Members of the Airways Pension Scheme (APS) are set to receive boosts to their pensions after long-running litigation between the scheme's trustees and British Airways (BA) has ended.
A settlement has been reached which will see the scheme gradually return to awarding increases to pensions in line with the Retail Prices Index (RPI).
Nearly six years after litigation began, BA and the APS trustees have agreed to end a court battle over the trustees' decision to award a 0.2% discretionary increase late in 2013.
The litigation had seen the trustees' move allowed in the High Court, but the Court of Appeal had reversed the judgment. A further appeal to the Supreme Court was scheduled for July.
The case stems from a government decision to move Pension Increase Review Orders (PIROs) from RPI to the Consumer Prices Index (CPI) in 2011, a move which affected the APS as it was formerly a public-sector scheme.
The settlement, if approved by a court later this year, will see backdated payments to pensioners for the 2013 to 2019 period in the form of a lump sum of up to 4.6% of pensions in payment in 2013, and adjusted for members whose payments began after that date.
A further ‘catch-up' discretionary increase of up to 1.7% will be paid for pensions in payment on 31 March 2019, and another 0.7% will be added from 8 April 2019 to account for some of the gap between the latest PIRO and RPI.
Payments will be adjusted depending on when pensions or guaranteed minimum pensions came into effect, and when the member left active service. Deferred members will receive similar increases.
BA and the trustees have also agreed an intention to award an increase of 75% of the gap between CPI and RPI in 2020, and then to move fully to RPI for 2021.
This will depend on meeting the terms of an undisclosed affordability test, and unilateral approval by a simple majority of trustees. Professional advice to the trustees outlined a "good reason" to believe the test will be met in every year from 2021, with the scheme currently in surplus.
As part of the agreement, BA will no longer be required to pay deficit recovery contributions or cash-sweep contributions to the scheme, effective as of 31 December 2018, with these only restarting if funding falls below 100% on a technical provisions basis - when increases would also be suspended.
Speaking to PP, BA Pensions chief executive Fraser Smart said the key reason behind the settlement was to "gain some certainty", and that discussions had been going on for some time.
In particular, the settlement was aided by the scheme's movements to de-risk, through removing a requirement to invest in equities, but mostly the record-breaking £4.4bn buy-in with L&G last year.
"The real catalyst was to get that buy-in transaction done and that unlocked the discussions on both sides," Smart explained.
The settlement is subject to court approval and, after that, the scheme will conclude its overdue 2015 valuation, as well as the 2018 valuation, both expected within three months.
Now, the focus is on implementing the settlement and improving security of benefits for members, with the trustees expecting the scheme to be fully insured with all members eligible to draw their full benefits from 2028 - although this is not fixed.
"We'll see where the funding takes us," Smart added. "At that point, we expect to be in a very secure position. The more we can secure liabilities, the better. If that's a buy-in, then so be it, but that date is not set in stone."
The trustees will also provide a way to opt-out of the increases if this would cause members to breach enhanced or fixed tax protections, and will encourage members to let the scheme know if this may affect them.
"We want to make sure our members are looked after," Smart said. "We spent quite a bit of time thinking about those members that might have enhanced or fixed protection who might inadvertently trigger those limits.
"We are putting in place processes to encourage them to tell us if they have any protections that we're not already aware of so they're not inadvertently caught."
BA has set aside around £40m to pay for the discretionary increases if it is required. The settlement is expected to receive court approval during the summer.
The company's other scheme, the New Airways Pension Scheme, is also expected to now benefit from a £250m contingent payment set aside for APS if the scheme had been in deficit this year.
The Association of British Airways Pensioners said it was "pleased" to see the proposed settlement.
In a statement, the pensioner body said: "The proposals to return to RPI pension increases in 2021 rather than 2023 and that an improved discretionary increase protocol using a simple majority trustee director vote will be put in place, are very positive moves.
"The trustees' statement that the decisions of the APS trustees have been unanimous is welcome as is the news that the £250 million payment due to be paid to APS in January 2019 as part of a deficit recovery plan can now, subject to the High Court's blessing, be paid instead to help offset the deficit in the New Airways Pension Scheme."
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