British Airways Plc v Airways Pension Scheme Trustee Ltd

A trustee’s power of amendment in an occupational pension scheme must be exercised for the purpose for which it was conferred. That purpose is identified from the trust instrument, the effect of the power and the commercial context. A broadly worded power does not necessarily permit trustees to redesign the benefit structure, alter the constitutional allocation of functions, or impose new funding liabilities on the employer for benefits not previously promised. The majority held that a unilateral discretionary pension-increase power went beyond the proper purpose of the amendment power, particularly while the scheme was in substantial deficit. The clause excluding benevolent or compassionate payments did not prevent a general pension increase. Such an increase remained a pension benefit rather than a purely gratuitous payment.

British Airways Plc, the sponsoring employer of the Airways Pension Scheme, appealed from Morgan J’s decision in [2017] EWHC 1191 (Ch). The judge held that the trustees had validly amended Rule 15 in 2011 to create a discretionary power to increase pensions and had validly exercised that power in 2013 to award an additional 0.2% increase above CPI.

The appeal concerned whether the amendment and its exercise were ultra vires or made for an improper purpose. It also concerned whether the increase amounted to a benevolent or compassionate payment prohibited by clause 2 of the Trust Deed. The central question was whether trustees could unilaterally create and exercise a power to increase pension benefits, with resulting funding consequences for the employer.

1. Disposition. By a majority, Lewison LJ and Peter Jackson LJ allowed the appeal. Patten LJ would have dismissed it. All three judges agreed that the additional increase was not a benevolent or compassionate payment prohibited by clause 2.
2. Proper purpose. The proper-purpose rule applies where a fiduciary exercises a power within its apparent scope for a reason outside the purpose for which the power was conferred. The inquiry is distinct from construction of the power itself. The relevant purpose is identified from the instrument, the effect of the power and the business context. The court considered Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862, Equitable Life v Hyman [2002] 1 AC 408 and Eclairs Group Ltd v JKX Oil and Gas plc [2015] UKSC 71.
3. Application of the rule. The majority treated clause 4(a), clause 11, clause 24 and Rule 15 as defining the constitutional allocation between the employer and the trustees. The trustees’ function was to manage and administer the scheme, not to design its benefit structure. The 2011 amendment gave them an effectively unlimited power to create additional benefits, including benefits not limited to inflation, and to impose further funding liabilities on BA while the scheme was in substantial deficit. That altered the constitutional balance and exceeded the proper purpose of clause 18. The amendment and the purported 2013 exercise were therefore invalid.
4. Clause 2. The prohibition on benevolent or compassionate payments distinguished pension benefits from purely gratuitous payments. The increase remained a pension payment, although it exceeded the strict existing entitlement and was influenced by members’ expectations concerning RPI. It was not rendered benevolent or compassionate merely because it involved an element of generosity.

• Court of Appeal (Civil Division): In [2018] EWCA Civ 1533, the majority allowed the appeal. The amendment to Rule 15 and its purported exercise were invalid for improper purpose. The court unanimously rejected the clause 2 argument.
• High Court of Justice, Chancery Division: Morgan J held in [2017] EWHC 1191 (Ch) that both the amendment power and the discretionary pension-increase power had been validly exercised.