BBC Court Ruling Calls Validity of Amendments into Question

By Beth Brown, partner at Arc Pensions Law

August 12 2024 - In the recent ruling in the BBC vs BBC Pension Trust Limited and Christina Burns case, the Court of Appeal upheld last year's High Court decision. The Court confirmed that the meaning of the word "interests" in a restrictive amendment power prevented prejudicial changes to the future accrual of benefits.

Many trustees and employers who sponsor defined benefit pension schemes will now be considering if their own amendment power is as restrictive as the BBC amendment power and whether amendments already made were in fact invalid in light of the Court's approach to the BBC restrictive amendment power.

What happened in the BBC Case?

The BBC was considering options to reduce the cost of its long-standing BBC pension scheme which was open to ongoing accrual for employees who joined the BBC before 1 December 2010. As at May 2022, the BBC was paying a contribution rate of 42.3% of pensionable salaries of active members to fund their ongoing accrual. By comparison, the BBC was paying an average of 7 - 8% for employees who joined after 2010 and are members of separate defined contribution schemes. The BBC's considerations included closing the scheme to future accrual, reducing the rate of accrual or increasing member contributions.

The BBC understood that the scheme's amendment power, which was drafted many years ago, included a restriction that any amendment may not substantially prejudice the "interests" of active members in the scheme, but it was not clear whether this restriction applied to benefits accrued up to the date of amendment or could capture future benefits. The BBC applied to the Court for a view on the meaning of "interest".

The BBC argued that the amendment power only prohibited amendments which adversely affected benefits earned by members by pensionable service already performed at the date of the amendment and that the mere hope of future benefits was not a legal right. The Court concluded that amendments that adversely affect a members' "interests" has a wider application than benefits already accrued. The Court held that the amendment power would capture anything that would leave active members worse off.

Adopting the approach that the word "interests" is deliberately simple, broad and "open-textured", the Court took the view that it was wide enough in the BBC amendment power to include:

• rights earned in respect of past service up to the date of any amendment;

• any linkage to those rights accrued in respect of past service (i.e. final salary link); and
• future service benefits of active members which the active members could earn in the future if they remained employed by the BBC.

This interpretation of the amendment power means that no detrimental amendments can be made to the scheme, including reductions to future service benefits or closing the scheme to future accrual.

Perhaps the most surprising aspect of the judgment for all of us, including HR professionals, is the protection of future service benefits of active members who are members of a particular pension scheme merely because they could continue to be employed by the sponsoring employer. Generally employees are not treated as having an automatic right to continue to be employed by an employer, or to any particular pay increase, so the decision to protect future pension rights would appear to be inconsistent with this approach.

What does this mean for you and your scheme?

This is another example of uncertainty created retrospectively for defined benefit pension schemes. However, it is important to emphasise that the amendment power in every scheme is different and much of the interpretation of any amendment power will turn on the exact wording in the particular scheme. There are often subtle differences between the precise wording of different schemes' rules. The BBC scheme had a very old amendment power which does not easily fit with modern day pensions.

Schemes which have the word "interests" in their amendment powers will want to give careful thought as to whether the BBC case has any impact on their current interpretation and understanding of their rule. They will also want to check whether the validity of past amendments, perhaps even those made on the back of legal advice that "interests" could only properly mean benefits that members had already earned, could be called into question. Some such amendments, including some existing scheme closures, could have potentially expensive consequences if it turns out that a scheme which thought it had closed to accrual many years ago couldn't properly have done so.

Schemes should not be fearful of amending their schemes but this case is a reminder that the amendment power should be carefully considered every time an amendment is made to a scheme.

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