The High Court has recently decided that restrictions in the rules of the BBC Pension Scheme mean there is a limited ability to make changes to future service benefits.
Although the decision is significant for the BBC, which has been looking to cut its pension costs, only time will tell whether the judgment will have a wider impact. That will depend on whether other pension schemes contain similar restrictions to those found in the amendment power of the BBC Pension Scheme.
The BBC had been looking to limit the costs of funding the BBC Pension Scheme, which had increased significantly over the years. Concerns about costs had led the BBC to take various steps in 2010, which included the imposition of a limit on the extent to which future pay rises would count as pensionable pay for certain employees. That change had led to substantial litigation, both in the High Court and the Court of Appeal (Bradbury v BBC ).
Subsequently, the BBC started to consider further options for reducing pension costs by curtailing or removing future service benefits, e.g. by closing various categories of the BBC Pension Scheme to future accrual or reducing the rate at which benefits would accrue.
Questions arose as to whether (amongst other things) the BBC Pension Scheme's rules could be amended to make changes to future accrual. To resolve those questions, the BBC applied to court. The defendants were the trustee of the BBC Pension Scheme and a Representative Beneficiary, who represented the interests of members who joined the BBC Pension Scheme before 1 December 2010 who were still employed by the BBC and continued to accrue defined benefit (DB) pension benefits.
Judgment in British Broadcasting Corporation v (1) BBC Pension Trust Limited and (2) Christina Burns was handed down on 28 July 2023.
What was the court asked to consider?
The court was asked to decide various questions. In this article, we focus on the court's decision on the meaning and effect of the fetter in the amendment power of the BBC Pension Scheme.
The amendment power had been in substantially the same form since a 1949 deed. Although the amendment power gave the trustee a broad power to alter or modify any of the rules of the BBC Pension Scheme, it provided that no alteration or modification could take effect as regards "Active Members" "whose interests are certified by the Actuary to be affected thereby" unless certain criteria were fulfilled, which criteria were designed to ensure that the relevant "interests" were not substantially prejudiced.
A critical question at the heart of this case was what was meant by the word "interests" and whether "interests" include future service benefits.
The parties' arguments
The parties agreed that the word "interests" included rights earned by past service. Therefore, the question which Mr Justice Adam Johnson had to consider was whether the concept was sufficiently wide to embrace, not just rights earned by past service or any linkage of the value of those past service rights to final salary, but also the ability of members to accrue future service benefits under the BBC Pension Scheme.
According to the BBC, future service benefits reflected members' "mere hope" of accruing benefits by service not yet rendered and contributions not yet paid. Such "mere hope" was not a legal right of any recognisable type and so not contemplated by the idea of "interests" in the amendment power.
The Representative Beneficiary argued that the "interests" protected by the amendment power included an interest in the terms of the BBC Pension Scheme governing the ongoing accumulation of benefits remaining the same in the future and not being amended so as to leave Active Members worse off in terms of those accumulating benefits than they were before, e.g. by an amendment which would/might remove the final salary link, reduce the rate of future accrual or remove the right to future accrual altogether.
What did the judge decide?
Mr Justice Adam Johnson chose to adopt a broad (and, it might be said, colloquial) interpretation of the word "interests".
For the judge, the concept of "interests" did not involve any difference between benefits already earned by past service and those to be earned in the future. He thought the amendment power was intended to focus enquiry on the position of Active Members under the rules of the BBC Pension Scheme as they stand before any amendment compared with their position after the proposed amendment came into effect. If their positions would be different under the amendment, members' interests would be affected.
The judge decided that, put colloquially, affected members had an interest in the "rules of the game" not changing in a substantially prejudicial way before they reached normal retirement age. Drawing on a gambling analogy, the judge said that:
"The interests of a gambler who places a bet at odds of 10/1 would plainly be affected if, half-way through the race, the bookmaker was allowed to reduce them to odds of 5/1, even though his horse may not be placed or may not finish at all ... I think it clear that a person's interests are affected if the terms change, even if there is a risk that the occasion for the terms being deployed will never in fact arise."
In reaching this decision, the court had to consider, and then distinguish, the decision of the High Court in Wedgwood Pension Plan Trustee Ltd v Keith Salt . In that case, a fetter in the scheme's amendment power prevented an alteration or modification to the rules that would prejudice or adversely affect the rights of any member. In Wedgwood, the court decided that this wording did not prevent changes being made to future accrual and concluded that:
"The word "rights" does not … naturally cover benefits which might in the future be obtained as a result of future service … [T]his conclusion is consistent with the proper approach to construction of a pension scheme … that the rules should be construed so as to give a reasonable and practical effect to the scheme bearing in mind … the scheme has to be operated against a constantly changing commercial background."
That decision was consistent with what is widely considered to be a purpose of a pension scheme, namely, to provide pensions and related benefits at a cost which is acceptable to the employer.
In BBC, the judge could see the force of the employer's argument that it would not give reasonable and practical effect to the BBC Pension Scheme to adopt an interpretation of the word "interests" that gave the BBC only limited flexibility to change the terms on which benefits would accrue in the future. However, Mr Justice Adam Johnson concluded that the word "interests" was (as members had argued) intended to cover benefits to be earned by future accrual. The judge could see the possible tension between the approach he preferred to take and that taken by the court in Wedgwood. However, he thought the reference in the BBC Pension Scheme's amendment power to "interests" (which the judge thought involved an "inherent pliability") and not "rights" (as in Wedgwood) was a point of difference and suggested that a broader scope of protection was intended under the BBC Pension Scheme.
Time will tell whether the BBC seeks to appeal the judgment to the Court of Appeal.
It is well-known that, in considering the impact of the rules of any pension scheme, it is necessary to approach court judgments given in cases involving other schemes with caution. Each case will turn on the wording of the rules of the scheme in question. However, there may be other pension schemes in which the amendment power prevents amendments that would affect the interests of affected members, albeit in many schemes the wording may confine interests to those that relate to benefits that have already accrued, which would enable changes to be made to future accrual.
In the meantime, any judgment (such as that in BBC) that prevents an employer from making alterations to benefits in a pension scheme to be earned by future service may give rise to concern more generally. We suspect this will not be the last judicial word on the issues raised by this case.
For further information, or to discuss any of the points raised in this article, please contact Ian Gordon or Charlotte Scholes.