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How do you solve a problem like Accrual?

Final Salary Schemes: accruals, amendments, and member “interests”

17 years ago, on Saturday 29 July 2006, UK television viewers settled down to watch a new reality tv show entitled “How do you solve a problem like Maria?”. This documented the search for an undiscovered musical theatre performer to play Maria von Trapp in a new West End production of The Sound of Music. The programme and the Musical were hugely successful, leading to a series of similar format shows, ending in 2010 with Over the Rainbow to cast Dorothy and her loyal dog, Toto.

2010 was also the year that the BBC embarked on its quest to manage spiralling pension costs and a multibillion-pound deficit, by closing its Final Salary Pension Scheme to new members and capping pensionable salary.

This move led to a Court of Appeal judgment in July 2017 (Bradbury v British Broadcasting Corporation) which the BBC won. The Court of Appeal upheld the BBC’s ability to decide whether (including how much of) an increase in pay would be pensionable. The Court also unanimously agreed that the BBC’s actions did not breach its implied duty of trust and confidence to its employees. Nor did the BBC breach the prohibition on forfeiture in Section 91 Pensions Act 1995 as Mr Bradbury was not being asked to surrender an entitlement to a pension or a right to a future pension when his pay increase ceased to be pensionable.

Fast forward to May 2022, when the BBC announced a review of future pension provision for employees and asked the High Court to decide the correct interpretation of the Scheme’s power of amendment. Having done so and received the High Court decision of Mr Justice Johnson dated 28 July 2023, the BBC lost and is once again asking itself how it solves the problem of spiralling pension costs.

The Scheme’s amendment power is contained in Rule 19. It is a very old power that has been largely unchanged since 1949. It allows the Trustee to amend the Scheme with employer consent. This power is, however, fettered in two ways: either the actuary certifies that the amendment doesn’t substantially prejudice the interests of the affected active members or there’s a meeting of members convened by the Trustee to approve the change.

The Court was asked to decide the meaning of “interests”. The BBC argued that an affected member’s “interests” were limited to past service benefits with a possible linkage of those benefits to final salary. The members argued that “interests” was much wider and also covered the ability to accrue future service benefits on the same terms as before an amendment.

The High Court rejected the BBC’s proposals.

Mr Justice Johnson ruled that there is no “fault line” between pensions contributions that employees have already earned and those that are yet to come. He took the view that “the question to ask is: are their positions going to be different under the proposed amendment or modification? If they are different then it seems to me inescapable that their interests are affected.”

So the correct construction of the Scheme’s amendment power supported the members’ view that the fetter in the amendment power protected future service benefits. It is difficult to see where the BBC will go from here. It has not yet appealed this decision, although it has until 15 September 2023 to do so. The BBC did not disclose exactly what pension changes it was proposing by way of a benefit re-design.

The Judgment was however helpful more generally in two respects:

The Court considered whether there would be an improper use of the Trustee’s powers if the Trustee exercised the amendment power to redesign the benefits to reduce the Scheme’s liabilities. The members argued that benefit design was for the employer using the agreed procedures it already has in place for this not the Trustee. The role of the Trustee is simply to administer the Scheme as it is.

Helpfully for the Trustee, and for other trustees, the Court decided that the Trustee could use its amendment powers in this way to make changes to future service benefits and the Trustee would not be exercising its powers for an improper purpose, irrespective of whether the BBC went through its agreed procedures for the changes.

The Judgment is also helpful for other trustees and employers in that there is nothing in the Judgment to prevent employers reaching extrinsic agreements with their employees about changes to their pension arrangements that can, in effect, by-pass the restrictions in a tricky amendment power. Such an extrinsic agreement can then be subsequently documented by the trustees and employer, so it forms part of a scheme’s benefit structure. For the BBC, it is clear that the affected members are unlikely to agree, by way of an extrinsic contract, to any adverse future pension changes.

Author note: On 15 September, the BBC was granted permission to appeal. This a recent development following our original Passle Post on 7 September 2023