Defined Benefit  

British Airways wins court appeal against pension increases

British Airways wins court appeal against pension increases

British Airways won't have to pay discretionary increases to members of one its defined benefit (DB) schemes, after the Court of Appeal ruled in its favour.

In a judgement issued today (5 July), the court accepted the airline's arguments that the Airways Pension Scheme (APS) trustees' exercise of the amendment power was invalid and ineffective to grant a 0.2 per cent pension discretionary increase in 2013.

The APS was closed to new entrants in 1984, and currently has more than 25,000 members.

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In 2010, chancellor George Osborne announced that public sector pensions would in future be increased by reference to the consumer price index (CPI) instead of the retail price index (RPI). 

The rules for the BA scheme provided for pension increases to track increases to public sector pensions, so the chancellor's announcement affected increases granted to APS members.

RPI generally runs about 1 percentage point higher than CPI, and RPI is currently 3.3 per cent compared CPI of 2.3 per cent.

In 2011, the trustee of the scheme decided to introduce a power to award discretionary increases.

It exercised that power by granting a 0.2 per cent increase from 1 December 2013. This was half the difference between RPI and CPI.

The airline took this case to the High Court, which ruled in 2017 that the trustee at the time and their adviser had acted appropriately and that both decisions were valid.

BA appealed part of the judgement, and was also granted an injunction on the pension increases. The current trustee of the scheme hasn’t made a decision on increases since 2014 due to the ongoing court case.

Stephen Scholefield, partner at law firm Pinsent Masons, told FTAdviser this was a very interesting judgement for those advising trustees.

He said: "It makes it clear that reading the words on the page of the trust deed is not enough.

"Trustees and their advisers need to look beyond that and ascertain what the purpose of a power really is - something which is often easier said than done.

"The judgement is also likely to result in trustees who have a discretion to change indexation away from RPI coming under increasing pressure to do so, and indeed to be more sympathetic to employers’ desires to manage schemes’ liabilities."

There has been a long-term debate in the DB pension sector about switching inflation measures, with the High Court recently denying BT’s request for this change.

Final salary members' benefits would decrease by £80bn to £90bn if their pension schemes were allowed to switch from the outdated RPI, according to data from the Department for Work & Pensions (DWP).

Last month, the Lords Economic Affairs Committee launched an inquiry into whether RPI should be scrapped as a measure of inflation.

Rosalind Connor, partner at ARC Pensions Law, said the Court of Appeal “decided that there was a concept of a ‘proper purpose’ of the scheme which governed the way that employers and trustees behave”.