The interesting issue of pensions interests

Last week saw judgment given by the High Court in a case involving the BBC’s pension scheme. The case was brought by the BBC (as scheme employer) to establish what amendments to benefits could lawfully be made under the scheme rules. The BBC was concerned about how much securing pension provision for the minority of employees in its DB scheme was costing relative to the amount spent on pensions for the majority of its employees who were in less generous pension schemes. Evidence given in the case was to the effect that BBC employees in the DB scheme accounted for less than 40% of the workforce but received more than 80% of the BBC’s total pensions spend. The BBC had not actually formulated any formal proposals for change but it wanted to get clarity on whether the power of amendment would actually allow any change to be made to the future service benefits of existing members.

At issue was wording in the scheme rules which prohibited amendments which would affect “the interests” of active members unless certain criteria (which can effectively be thought of as safeguards) were met. The BBC wanted to confirm what was actually encompassed by “interests” and so for what sorts of amendments would it need to satisfy those safeguards.

Unfortunately for the BBC as employer, the judgment has severely restricted their ability to make the sorts of changes that they might have been hoping to be able to make.

Counsel for the BBC argued that “interests” meant rights earned up to the date of any rule amendment and possibly might also cover final salary linkage for those past service rights. This would have allowed the BBC to pursue changes to reduce future service benefits and, consequentially, reduce the cost of providing those benefits. Counsel for the representative beneficiary argued that “interests” covered rights earned up to the date of any amendment; final salary linkage of those pre-amendment rights; and the ability for members to accrue future service benefits on the same terms as before any rule amendment.  The result of the representative beneficiary’s argument being successful would be that the BBC could only change future service benefits for existing members if the various safeguards under the power of amendment were satisfied, for example actuary certification that interests were not substantially prejudiced, or actuary certification that substantially equivalent benefits would be provided, or members had consented.

The High Court favoured the broader definition of “interests” that was argued for by the representative beneficiary. The Judge acknowledged that this judgment would lead to serious problems with the ongoing management of the scheme, given the increasing costs of securing the DB benefits, but commented that that didn’t affect how the wording used in the rules should be interpreted.

The BBC has said that it is considering whether to appeal the decision.

This judgment may end up being used in the legal arguments put forward as part of the TPT pension scheme Benefit Review (which our housing association clients in particular will be familiar with) because one of the questions in that case is about whether changes can be made to future service benefits. The phrasing used in the TPT rules is different (“rights” rather than “interests”) and this may well allow for a different outcome but were the TPT judgment to follow the BBC judgment then this could be even more catastrophic for TPT employers than it is for the BBC because changes to future service benefits have already been effected within TPT schemes.

There was also a secondary question in the BBC case which will be relevant to employers who, like the BBC, have their own pension scheme. This question was whether, where the scheme rules permitted amendments in certain circumstances, could the BBC and scheme trustee agree to utilise such power to make changes to benefits at a scheme level which the employer would not have been able to make at an employee level unless it first complied with pre-existing consultation commitments. In legal terms the question was whether, if the trustee (with employer consent) used a power of amendment to reduce future service benefits, then would it be doing so for an improper purpose given that benefit redesign is supposed to be a matter for scheme employers not trustees.

The BBC did succeed in its arguments here, but partly because it had lost on the first question and so the scheme members did not need the additional layer of protection that a decision in their favour would have given. This is good news for other employers who are contemplating changes to future service benefits in their own scheme because it confirms that an employer can choose (where the scheme rules allow) whether to pursue changes at a scheme level or employee level. There are advantages and disadvantages of each but at least this judgment confirms them as separate discrete options and doesn’t mean that powers of amendments in scheme rules have to also be read as subject to outside obligations that may have been agreed by employers about how changes to terms and conditions would be effected.

For more information, please contact Kirsty Thompson or Katie Maguire.