British Airways court case – trustees win

In a 164 page judgment Mr Justice Morgan sitting in the High Court has ruled in favour of the trustees of the Airways Pension Scheme (APS) in a high profile dispute between the trustees and the employer, British Airways Plc (BA) regarding pension increases.

APS had long provided uncapped increases to pensions in payment based on the Retail Prices Index (RPI).  The mechanism for this, under its rules, was that APS provided increases in line with the statutory Pension Increase Review Orders (PIROs) which set the indexation rate for public sector pensions.  Following the Emergency Budget in 2010 PIROs prescribed the Consumer Prices Index (CPI) instead of the RPI which meant that the APS indexation rate automatically switched to CPI from RPI.  The APS 2011 pension increases were duly based on CPI.

Because using CPI is expected to result in lower pension increases the financial effect of this was highly significant.  An actuarial report in 2010 stated that this move would result in a reduction in the cost of providing benefits on a technical provisions basis of some £360m so that the funding level would rise from 92% to 97%. 

This was highly contentious for the APS trustees many of whom wanted to amend the rules so that increases would revert to RPI.  But the actuarial and legal advice received was that this could not be recommended, given the funding and employer covenant issues in play and this amendment never happened.  Some trustees resigned over this. 

Instead the trustees exercised the scheme amendment power (which is exercisable by the trustees unilaterally) to introduce a new power for the trustees (acting by a two-thirds majority) to award discretionary increases in addition to those that were given automatically as a result of the PIROs.

This power was first exercised  in 2013 when, in a series of trustee meetings, a discretionary increase of 0.2% was awarded.  This amount was selected to be equivalent to 50% of the difference between CPI and RPI increases.  Detailed legal advice (including advice from leading counsel) and actuarial advice was taken when making these decisions.

BA was said to be in “violent opposition” to all this and did indeed quickly issue legal proceedings challenging these actions by the trustees.  In particular BA claimed that:

• The exercise of the amendment power to introduce the discretionary increase power was invalid; and
• So was the award, made under this power, of the discretionary increase in 2013

The trust law is that the courts will not usually interfere with the exercise of trustee powers so long as the trustees do not exceed the scope of their powers, take all relevant factors into account, disregard irrelevant factors and do not act irrationally or perversely.

BA argued that the trustees had offended on all these points (and more, including “pre-determining” the matter).

Following a hearing last autumn lasting more than a week where trustees and advisers were cross-examined at length about the process which led to the discretionary award the judge decided against BA on all these grounds (apart from one relatively minor one about the effective date of the increase).

Comment

This case has generated a lot of publicity but at the end of the day the law concerned is rather trite.  If you are a trustee making a decision, go through a proper process and take all relevant factors into account while disregarding irrelevant ones.  Take specialist advice and ensure that you are acting within the scope of your powers.  If you do all this your decisions will be very difficult to legally challenge.

FCA implements new annuity comparison rules

The FCA has published its final rules for annuity providers under which they must provide an “information prompt” to their customers, setting out how much they could gain from shopping around and switching provider, if appropriate, before they buy an annuity.

The policy statement also sets out the FCA’s feedback on its November consultation (see Pensions Bulletin 2016/48).

In addition to the proposals consulted on, the final rules now require the information prompt template to include a clear and prominent statement about enhanced annuities which reflects the key questions that – if answered in the affirmative – are likely to result in the consumer being eligible to purchase an enhanced annuity.

Other changes introduced as a result of the consultation include: now requiring that firms engaging with consumers over the telephone will only have to provide the information prompt in relation to the specific guaranteed quote that a consumer has indicated they would like to proceed with; and to mandate that where an intermediary firm is used by a consumer, that firm is able to rely on the information prompt given by the annuity provider, if it is satisfied that it is appropriate to do so.

Significantly, the date by which affected firms are required to comply with these new rules has been moved back by six months to 1 March 2018.

Comment

The extension of the rules surrounding the new information prompt to ensure that individuals consider whether their circumstances or policy terms give rise to the potential for enhanced annuities is very welcome, as no doubt are the extension of the deadline for compliance and the easements for intermediary firms and telephone salesforces who have to implement it.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.