The High Court recently looked at whether future accrual under the DB section of the BBC Pension Scheme could be limited by reference to capping pensionable salary increases at 1% via agreement or whether the scheme rules themselves allowed capping without requirement for amendment.
The BBC had sought to address the deficit in its DB scheme by giving members the following options:
- remaining in the scheme but having future pay increases limited for pension purposes to 1%;
- opting out of the DB Scheme and joining a career average scheme without a cap applying; or
- leaving the DB Scheme and joining a defined contribution scheme.
The BBC argued that that they had an implied ability to cap salary through the definitions, as "Basic Salary" was defined as "the amount determined by the BBC as being an employee's basic salary or wages payable under the terms of his or her continuing or fixed term contract". The judge rejected this argument on the basis that, as the definition of Basic Salary would apply to both accrued benefits and future benefits, much clearer wording would have been needed within the definition to ensure that any such determination by the BBC only applied to future accrual. In this case, the wording of the definition was insufficiently clear. The judge did state that it would have been possible to introduce an amendment to the definition to address this point.
On the issue of agreement between employee and employer, the judge decided that, subject to compliance with the employer's duties of 'trust and confidence' and 'good faith' (which were not specifically argued in this case) the employer and the employee could agree to limit salary increases and therefore bind the scheme.
In this particular case, as in South West Trains, the judge emphasised that decisions such as future salary increases exist in their own right outside the terms of schemes rules and therefore can reasonably be the subject of extrinsic contracts.
This case reinforces the principle that employers can legally seek to enter into contracts with employees that vary the terms of future accrual under their scheme, so long as the member was actually given a real choice and subject to there being sound and reasonable business reasons for the company making the offer. The judge commented that a desire to reduce the deficit under the scheme would be the sort of reason that would not breach implied duties. He confirmed that as employers are allowed to act on financial grounds taking into account their reasonable interests.
The judge was asked to consider whether Section 91 of the Pensions Act 1995, which prevents a member from agreeing to surrender a right to a future pension, was breached as a result of the extrinsic contract. The judge said it had not been, as Section 91 protects the rights to which a member will become entitled in the future based on events which actually occur. According to the judge, a member has no right to a particular salary increase so salary increases can be surrounded without breaching Section 91.
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