Trustee Actions Under The Spotlight

British Airways Plc v Airways Pension Scheme Trustee Limited1

In this recent case, a majority of the English Court of Appeal held that an amendment made by the trustee of the Airways Pension Scheme (the "Scheme"), which introduced a trustee power to award discretionary post-retirement pension increases, went beyond the proper purpose of the amendment power and was invalid.

This has been seen as an important decision in the UK. While the case turns on its own facts and is of persuasive authority only in Ireland, it touches on points of general application relating to the exercise of an amendment power, the principle or proper purpose test and the role of trustees in relation to the scheme for which they act.

Background

The catalyst for the rule change made by the trustee was the decision at UK Government level that a switch should be made from the Retail Price Index (RPI) to the Consumer Price Index (CPI) as a measure for setting minimum pension increases for public sector schemes. Due to the design of the Scheme, this change affected the Scheme and its members. The members of the Scheme were vocal in expressing their concern that, as a result of this change, future pension increases would be reduced and pensions would not be adequately protected against inflation.

Unusually, under the terms of the Scheme, the trustee had a unilateral amendment power, (ie the approval of the employer was not required in order for amendments to be made). In 2011, the trustee exercised this power to introduce a rule change which gave them the power to grant discretionary increases on pensions in payment, over and above those granted automatically under the Scheme.

The trustee exercised this new power for the first time in February 2013 to award an additional pension increase of 0.2% over CPI. At the time, British Airways ("BA") the sponsoring employer of the Scheme, called the trustee decision "perverse and irrational", estimating that it would cost an additional £12 million in funding. Soon afterwards, BA initiated legal action against the trustee in the UK High Court. The two main questions at issue were firstly whether, in introducing the power to grant discretionary increases, the power of amendment was validly exercised and secondly whether, if the amendment was properly made, it was exercised validly in granting the increase. Connected with this second question was whether the granting of a discretionary increase conflicted with a prohibition in the...