Active members' 'interests' includes benefits not yet earned, and amendment to the scheme's terms concerning future service benefits would have 'affected' the members' interests, leaving them worse off.
The judgment handed down by the High Court in BBC v BBC Pension Trust Limited & Anor  EWHC 1965 (Ch) held that active members' 'interests' covered benefits not yet earned via ongoing service, and that a proposed amendment to the scheme's terms concerning these future service benefits would have 'affected' the members' interests, leaving them worse off.
The BBC is facing increasing costs of funding its pension scheme for its employees (the "Scheme"). As at May 2022, the BBC was contributing over 42% of the pensionable salaries of Active Members to fund their ongoing pension accrual. This is almost three times the rate it was paying in 2010. Further, whilst defined benefit employees represented less than 40% of the workforce, they accounted for over 80% of the BBC's spend on pension provision. In those circumstances, the BBC wished to limit ongoing costs of funding the Scheme and to understand the scope of the limitations on the Scheme's power to make amendments.
The BBC therefore made an application to court seeking its decision on how the power of amendment, and specifically the word "interests" should be interpreted. The defendants were the BBC Pension Trust Limited (the "Trustee") and Ms Christina Burns, an active member of the Scheme who was appointed to represent the interests of all employees accruing defined benefit pensions (the "Active Members").
The BBC Scheme amendment power contains an unusual proviso which provides that no alteration or modification shall take effect as regards the Active Members "whose interests are certified by the Actuary to be affected thereby" (emphasis added) unless the following requirements are fulfilled:
- the Actuary certifies that the alteration or modification does not substantially prejudice the interests of such Members; or
- the Actuary certifies that to the extent to which the interests of such Members are so prejudiced, substantially equivalent benefits are provided or paid for by the BBC or the Trustees or provided under any legislation; or
- the alteration or modification is approved by resolution adopted at a meeting of such Members convened by the Trustees.
Significantly (for the BBC's arguments), this proviso had been present in the Scheme Rules since the Scheme was established in 1949.
During the proceedings, the BBC and the Representative Beneficiary sought the Court's findings on the following two questions concerning the amendment power:
- Does "interests" in the proviso include Active Members' benefits not yet earned by working for the BBC (i.e. future service benefits) as well as past service benefits (benefits already earned via service)?
- Does the BBC need to obtain agreement from the Active Members before the Trustee can properly implement any amendments in relation to future service benefits?
This article focuses on the first of these questions only.
What did the BBC and Representative Beneficiary argue?
The BBC contended future service benefits of the type currently provided by the Scheme amount to no more than a "mere hope". This is because the required service had not yet been rendered and the required contributions not yet paid for the Active Members to be entitled to the benefit. The BBC also claimed that if the word "interests" in the proviso included future service benefits, it would lead to serious issues with the ongoing management of the Scheme given the increasing costs. It argued that it would not give reasonable and practical effect to the present Scheme as it would only give the BBC limited flexibility to change its terms. In addition, the BBC relied on how the word "Interests" had been included since the original Power of Amendment in the Deed in 1949 (the "1949 Deed") and that the word "interests" was used in other parts of the Deed and Rules. For instance, the same word appeared in provisions dealing with the winding-up of the Scheme. There, the word referred to the Active Members' "interests in the Fund" and this would exclusively mean the past service benefits already earned.
On the other hand, the Representative Beneficiary argued "interests" included future service benefits for several reasons. Firstly, an interest is by definition broader than a right which suggests the former affords a wider scope of protection than the latter. Interest more naturally includes a reference to effects of an intended change to the terms on which benefits can be earned in the future. Secondly, the Representative Beneficiary said that the original 1949 Deed, which had since been amended many times, supports their argument. Under the 1949 Deed, Active Members had no right to a leaving service pension. Instead, the employees only became entitled to a pension on retirement after having served a minimum of 10 years. The pension was then payable once the employee retired. With this context in mind, the Representative Beneficiary submitted an Active Member in 1949 would naturally have an interest in the rules of the Scheme not changing in a way that could prejudice their future service benefits before they got to retirement age. Lastly, the Representative Beneficiary said this proviso provided more flexibility to the BBC than other provisos in the Scheme because even if the Active Members would be worse off by a proposed change, the amendment would still be effective if substitute benefits were provided or if the Active Members formally agreed to the change. However, this flexibility was not present in other provisos, for instance dealing with the position of retired members or deferred pensioners. The fact that the BBC was given a higher degree of flexibility under this proviso suggests the interests that needed to be protected were wider in scope that other types of interests under other provisos.
What did the Court decide?
The High Court said that on the natural reading of the proviso, "interests" does not seem to include a division between past service benefits and future service benefits. In reaching this decision, the Court asked itself whether the positions of the Active Members would be different under the proposed amendment. If the answer is yes, their "interests" are affected and the protections under the proviso listed above would come into play. These protections are designed to give assurance that although the Active Members' positions will be different, they are not substantially worse off, or if they are, then the difference is made up in some other way which the Actuary would certify were appropriate, or the proposed change has been approved by the Active Members themselves at a duly convened meeting. The Court found that the nature of these protections suggests the Active Members' "interests" includes their interests in future service benefits. To illustrate his point, Mr Justice Adam Johnson used the following helpful analogy:
"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...His interests are affected because the rules of the game will have changed part-way through in a manner that will leave him worse off if he stays the course to the end of the match."
Therefore, in the same way for Active Members, whether there is a risk that they may not remain in employment and accrue the benefits is irrelevant. It will not make a difference as to whether their interests are affected by proposed changes to the Scheme's benefits. The High Court held that "interests" of Active Members referred to the final salary link to past service rights, the ability to accrue future service benefits under the Scheme on the same terms as immediately before the amendment, and the ability to accrue any future service benefits under the Scheme.
In response to the BBC's arguments, the Court found that to give reasonable and practical effect of the Scheme, it was necessary to first look at how the Scheme is intended to work. In this case, the Scheme was clearly intended to be administered on the above basis. Further, the use of "interests" elsewhere in the Deed and Rules of the Scheme did not mean interests included the same content in every context. For example, regarding its use in the winding-up provisions, the context necessarily meant there will be no future benefits to earn since the Scheme will be closing. However, in the amendment power, the context allows for future service benefits.
Nonetheless, the Court has more recently given permission to appeal. We therefore expect a decision from the Court of Appeal early next year.
This decision will be of particular interest to Trustees and Employers of schemes with similarly worded powers of amendment. Our concluding thoughts on the case are:
- As ever, judgments turn on the facts and it must be recognised that the wording of the BBC Scheme amendment power, and in particular the combination of the word "interests" and the third proviso which follows it, are fairly unusual. A global interpretation of what "interests" means in all cases is unlikely to result from this case.
- The decision has reinforced the court's careful approach to the construction of pension scheme documentation. That is to focus on textual analysis and by attaching less weight to the background factual matrix than might be expected in the case of commercial contracts.
- Because the power of amendment had remained relatively unchanged since 1949, the relevant background factual matrix effectively stretched back that far, a fact that probably weighed against the BBC so far as it attempted to use the current cost of delivering defined pension benefits to support its arguments in favour of a restrictive interpretation of "interests". The same words can't mean one thing then, and a different thing now.
- The decision is likely to be of wider interest to Trustees and Employers of defined benefit pension schemes which contain amendment powers with provisos which prevent defined benefit accrual being terminated, or the link with final salary being severed. Some commentators have questioned whether established case law on these issues, such as in Re Courage Group's Pension Schemes had been properly decided or whether this decision might upset the orthodoxy. We consider it a useful development that the Court of Appeal may now have the opportunity to tackle this issue and we will comment on the Court of Appeal judgment when 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.