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Pensions Update

A battle of the titans

The Court of Appeal has pushed back on the idea that the trustees of the British Airways (BA) scheme properly awarded a modest one-off discretionary increase to pensioners out of the Scheme’s assets at the time. 

The trustees carefully altered the scheme’s rules to give them the unilateral power to award a discretionary pension increase in limited circumstances
and. They then used that power at a time when the trustee was in dispute with BA over the scheme adopting (Consumer Price Index) CPI rather than Retail Price Index (RPI) for benefit increases. 

Having established that the amendment to allow for the introduction of the discrete increases had been done properly, the High Court was sympathetic to use of that discretionary power by the trustees to grant the one-off discretionary increase. 

This was on the basis that once a scheme contains a trustee discretion, it is long established law that it is for the trustees to decide whether or not to exercise that power as it is a discretionary power. 

The Court of Appeal however, effectively overruled that principle by looking at the question in a different way. They accepted BA’s submissions that it is for the employer, as the scheme’s paymaster, to set out the terms of a pension scheme and what benefits should be provided under it – it’s all part of the employer’s remuneration package which the employer funds. 

Trustees should exercise their powers, including their discretionary powers, within those constraints. They cannot go about unilaterally altering the scheme’s benefit structure and increasing overall employer liabilities because it’s unreasonable. Not surprisingly the case is likely to be heard by the Supreme Court. 

In the meantime, this shows what happens when employers and trustees are at loggerheads about how to run a scheme. It's better always to work together and agree approaches to such fundamental questions as to what a scheme’s benefit structure is to be. Given how expensive it is now to fund defined benefit (DB) schemes, the Court of Appeal was forced to reach a conclusion that helped to safeguard the scheme’s existing benefits rather than trying to overload an already vulnerable employer, with extra benefits to fund.

Published: July 2018

Pensions Law Update - July 2018

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