Employers can restrict what pay increases count towards an employee's pension, court rules

Out-Law News | 25 May 2012 | 5:25 pm | 2 min. read

Employers are entitled to offer pay increases on the condition that all or part of that increase does not count towards an employee's future pension entitlement, the High Court has ruled.

However the employer must make sure that any offer does not undermine the "implied duty of trust and confidence" between an employer and its employees.

In his judgment, Mr Justice Warren said that limiting the amount of a pay increase offered to Mr Bradbury, a clarinettist in the BBC Philharmonic Orchestra, which could be taken into account for pension purposes to 1% was on the face of it lawful. The law prevents scheme members from giving up pension rights they have already built up, however as Bradbury did not have a contractual right to future pay increases that prohibition was not relevant in this case.

Pensions law expert Carolyn Saunders said that the decision was good news for employers.

"The decision will reassure the many employers that have sought to limit their defined benefit pension liabilities by entering into agreements with members that are separate from and outside of the rules of the pension scheme," she said. "Although the question of whether the employer acted in good faith remains undecided, the court's comments suggest the members would face an uphill struggle to win on this point."

According to the BBC, the limit was imposed as a way of making the company's generous defined benefit scheme "affordable and sustainable". The scheme is currently running at a deficit of £1.6 billion, according to the broadcaster - a gap which it is legally obliged to fill over the next 11 years.

The BBC Pension Scheme is composed of four sections: a final salary section which has been closed to new members since 1996; a "new benefits" section for employees who joined after the original scheme closed to new members with benefits also based on final salary; and two "career average" sections, which provide defined benefits based on an employee's revalued average pay over the course of that person's employment. The original career average section closed in 2010.

The 1% salary cap on increases in pensionable pay has applied to both final salary schemes and the original career average section of the scheme since March 2011 following a consultation process with scheme members and trade unions. As a result, members of these three sections of the scheme will have any increases in pay limited to 1% in each year for the purposes of calculating their pension entitlement. 8,000 scheme members, including Bradbury, chose to opt out of their section and join the new career average section of the scheme. Pay awards in this section of the scheme are not subject to the 1% cap, however the scheme itself is less generous.

Mr Justice Warren refused to rule on whether the BBC had breached its implied duty of trust and confidence towards Bradbury by withholding the pay rise from him if he refused to accept the 1% cap as evidence on this issue had not been submitted to the Pensions Ombudsman as part of his original complaint.

"It would be wrong for me to deal with this issue, only raised fairly and squarely for the first time on appeal, without the BBC having been given the opportunity to adduce evidence," he said. However, he added that there was "no suggestion" that the BBC had acted improperly as its case would be "that pension costs were unsustainable at the level being incurred, and that something had to be done to reduce those costs".

He added that he would "hear further argument" if the parties could not reach an agreement between themselves.

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