BBC pensions cap ruling offers reassurance to DB employers

BBC Philharmonic Orchestra principal clarinet John Bradbury had complained to the Pensions Ombudsman in 2011 about the cap, which sought to limit the pensionable element of any pay rises to 1 per cent.

Faced with a multi-billion pound deficit, the BBC decided in 2010 to offer three options to members of its three existing sections.

Members could remain in their current section with only 1 per cent of future pay increases to count as basic salary and therefore pensionable; they could join a new career average section; or join the defined contribution plan.

Something had to be done and what they did wasn’t unreasonable in that context

Mark Smith, Taylor Wessing

The case reached the High Court, returned to the ombudsman to consider new arguments, and was heard again in the High Court before reaching the Court of Appeal this year.

Ruling in the case, Lady Justice Gloster agreed that the broadcaster had the right to make the changes, and did not breach its duty of trust and confidence in doing so.

“The respondent’s conduct had to be assessed against the reality of the background that the respondent was faced with a multi-billion pound deficit in the scheme and where the trustees, the unions and the respondent all agreed that something had to be done,” she said.

Rule wording is crucial

Pensions lawyers cautioned against employers concluding that they would automatically be free to act in the same way as the BBC.

The scheme rules had defined basic salary, and therefore pensionable salary, as being the amount determined by the BBC. This definition might not therefore include a pay rise.

“In a way it hangs on the specifics of the BBC Pension Scheme rules,” said Matthew Giles, partner at Squire Patton Boggs. “There was a bit of flexibility that the BBC had to determine what basic salary was.”

However, Clive Weber, a partner at Wedlake Bell, said this area of the judgment was the most likely target for any subsequent appeal.

“In the past, quite a few people took the view that that wasn’t a wording which gave great discretion, it was really just a failsafe, that you could distinguish between what’s basic and what wasn’t,” he said.

Beeb acted in good faith

The judgment also rejected Bradbury’s assertion that his employer had breached its duty of trust and confidence in the way it implemented the change.

By contacting members individually, he claimed that the BBC had marginalised trade unions and the scheme’s trustees.

But lawyers agreed with the judge’s ruling that the change was made in good faith, and the broadcaster had legitimate commercial reasons for doing so.

Chantal Thompson, partner at Baker McKenzie, said it showed that an employer “can have regard for its own interests as long as it acts consistently and responsibly, and I think the BBC has”.

“Our licences go up if they can’t sort out the pension deficit,” she added.

Mark Smith, partner at Taylor Wessing, agreed: “Something had to be done and what they did wasn’t unreasonable in that context.”

He said employers considering benefit changes should pay attention to the way in which they make those changes, as well as the legality of doing so in preparation for challenges of this sort, adding: “The fact that options were offered would doubtless help.”

IBM ruling still to come

The case draws interesting parallels with a Supreme Court case concerning IBM, heard earlier this year but still awaiting publication of the judgment.

The technology giant is said to have given members a reasonable expectation that their benefits would not change in the near future, before later closing a DB scheme to future accrual.

Legal experts said similar concepts would be applied, but doubted whether the court would find that IBM’s approach to changes was as reasonable as that of the BBC.

“What was going on in IBM and Dalgleish was I think in anybody’s book a rather poor show,” said Weber.