Following the ruling in Re Bradbury v BBC, companies can change the rules on pensionable pay without the trustees’ consent
The BBC implemented a cap of one per cent on increases in pensionable pay for active members of its final salary scheme to help address its £2 billion deficit.
The BBC made the change by altering the members’ employment contracts rather than by changing the scheme’s amendment power. The broadcaster chose the contractual route because altering the amendment power would require the support of the majority of active members; the trustees +opposed the cap, and the scheme was coming up to a valuation which was likely to show the deficit had increased further.
Before the cap came into force the BBC consulted with employees and union representatives, but not with the trustees.
Following the consultation the employer offered members two alternatives to the cap – to stay in the final salary section of the scheme and accept that their pay would not increase, or opt out of the final salary scheme (and still receive deferred benefits) and move to a career average or defined contribution arrangement.
One member, John Bradbury, who was a BBC Philharmonic Orchestra clarinettist, took the zero pay increase for a year before moving into the career average section of the scheme. He complained to the Pensions Ombudsman on three grounds:
- The BBC had wrongly changed the definition of pensionable salary without altering the scheme rules with the trustees’ consent
- He had contributed to the scheme in good faith on the grounds that his benefits would be based on his full salary rather than the cap
- The BBC could not retrospectively lower the value of his accrued benefits through the cap because it contravened section 91 of the Pensions Act 1995
The Pensions Ombudsman dismissed his complaint, and so did the High Court when he appealed the Ombudsman’s decision.
What does this mean?
Employers can legitimately change the definition of pensionable pay using contracts. They do not have to change the scheme rules, or consult trustees. Trustees should make sure their views are known to the employer and cultivate a good relationship by communicating openly and regularly to increase the chance their stance will be taken into account.
Many more schemes may use contracts to limit pensionable pay increases in the face of financial pressures. The High Court has confirmed in this case that employers are justified in making changes where they are struggling with a large deficit, as many UK pension schemes are.
In the future the courts may have to address the issue of whether survivor benefits can be changed contractually, given that the contract only exists between the member and the employer, and the survivor is not a party to it.