London High Court considers trustee decision-making processes

The High Court of England and Wales has provided useful guidance for trustees generally as to the scope of their powers and the manner in which they may properly go about their decision-making processes.

These issues arose in connection with a challenge brought by British Airways against the trustees of the Airways Pension Scheme.  British Airways alleged that changes to the rules of the scheme, and the granting of discretionary increases to members' benefits, were invalid or improper and/or an abuse of the trustees' powers under the scheme.

The Court took a rigorous approach to analysing the decision-making processes of each of the relevant trustees. Morgan J considered at some length the witness evidence given by the trustees, and contemporaneous communications to check that the trustees had gone through a proper decision-making process, and had not "pre-determined" the issues in question.

The Airways Pension Scheme

The provisions of the Airways Pension Scheme ("APS") require members' benefits to be uprated on an annual basis (as inflation-proofing) in line with the Pension Increase Review Orders used for public sector schemes. This reflected the origin of the APS as a vehicle for providing retirement benefits for those in the public sector.  This particular requirement has been in the scheme continuously since 1973, notwithstanding that since the late 1980s all the participating employers have been private sector organisations.

Under the terms of the trust deed, the trustees had the powers to:

• Amend the trust deed "in any way", providing that any change made "would not have the effect of changing the purposes of the scheme". The rules of the APS provide that the scheme's main object is the provision of pension benefits on retirement.  The rules also state that the scheme is not a benevolent scheme and that no benevolent or compassionate payments can be made from it.
• Award a discretionary increase pursuant to the purposes of the APS.

In 2010 the Government announced that the uprating of members' benefits from any scheme which relied on Pension Increase Review Orders for their inflation-proofing would be by reference to increases in the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). The APS trustees were concerned that, as increases in the CPI are generally lower than increases in the RPI, the level of inflation-proofing provided to the members of the pension scheme would therefore be diminished.

To combat this, the trustees amended the trust deed to provide the trustees with the discretion to uprate members' benefits in future years, by such amount as the trustees may think fit.  The trustees subsequently used this power to uprate members' benefits above the CPI-based inflation-proofing required by the scheme's rules, either referring explicitly to the need to 'bridge' some of the gap between CPI and RPI, or simply by requiring that a specific additional percentage increase to members' benefits be given.

British Airways' challenge and Court decision

British Airways challenged the trustees' actions in respect of: (i) the introduction of the power to grant discretionary increases, and (ii) the use of the power to uprate the inflation-proofing.

The Court held that the trustees' amendment of the trust deed introducing a power to make discretionary increases to members' benefits did not permit the trustees to make benevolent payments. Nor did it change the purposes of the scheme. The power had not been used for an improper purpose. Accordingly, the amendment was permitted as part of the trustee's power of amendment: it was not an abuse of the trustees' powers and (as set out above) on the evidence before the Court the decisions did not involve any element of unlawful 'pre-determination' by the trustees.

The Court held that the subsequent exercises of the discretionary power by the trustees did not involve the making of benevolent or compassionate payments. Similarly, the decisions were not improperly made by the trustees (either because they failed to take into account all relevant factors and ignore all irrelevant ones, or alternatively because despite having taken all proper considerations into account they had come to a decision that was perverse in all the circumstances)¹.

After a review of the authorities, Morgan J stated that it was "less easy to find illustrations in the decided cases of where trustees have been held to have failed in their duty [to consider whether and how to exercise a discretion]", where the trustees had gone through a proper decision-making process. Morgan J then considered in detail the decision-making process of the six relevant trustees, and found that all six had given "active and genuine" consideration to the exercise of the discretionary power, and had not, as alleged, fettered their discretion by adopting an inflexible view that discretionary increases should be awarded.

In coming to this conclusion, Morgan J examined the witness evidence given by each of the trustees explaining their views over the course of the debate as to the appropriate increases to be made. The judge had recourse to the records of meetings that had been attended by the various trustees, and their changes in attitude over time and resulting from the various advices they had received. Likewise, contemporaneous emails of one of the trustees were regarded as showing that the trustee had an open mind as to the correct level of any increase.

Comment

This decision demonstrates that where trustees engage in a bona fide decision-making process, the English courts will generally be reluctant to interfere in that decision (assuming it is within the trustees' power). In particular, it is clear that the courts will uphold trustees' exercises of their discretion, where the trustees can show that they did go through a clear decision making process, but that the evidence will be closely scrutinised by the court. To this end, trustees would be well advised to keep contemporaneous records of their decision making processes and their engagement with the issues in any meetings or discussions on the subject.

We note, however, that this decision has been appealed, and we will provide an update on the outcome of any appeal.

[1] However, the first purported exercise of the power was agreed by the parties to have been invalid as a result of the decision having been made subject to later review prior to any increase being effective – and no date for the increase was given. This suggested that the trustees did not intend to make an effective decision.