UK: High Court Confirms Use Of Contracts To Limit Pensionable Pay

Re Bradbury v. BBC [2015] EWHC 1368 (Ch) (The Case)
Last Updated: 17 June 2015
Article by Elmer Doonan, Jay Doraisamy, Andrew Patten and Paul Lawrence

Background

BBC Philharmonic Orchestra clarinettist John Bradbury was an employee of the BBC and a member of the final salary New Benefits Section of the BBC Pension Scheme (the Scheme). In 2010, faced with a £2 billion funding shortfall, the BBC decided to impose a cap on increases in pensionable pay of 1 per cent for active members (the Cap).

The BBC imposed the Cap contractually rather than through the Scheme's amendment power. Use of the amendment power was unpalatable as:

  • it would need the support of a majority of the active members;
  • the Scheme trustees opposed the Cap; and
  • a Scheme valuation was scheduled for the near future which was likely to show a big increase in the Scheme's funding shortfall.

Before imposing the Cap the BBC consulted with employees and their union representatives (but not the trustees). Partly because of that consultation the BBC offered employees the following alternatives to the Cap:

  • to stay in the final salary section of the Scheme and enjoy zero pay increases; or
  • to opt out of the final salary section and receive deferred benefits in that section, and either join the Career Average Section of the Scheme, or a defined contribution arrangement (called LifePlan).

Mr Bradbury opted for the zero pay increase for a year and then moved to the Career Average Section of the Scheme. He complained to the Pensions Ombudsman (the PO) on three basic grounds:

  • the BBC wrongly changed the definition of "Pensionable Salary" without amending the Scheme rules with the agreement of the trustees;
  • he had contributed to the Scheme in good faith on the basis that his benefits would be based on his full salary rather than the Cap; and
  • the BBC could not retrospectively lower the value of his accrued benefits by introducing the Cap as this breached section 91 of the Pensions Act 1995.

The PO dismissed his complaint on 24 October 2011. As the BBC was making this change through the contractual route and not the amendment route none of these arguments were relevant.

Mr Bradbury appealed the PO's decision to the High Court. He argued the PO had erred in his decision and had misunderstood the "Basic Salary" definition used in the Scheme. He added for good measure that the BBC had breached the implied term of trust and confidence and/or the implied term of good faith contained in his employment contract (the Implied Duties).

Warren J upheld the PO determination. However, he found that Mr Bradbury's Implied Duties arguments merited further consideration even though he had not raised them before the PO. As the BBC had not had an opportunity to address these he stayed the Case and remitted this part of the Case back to the PO for consideration.

In the remitted case before the PO in 2012 Mr Bradbury argued that the BBC's actions in imposing the Cap were in breach of the Implied Duties. The matters he relied on were:

  • Improper coercion by the BBC. The BBC had left him with no choice but to accept the Cap.
  • Improper collateral purpose. Based on some evidence from a former BBC HR officer Mr Bradbury claimed the main purpose of the Cap was to increase staff turnover among older and underperforming employees.
  • Indirect age discrimination. The BBC had been guilty of age discrimination in imposing the Cap as it discriminated indirectly against younger members.
  • Lack of meaningful consultation. The BBC had consulted with members and unions with the result already decided, and therefore the consultation was disingenuous. It had not consulted the trustees at all.

Mr Bradbury also argued the PO should consider whether the BBC's actions taken as a whole had undermined the Implied Duties.

The BBC's case was that the only way that it could have breached the Implied Duties was if it acted irrationally or perversely. It had introduced the Cap to deal with funding pressures without any improper purpose. It had every right to implement the Cap contractually and in each case it had acted reasonably. Mr Bradbury did not allege that he had suffered any discrimination, and the consultation had been meaningful as it had led to the BBC allowing members to join the Career Average Section of the Scheme.

The PO dismissed the remitted complaint. Mr Bradbury appealed and Warren J had to consider whether this appeal had any merit.

What was Mr Bradbury's case at the second High Court hearing?

Mr Bradbury challenged the PO's remitted decision on three points.

  • The PO had taken each element of Mr Bradbury's case and considered it in isolation without addressing the central point that, taken together, the elements amounted to a breach in the Implied Duties.
  • The PO had applied the wrong test for deciding whether there had been a breach, applying a "reasonable range of responses" test instead of asking whether the BBC had treated its employees fairly in the conduct of its business.
  • The BBC had frustrated Mr Bradbury's "Reasonable Expectations" that:

    • it would comply with the Scheme rules;
    • it would honour the definitions of "Pensionable Salary" and "Basic Salary" in the Scheme rules; and
    • it would amend the Scheme rules under the terms of the power of amendment.

What did the Court decide?

Warren J dismissed Mr Bradbury's appeal.

(1) Failure to consider Mr Bradbury's issues as a whole rather than "salami slicing"

The Court considered the PO's findings on each element of Mr Bradbury's case:

  • Coercion. It was "perfectly proper" for the BBC to follow the course of action it had taken and to use a contractual agreement. The PO was right to find that although Mr Bradbury had limited options this did not amount to improper coercion given the underlying situation faced by the BBC. The BBC was entitled to impose a Cap against any other option that might be available.
  • Collateral purpose. There was no error in the PO's determination that the BBC imposed the Cap primarily due to the funding deficit. Based on the PO's findings of fact there was nothing to stop the BBC using the Cap even if this had other benefits for it.
  • Discrimination. Except in cases of extreme behaviour (which this was not), a claimant will not be able to claim a breach of the Implied Duties created by the way his employer treats a third party. Mr Bradbury did not claim that he had suffered discrimination and had no complaint on this point. Therefore, the PO was entitled to refrain from considering the wider discriminatory impact of the changes introduced by the BBC.
  • Improper and insincere consultation. The PO was correct to note that, given the substantial pension deficit, "something radical" was required and that inaction on the part of the BBC was not a practical option. In particular the PO's conclusion that the BBC did not need to consult with the trustees before consulting with the members was affirmed.

On Mr Bradbury's argument that these elements taken together created a breach, the Court held that:

  • the PO had considered and determined that, taken as a whole, these elements did not give rise to a breach; and
  • given the PO's findings on each element it would have been perverse for the PO to have decided that there had been a breach.

(2) Failure to apply the right test

The Court held the PO had applied both tests to the elements set out above, and that this was the correct approach given the Court's decision in the first High Court hearing. Therefore, there was no basis for this challenge.

(3) Reasonable expectations

On the reasonable expectations point, the Court held this was raised too late in proceedings. Even if this argument had been allowed to proceed Mr Bradbury had not provided any evidence that he had any "Reasonable Expectations". His arguments were a mix of things that would have been "Reasonable Expectations" had the BBC used the scheme amendment route, and those that were just 'expectations' that the BBC had had no part in inculcating to Mr Bradbury.

What can we learn from this case?

This is a reassuring decision for employers who are considering, or who have already taken, similar action in respect of their pension schemes. It confirms that it is possible to place limits on pensionable pay through extrinsic contracts rather than by using the power of amendment in the scheme rules.

There remains a question mark over whether these extrinsic contracts can take effect in respect of survivor benefits. On a contractual analysis, the employer has entered into an agreement with the member (and provided consideration), but not with any ancillary beneficiaries. The net effect would therefore be similar to a member commuting their own benefits in a scheme. Any survivors pension has to be calculated as if the commutation had not taken place.

It also confirms that, in practical terms, an employer facing a financial imperative to cut the costs associated with their pension scheme will be able to take this into account when deciding what to do, and not just whether the change they are proposing will have a negative effect on employees. They will obviously need to consider this but, as the Court notes, it is generally going to be a business decision for the employer provided the action taken:

  • was a response to that situation; and
  • does not impose an undue detriment to the employees affected in comparison to the other options available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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