Back to basics: what is the purpose of a pension scheme?

In an important decision on the scope of trustee powers under a pension scheme, the majority of the Court of Appeal has today ruled that the trustees of BA’s Airways Pension Scheme did not act for a proper purpose in amending the Scheme rules to allow discretionary pension increases to be paid to members, and in subsequently using that power to award an increase.

The flightpath to the judgment

The original backdrop to these proceedings was the Government’s decision in 2010 to change statutory minimum pension increases from RPI to the generally lower CPI basis. This had a knock-on effect of reducing pension increases payable under the Scheme, which provided for annual increases to be paid based on statutory orders.

The trustees decided to use their unilateral amendment power to introduce a rule allowing them to award discretionary annual increases, subject to taking appropriate professional advice. In 2013, they used this new power to award additional pension increases for that year of 50% of the difference between CPI and RPI. Last year, the High Court held that the trustees had been entitled to do so. It also found that a restriction in the Scheme’s objects clause, which prohibited “benevolent or compassionate payments”, was not infringed merely because the effect of the trustees’ award was ‘generous’ to members.

The basis of the appeal

The employer contended that by making the amendment, and exercising the new power, the trustees had stepped outside their legitimate role in relation to the Scheme (the Scheme’s Trust Deed described their functions as to “manage and administer the Scheme”), and assumed the role of ‘paymaster’ in the employer’s business. It argued that the combined exercise of the amendment and new increase powers had the effect of setting, rather than delivering, the remuneration which it paid its current and former employees in the form of pensions.

The Court of Appeal’s decision

Lewison LJ said that the amended Scheme rules would have purportedly given the trustees unlimited power to design the scheme and this did not correspond with their function under the Trust Deed. In seeking to give themselves responsibility for designing the Scheme’s benefit structure, as opposed merely to managing and administering it - in circumstances where the Scheme was in deficit and the employer would have to fund the additional benefits - the trustees had gone beyond the proper purpose of their power of amendment.

Peter Jackson LJ agreed, placing emphasis on considering the amendment power in the context of the purpose of the Scheme as a whole. The Scheme rules already provided for specific situations in which the employer could be required to pay more, but contained no provision for unilateral discretionary increases by the trustees. He agreed with Lewison LJ that the description of the trustees’ role in the Trust Deed was significant; and that there was a conceptual distinction between a scheme in surplus and a scheme in deficit. The purpose of the amendment power under the Scheme was to give the trustees “a wide power to make those changes which may be required by the exigencies of commercial life”. It could not be used for purposes contrary to the Trust Deed.

It is worth noting the dissenting judgment of Patten LJ, who described the purpose test set out by his colleagues above as one which would put trustees “in a position of complete uncertainty about the scope of their powers.” In his view, the changes made to the Scheme included a number of safeguards, and adequate protection for the employer was provided by the fact that the trustees had to exercise their powers under the Scheme in good faith and a proper trustee-like manner.

There was, however, unanimity from the Court on the other issue appealed by the employer. All three judges agreed with the High Court’s assessment that there had been no breach of the restriction preventing “benevolent or compassionate” payments.

Conclusion

The decision turned to an extent on the facts of the case, which the Court accepted were novel, and may be of most immediate relevance to the minority of pension schemes which contain a unilateral trustee amendment power.

However, any case at Court of Appeal level which discusses the fundamental purpose of a pension scheme and the role of its trustees is one that justifies careful consideration by both trustees and employers. The judgment also considers some of the key previous case law on the exercise of trustee amendment powers.

We understand that an appeal to the Supreme Court is being considered.

Please get in touch with your usual contact at CMS if you wish to discuss further.