The High Court decision on the BBC cap on pensionable salary is a comforting result for employers, Natasha Browne hears
- The court rejected claims that the BBC breached its implied duty by capping pensionable pay
- Lawyers are cautiously optimistic about the lesson for employers
- Fears that ‘reasonable expectation' claims could rise appear unfounded
BBC Philharmonic Orchestra clarinettist John Bradbury first brought a complaint about a proposed cap on pensionable pay to the Pensions Ombudsman (PO) in 2011. The BBC wanted to limit pensionable pay on salary increases to 1% in order to plug its funding gap.
However, Bradbury argued that basic salary had its own meaning and it was not open to the broadcaster to lower it for pension purposes. His key point was that his interest in the scheme included the benefits resulting from future salary increases.
PO Tony King said he thought the first limb of the argument was not sustainable. On the second branch, he said: "I am afraid that I do not accept that as an act in relation to the scheme the BBC cannot take an approach to pay increases (inevitably with your agreement) that would have similar effect to a change in the scheme rules, even if that rule change would not be allowed under the rules."
And so the case moved on to the High Court, where Justice Warren ruled the scheme's definition of basic salary allowed it to determine which part of salary was pensionable, giving it the right to put the cap in place.
Bradbury took his complaint back to the PO, saying the BBC had breached its implied term of trust and confidence by seeking to impose the cap.
But King ruled: "In light of the scheme deficit, its potential future liability, its resources and its overall obligations and the steps taken by it to address the problems it faced in relation to the scheme, I find the BBC did not breach its implied duties."
The case went back to the High Court, where Warren sided with the PO's decision and threw out arguments that members of the BBC scheme had been "coerced" into accepting the changes.
And although he agreed the broadcaster had not sufficiently consulted with the trustees before making the change, Warren accepted the BBC had to implement a solution in time for it to be reflected in an upcoming valuation.
The case has been compared to that of IBM, where the employer was found to have misled its pension members over the closure its defined benefit (DB) schemes. Warren was the judge in both cases.
Norton Rose Fulbright senior knowledge lawyer Lesley Harrold (pictured) says the IBM case confirmed that the appropriate test for assessing whether there has been a breach of the imperial duty is whether the employer acted perversely or irrationally.
She says: "This is a high hurdle and requires the employer to have acted in a way that no reasonable employer would have acted in the same circumstances. The members' reasonable expectations were also relevant.
"This case was the first time an employer had been held to have been in breach of both its implied contractual and imperial duties, and therefore raised concerns not only for employers who hoped to change future scheme benefits but also those who had conducted such exercises in the past.
"In the recent BBC judgment, Justice Warren found that the employer's overall conduct did not give rise to a breach of its implied duties."
Another commonality of both cases was the member's "reasonable expectations" argument. In a 2012 ruling on IBM, the judge held that employees between the ages of 60 and 63 could retire on a full pension without the consent of the company.
But concerns that the reasonable expectations angle was an effective play for members were alleviated in a later PO decision on Thomson. The deputy PO rejected claims that discretionary inflation rises applied by the trustees had set a reasonable expectation for members after the GE scheme stopped the increases.
Harrold adds: "It seems that initial fears following the IBM decision of a flood of reasonable expectation claims may prove to be unfounded. Justice Warren in the BBC case commented that disappointment of Bradbury's ‘mere expectations' was an inadequate basis on which to assert a breach of the employer's implied duties."
Lawyers are cautiously upbeat about the wider implications of the judgment. Burges Salmon senior associate Leonardo Robinson says: "This case will be good news for employers who want to use an extrinsic contract to exclude future pay rises from the salary definition.
"It does not mean that they have a completely free hand to make changes, but it does show that the courts will be willing to show some sympathy to employers who act with proper motives.
"Even so, the degree of scrutiny on the conduct of the parties emphasises the need for employers and trustees to keep evidence on file to demonstrate that their own conduct was above criticism."
Ashfords head of employment Stephen Moore adds: "The decision confirms that when the court is considering changes made to pension schemes it will look at the wider context in which the changes were made and on the individual actions taken by the employer, rather than solely considering the final decision made and the cumulative impact on members.
"The fact that the ombudsman and court placed such weight on the financial context of the BBC's decision (that is, the significant deficit in the BBC pension scheme) indicates that employers in genuine financial difficulty will not be penalised for taking quick action to rectify this, provided that any action can be justified and considered 'proper' in the circumstances."
Linklaters associate Geoff Egerton sums up by saying: "The manner in which the benefit changes are communicated to members will be key. Employers should think very carefully before saying anything that could be interpreted as giving a commitment for the future."
Mark Evans has been appointed as a director at Independent Trustee Services (ITS) to lead trustee appointments in London.
The Pension Protection Fund (PPF) is consulting on changes to the actuarial assumptions it uses in valuations in a bid to better reflect the bulk annuity market, with schemes set to move into surplus on aggregate.
Private sector defined benefit (DB) schemes were 96.3% funded on a Pension Protection Fund (PPF) compensation basis at the end of July, according to the lifeboat fund's monthly index.
Conduent has completed the sale of its actuarial and human resource consulting business to private equity investor, H.I.G. Capital.