension scheme, 98 per cent of whom are already retired and on far more generous pensions than succeeding generations of British Airways employees.

"Last year British Airways made payments of more than £500m toward pension fund deficits."

The case has demonstrated the need for trustees to properly record how any decisions have been made. Pinsent Masons partner Stephen Scholefield said: "The lesson for trustees is to be honest, take advice, be clear as to why you make a decision and record it properly. If you do that then most challenges are doomed to failure.

"The case shows just how much scrutiny decision-making can come under, so trustees - and those advising them - need to ensure they have robust decision making processes, which of course fits well with The Pensions Regulator's vision for 21st century trustees.

"While the trustees stood up to scrutiny here, it is nevertheless a wakeup call for the industry."

Arc Pensions Law partner Rosalind Connor agreed, stating as long as trustees document well and consider only the relevant factors, the court will look more favourably on them.

"The court has relied quite heavily on the written evidence," she said. "That's a lesson to all of us: write it down, write it down clearly, and make sure the minutes actually reflect what you do. Turning up in court and saying ‘I know the minutes say that but actually it's something a bit different' is difficult.

"They've also said that 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 not relevant. Just because you don't reach the same decision that someone else might reach, doesn't mean you've made an incorrect or attackable decision.

"It's quite a high bar for a court to overturn a decision."

How the case unfolded

June 2010: Government announces plan to move public sector schemes from RPI to CPI, affecting APS due to its link to pension review orders. APS valuation is signed off using RPI

March 2011: Trustees amend the scheme rules to allow them to grant discretionary increases

April 2011: APS is moved to CPI

July 2011: Trustees hold annual general meeting where members voice rage at indexation change

October 2011: Scheme actuary presents a test for discretionary increases, which will likely be passed in 2012

December 2011: A deterioration in the funding position means the test will now fail

March 2012: Trustees vote against awarding a discretionary increase

August 2012: Trustees are presented with a new methodology for granting increases. This test is later adopted by trustees

February 2013: Trustees unanimously agree to award an increase, but set no amount

June 2013: Trustees agree a 0.2% increase for implementation in September. The 2012 valuation is agreed, including RPI assumptions

July 2013: BA and TPR voice concerns over increase, and BA threatens litigation

September 2013: Trustees agree to re-run vote

November 2013: Trustees run four votes on increase, eventually settling on 0.2% again

October to December 2016: BA and APS trustees battle in the High Court

May 2017: Court judges in favour of APS trustees

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