Pensions | RPI / CPI: British Airways wins on appeal

Key facts

The case relates to the Airways Pension Scheme.  Because the scheme was set up before British Airways was privatised, its rules provide for pensions in payment to be increased on a basis that usually applies in the public sector: in line with Pensions Increase (Review) Orders (PIROs).  Before 2011, PIRO increases were set with reference to RPI.  However, since 2011 they have been set with reference to CPI.  Unusually (and again for historical reasons), the trust deed gives the trustees sole power to amend the scheme: they do not need the agreement of British Airways.

In 2011, and in response to the change to CPI, the then trustees amended the scheme's pension increase rule to give themselves a new power to award additional discretionary increases.

In 2013, the trustees used the new power to award an additional discretionary pension increase of 0.2%.

The trustees were trying to bridge the gap between RPI and CPI increases.  0.2% represented 50% of the difference between RPI and CPI as at 30 September 2012.  However, the scheme and its successor (the New Airways Pension Scheme) were in deficit, with the result that British Airways would have to pay additional contributions to fund the increase.

British Airways applies to the High Court

The High Court found that the trustees had validly amended the scheme's pension increase rule to introduce the new power to award additional discretionary increases, and had validly used that new power to award the 0.2% increase.    

The judge also found that the trustees' decision to award the additional pension increase of 0.2% was a 'lawful exercise' of the new power.  In reaching their decision, the trustees had taken account of all relevant and no irrelevant factors and their decision was not irrational or perverse.  In particular, the trustees had considered (but were not bound by) the views of British Airways as employer.

British Airways appeals to the Court of Appeal

British Airways did not appeal the 'lawful exercise' finding.  However, it did appeal on the more fundamental questions of whether the trustees could validly make the amendment and / or exercise the new power.  The Court of Appeal considered whether, in making the amendment and or exercising the new power, the trustees had:

• acted 'ultra vires'  (outside of the scope of their powers);  and / or
• used their powers for an 'improper purpose'.

The Court of Appeal: the trustees did not act outside of the scope of their powers…

All three appeal judges decided that the trustees had acted within the scope of their powers when they amended the scheme rules to introduce the power to award an additional pension increase and then used that power to award a 0.2% increase.  The argument here turned on clause 2 of the trust deed (which gave the main purpose of the scheme as providing "pension benefits on retirement" and said that it was "not in any sense a benevolent scheme and no benevolent or compassionate payments can be made") and the scheme power of amendment (which said that no amendment could "have the effect of changing the purposes of the scheme").  The judges concluded that it was ok for the trustees to amend the scheme to introduce the new power to award an additional pension increase because the new power would, itself, be subject to clause 2.

This left the question of whether the trustees had acted for a purpose permitted by clause 2 when they used the new power to award a 0.2% increase, which itself depended on whether the 0.2% increase was a "benevolent or compassionate payment".  The judges agreed that it was not.  It seemed likely that the wording in clause 2 had been included to help the scheme to obtain Inland Revenue approval as a pension scheme (that is, a scheme which provided "only pension benefits to those entitled to them" as distinct from purely benevolent or compassionate payments) and the 0.2% increase was a pension payment.

…but did act for an improper purpose

However, the Court (two of the three judges, with one dissenting) found that, when the trustees amended the scheme rules to introduce the power to award additional pension increases and later used that power to award a 0.2% increase, they acted unlawfully by using the scheme's power of amendment for an 'improper purpose'.  Clause 4(a) of the trust deed provided for the trustees to "manage and administer the Scheme and [to] have power to perform all acts incidental or conducive to such management and administration".  Of this, Lord Justice Lewison said: "I would readily accept that managing and administering the scheme entitles the trustees to deal (if necessary by amendment) with assets which already form part of the scheme (i.e. where there is a surplus); or to require (if necessary by amendment) additional contributions to be made in order to secure the benefits [already] promised under the rules … But I do not agree that, in effect, the trustees can do whatever they like so long as their ultimate purpose is to provide pensions".

In this case, the fact that scheme was in deficit and that British Airways would need to make extra contributions to fund the additional increase awarded by the trustees meant that the trustees had strayed beyond their proper purpose of 'managing and administering the scheme' and into the remit of designing the scheme's benefit structure.  The scheme's benefit structure was a matter for the employer.

Osborne Clarke comment

The Court of Appeal's decision will clearly have an effect on the pensioner members of the scheme.  We understand that the (now) trustee has been given permission to appeal to the Supreme Court.  If it decides to appeal, the final position for members will depend upon the decision of the Supreme Court.  If it does not, then the increase awarded by the trustees in 2013 will not be paid.

For trustees and employers more generally, the facts of this case are unusual:  it is very rare for trustees to have the power to amend the scheme's rules or increase benefits without the agreement of the employer.  However, the High Court's reasoning around decision making and the Court of Appeal's reasoning around 'proper purpose' could be relevant in other cases.  Trustees and employers may wish to discuss the decision with their legal advisers.