knowledge | 2 August 2018 |

Pensions Update: British Airways Decision Concerning the Limits of Trustee Discretion

A recent decision from the English Court of Appeal considered the murky territory of trustee discretion in the context of pension schemes. The case of British Airways plc –v- Airways Pension Scheme Trustee Limited (the “BA case”) found that the Trustees of the Airways Pension Scheme (the “Scheme”) had validly amended the Scheme rules to introduce a power to award additional discretionary pension increases. However, in subsequently exercising that power to award a 0.2% increase to pensions, the Trustees were found to have acted for an improper purpose by straying beyond the purpose of managing and administering the Scheme and into Scheme design.

While the BA case is undoubtedly fact-specific, it ought to cause trustees and their advisers to give careful thought before exercising a discretion vested in them by trust deeds. While few trustees enjoy a unilateral power of amendment as here, the BA case enjoys persuasive authority and provides an interesting counterpoint to recent Irish decisions concerning the limits of trustee decision-making. However, employers should be aware of the prohibitively high threshold for overturning trustee decisions set by recent Irish cases.


The BA case concerned a challenge by British Airways plc (the Principal Employer of the Airways Pension Scheme) against a decision by the Trustees of the Scheme to exercise their unilateral power of amendment to give themselves a power to provide discretionary increases in pensions. Unusually, the Trust Deed gave the Trustees the sole power to amend the Scheme and did not require the approval of the employer, subject to the proviso that no amendment could be made which would have the effect of changing the purposes of the Scheme. A decision of the High Court had found that this had been a valid exercise of the power of amendment and was not beyond the scope of the power.

Validity of the exercise of the power of amendment

On appeal to the Court of Appeal, the employer argued that even if the change to the Scheme was valid, it had not been validly exercised when it was used to grant an additional increase as it contravened the prohibition in the Trust Deed against making “benevolent or compassionate” payments. The trust deed contained an objects clause outlining that the object of the Scheme was to provide pension benefits to relevant employees and prohibiting benevolent or compassionate payments. However, the Court of Appeal concluded that the Trustees had acted within the scope of their powers in effecting the amendment. The fact that the motivation for the Trustees having exercised the power to award a 0.2% increase may have included an element of generosity did not make the payment a “benevolent or compassionate” one. The Court noted that the wording in the Trust Deed had likely been included to assist in obtaining Inland Revenue approval as a pension scheme.

Improper purpose

The Trust Deed contained a general power for the Trustees to “manage and administer” the Scheme. The Court noted that the Trustees may have had a unilateral power of amendment but there was nothing to suggest that the power of amendment was intended to give the Trustees a right to remodel the balance of powers between themselves and the employer. The fact the Scheme was in deficit and the Principal Employer would need to make additional contributions to fund the increase had involved the Trustees in designing the Scheme’s benefit structure which had gone beyond the management and administration of the Scheme and was a matter for the employer. As noted by Lord Justice Lewison:

"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 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".

Irish authority on trustee discretion

While the BA case usefully addresses the limits of trustee discretion, there is comparatively little Irish authority reviewing the exercise of such discretion. As a matter of general principle, trustees should consider all relevant matters and should not be influenced by matters that are not relevant to their decision; they should take advice from appropriate advisors as required; and should make decisions based on the advice available to them which cannot be considered to be such that no reasonable body of trustees would have made in the circumstances. To this might be added that trustees should not act for an improper purpose in exercising their discretion.

In Greene –v- Coady (the “Element Six case”), Judge Charleton described the basis on which a court should review a decision made by trustees, as placing the court “in the hot seat of a trustee… on the basis of what the trustees knew or ought to have known”. The court, it was said, should look at the decision through the lens of the trustees informed by the same material and the same relevant considerations that ought properly to have been considered by them. The court will not draw its own conclusions on the basis of evidence available at the time of court proceedings. Once the court accepts the trustees’ decision about what is relevant, it should not interfere with the weight given to each issue identified, unless clearly perverse.

The court in the Element Six case made it clear that it is unlikely a trustee’s exercise of discretion will be disturbed where it is exercised honestly and in good faith, in accordance with the plan documents and in the interests of the beneficiaries, and where it has not been influenced by any improper motive which might arise as a result of a conflict of interest. Mr Justice Charleton concluded that for the trustees to be liable for wilful default, that default must truly be capable of being characterised as a conscious breach of duty or a reckless breach of duty, in the sense of conscious awareness that is dismissed. Accordingly, the threshold for interrupting an exercise of trustee discretion is set at a high level and this standard was more recently approved by the High Court in Holloway –v- Damianus BV. That case also highlighted that employers have a duty to engage with trustees, particularly where there is a process for doing so under scheme rules and it is clear that employers who fail to do so will be disadvantaged by that failure in any subsequent dispute.

Concluding remarks

As the dissenting judgment in the BA case makes clear, the scope of trustees’ powers can sometimes be uncertain and exercising them mistakenly can prove costly for employers. And although courts are loath to interfere with the exercise of trustees’ discretion, this is likely only to be the case where trustees act squarely within the confines of their designated powers in the first instance. Accordingly, it is imperative for Trustees to ensure they are well-advised when exercising their discretion. The Pensions and Incentives Group at McCann FitzGerald can provide advice and assistance to trustees and employers when interpreting pension scheme documentation and when considering the scope and exercise of powers under scheme rules.

Also Contributed by David McCauley.

This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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