Monday, 20 November 2017

    British Airway’s other problem

    BA’s battle to get flight schedules back on track this weekend wasn’t enough to distract senior minds from another of the company’s business concerns - its pension scheme. 

    The airline has decided to appeal a decision made on 19 May in the High Court, which found against BA and in favour of the trustees of its 28,000-member Airways Pension Scheme (APS).

    BA, as scheme sponsor, challenged a rule change made by the trustees in 2011 that allowed them to make discretionary payments to pensioners, on top of annual increases in line with inflation. Under that rule, in 2013 the trustees awarded a discretionary 0.2 per cent increase to pensioners. BA objected to the trustees’ decision, however the High Court ruled that their actions were valid.

    Gavel

     

    The APS said that it welcomed the outcome and that it was “naturally very pleased with the clarity bought by the Court’s decision”.

    The 0.2 per cent increase represented the difference between RPI (Retail Price Index) and CPI (Consumer Price Index) inflation. Prior to 2011, RPI had typically been used for calculating annual pension increases in DB schemes, including the APS. From that date, a rule change meant that statutory increases in pension payments could be indexed to CPI rather than RPI.

    The switch from RPI to CPI was expected to make defined benefit schemes less expensive for sponsoring employers, but result in lower annual increases for pensioners as CPI is generally lower than RPI.  In this case, the 0.2 per cent increase represented £12m.

    A statement from BA said that the company had made more than £500m in payments towards scheme benefits in 2016. “Given the risks that remain within the scheme, we believe the deficit contributions should be applied to improve funding and reduce risks, not improve benefits.” 

    Rosalind Connor of ARC Pensions Law said that while BA’s choice to challenge the decision was understandable, “the [Court’s] decision at first instance was quite emphatic.”  She also referred to the judge’s comments on the length and expense of the trial, “obviously with some disapproval that all this time has been taken.” She warned that “BA risks more of the same commentary at the Court of Appeal.”

    In a letter to the Financial Times, former British Airways trustee Mike Post who resigned from the scheme in 2011 over its decision to adopt CPI over RPI, said that, by the expected date of completion of the appeal, around 6,100 pensioners of the scheme’s 28,000 would have died since BT started its litigation in 2013. 

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